Retail: saviour of the UK economy?
This week’s Retail Note analyses the official April retail sales figures from the ONS, which fly completely in the face of all the deafening narrative of crippling inflation, a cost of living crisis and possible recession.
7 minutes to read
Key Messages
- Staggeringly robust retail sales figures for April.
- Retail sales values (exc fuel) +1.3% y-o-y.
- Growth achieved despite post-lockdown comp of +36.5%.
- Month-on-month retail sales values grow +1.7%.
- Partly a function of seasonality / timing of Easter.
- But m-o-m retail sales volumes still up +1.4%.
- Consumer demand holding up despite wider economic pressures.
- Food sales disappointing (values -0.3%, volumes -6.9%).
- Non-food much stronger (+5.8% despite +123.0% annual comp).
- Online sales decline -10.9% y-o-y.
- Fourth consecutive month of double-digit decline.
- Online grocery -14.1% y-o-y; non-food-19.8%; online pureplays -2.6%.
- Receding of online penetration starting to level off.
- Implied ‘shop price inflation’ lower than CPI (7.4% vs 9.0%).
- Implied food inflation (6.6%) lower than non-food (8.0%) and fuel (31.2%).
- Retail sales likely to outperform the wider economy in 2022.
Absolutely staggering. If there is a consumer squeeze, the consumer doesn’t seem to have noticed. Shoppers have reacted to the cost of living crisis by going on something of a spending spree. Today’s retail sales figures have exceeded every expectation, even my own. Retail sales data are notoriously subject to misinterpretation, but there are very few nuances this time around.
In a nutshell: healthy month-on-month growth, both in value and volume terms (amazingly). Yes, there is some inflation in there, but we still bought a lot more stuff in April than we did in March. More tellingly (and equally amazingly) there was also retail sales growth year-on-year, despite the fact that April 2021 marked the first full month out of lockdown and the surge in pent up demand saw the highest rate of monthly growth on record. Unbelievably, last month we saw growth on record-breaking growth the previous year. Something nobody foresaw.
But, as ever, the devil is in the detail.
The headline numbers
Year-on-year retail sales values excluding fuel (the most meaningful headline figure) were up +1.3%. On the surface, fairly modest growth, but in the context of a record-busting +36.5% comp the previous year, a result not even the most diehard optimist could have dreamt of. Including fuel, y-o-y value growth was higher still (+4.5%). Unsurprisingly, y-o-y volumes were down (-6.1% exc fuel, -4.9% inc fuel), underlining the influence of inflation (scroll down for more on that…).
The far less meaningful month-on-month figures, so favoured by the economist community and the press, also surprised massively on the upside. Retail sales values were up m-o-m +1.7% (+1.9% inc fuel), while volumes were up +1.4% (both inc and exc fuel). QED: despite higher prices (but not as inflationary as we may have been led to believe) consumers still bought more stuff.
For all the economists out there scratching their heads, the explanation is fairly simple: April included Easter, March did not. April included the second biggest retail ‘event’ of the year after Christmas, March did not. And with that a reminder: retail is seasonal, month-on-month metrics are more often than not meaningless. Bear that in mind when next month’s figures inevitably don’t appear quite as rosy.
Some variance by sub-sector
If there was a blot on the copybook, it was the performance of the grocery sector. Food sales values dipped by -0.3% against a strong comp last year (+2.9%). Volumes were down -6.9%. Evidence of a consumer squeeze or a flight to the hospitality sector, which would in fact indicate the diametric opposite? Inconclusive from the ONS data, but newsflow and analysis from other industry bodies such as CGA do seem to indicate ongoing recovery in restaurants and pubs, giving some credence to the latter argument.
In contrast, y-o-y non-food retail sales values grew by +5.8%, despite a seemingly impossible comp of +123% the previous year. PCs and mobile phones (+154.8%) saw the strongest y-o-y growth, despite a very challenging y-o-y comp (+42.1%). The notion that these categories flourished during the pandemic remains nothing more than an urban myth, growth has in fact skyrocketed since we have come out of lockdown.
Less headline-grabbing, but arguably more encouraging growth at a number of other key high street product categories. Clothing enjoyed growth of +10.7% (vs 69.2% in April 2021), footwear +21.7% (+1.1%), cosmetics +7.1% (+161.6%) and jewellery +5.7% (+69.2%), all highly creditable performances. The picture amongst bulky goods categories was more mixed. Carpets (+32.4% vs +2.9%) and furniture (+6.8% vs +153.6%) were both in positive growth territory, but DIY (-5.6% vs +130.7%) and garden centres (-3.8% vs +193.3%) failed to emulate spectacular growth this time last year, despite Easter being their respective peak trading periods.
Online – perplexing as ever
As has become the monthly norm, more questions than answers in the ONS online sales figures. On the surface, the rebalancing continued apace. All online sales declined y-o-y by a further -10.9%, the fourth consecutive month of double-digit decline. Online grocery declined -14.1% y-o-y, while online non-food declined -19.8% (department stores -17.0%, clothing stores -7.4%, household goods stores -29.7%).
Another month of double-digit online decline despite wider retail sales growth, yet by some quirk of mathematics (or fudging of the numbers), online penetration somehow increased in the ONS figures to 27.0% from 25.9% in March. My crude calculations suggest a figure closer to 24% in April. The online grocery penetration figure of 9.1% appears slightly more credible and makes a mockery of others’ predictions of 20%+ for 2022 as a whole. The folly of extrapolating atypical trends during the pandemic.
On a more general note, we are starting to see the rebalancing of online level out. The m-o-m trend was positive (+6.2%) and the steep declines as lockdowns were lifted are annualizing.
Shop price inflation vs RPI/CPI
To acknowledge the elephant in the room: what do these figures tell us about inflation? The implied rate of inflation for all retail sales including fuel was 9.4% in April, broadly similar to the figure for CPI (9.0%). But stripping out fuel, ‘shop price inflation’ was tangibly lower at 7.4%. As expected (but not widely acknowledged) ‘shop price inflation’ is actually far less aggressive than other parts of the wider consumer economy (e.g. fuel 31.2% in April).
Implied grocery inflation stood at 6.6% in April, compared to 8.0% in non-food. Categories such as furniture (12.7%), DIY (12.6%) and carpets (11.8%) were above this level, while chemists (2.0%) and electricals (1.6%) were significantly below. No great surprises here, electricals being the perennially deflationary category in retailing generally.
Some brief perspective on inflation from a purely retail perspective. High inflation is clearly not helpful by any means but it is at least manageable to a certain degree. Price increases can only be passed onto consumers if demand is there to support them – and there is evidence to suggest this is still the case. In fact, a positive by-product of an inflationary environment is that it prompts far more full price ‘honest’ pricing, as opposed to promotional artificiality. Those retailers with strong brands and versatile pricing architecture are better equipped to ride out any storm.
And more generally: inflation is better than deflation. And a relative walk in the park compared to a protracted series of enforced lockdowns.
Where now?
It is always dangerous to read too much into one month’s retail sales figures. But in fairness, April was not a one-off – the trend in retail sales has been consistently positive even after the initial post lockdown rush receded.
But, disappointingly, the pre-occupation with month-on-month trends does tend to colour the narrative. I can say with some confidence that the economist community will sharpen their pencils ahead of the May figures, as they will inevitably show a negative month-on-month trend. May didn’t include Easter, April did. As simple as that.
There is also a tendency for all the noise to dominate the narrative to such a point that the bigger picture is lost. And I think that is what we are seeing here. Yes, spiraling inflation is a reality. Yes, recession is a possibility. Yes, certain sections of society are undeniably feeling the full force of the cost of living crisis and life is exceptionally tough for some. We cannot be blind to this reality. But aggregated retail sales are showing no signs of imminent collapse and nor do we expect this to change in the foreseeable future.
Those surprised at the resilience of retail sales shouldn’t be – during past recessions and times of hardship, retail sales have tended to defy expectations and out-perform the wider economy. Not bad for a much-maligned sector and one that is supposedly dead and wholly dependent on online for any semblance of life.