Green shoots or just weeds?
COVID-19 Market Update – 24/07/2020
10 minutes to read
Introduction
This is the 14th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores two key themes:
- Retail sales – are they really back to “pre-COVID levels”?
- Perspective on the rise of online grocery
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Retail sales values (exc fuel) increase +1.5% y-o-y in June
- Positive performance, but driven by grocery
- Foodstore sales +6.5% y-o-y in June
- Grocery sales growth slowly decelerating as hospitality re-opens
- Non-food sales decline -17.4% y-o-y in June
- Positive performance from DIY (+12.3%) and electricals (+17.3%)
- But fashion sales remain very weak (-34.8%)
- Online penetration declines by -150bps to 31.8%
- Very questionable as to whether “spend has returned to pre-COVID levels”
- Overall Q2 retail sales values down -7.9%
- Q2 grocery +6.8%, non-food -36.2%
- Online grocery penetration increases from 6% to 13% during pandemic
- Moot point as to whether it will stay at this level for long
- Profitability of online grocery still unproven
- Multi-channel operators better equipped to scale up
- Vital lessons learned for the ‘Big Four’
1. Retail sales – are they really back to “pre-COVID” levels?
Ignore everything the media has to say about retail sales performance. I awoke this morning to the BBC glowingly reporting that retail sales had already returned to “pre-COVID levels” and the word “rebound” was thrown around with gay abandon. Economists promptly jumped on the “V”-shaped recovery bandwagon. It was almost as if COVID-19 was nothing more than a bad dream. Sadly, as usual, the ONS retail sales figures have been woefully misinterpreted.
That said, the numbers and underlying performance are perhaps stronger than we may have anticipated. The key figures are always the year-on-year ones excluding fuel. Retail sales values in June showed a surprise return to growth of +1.5%, a considerable turnaround on the comparable figures for the preceding months (March -4.2%, April -18.2%, May -9.4%). A step in the right direction, rather than a rebound.
Month-on-month figures and those including fuel massively distort the underlying picture of what is actually happening on the high street. For example, rather than growth of +1.5%, year-on-year retail sales values including fuel showed a decline of -3.2%. Fuel perennially distorts the retail sales figures (a year-on-year decline of -43% in June being a case in point) and why it is included in data that is supposed to reflect the high street remains a mystery.
Most commentators, and indeed many economists, continue to make the schoolboy error of majoring on the month-on-month metrics, which misrepresent seasonal trading patterns at the best of times. Hence the almost triumphal response to today’s figures. For what they are worth (not very much at all) month-on-month retail sales values were up by +13.5% June compared to May. Comparing a month of complete lockdown versus a period where restrictions were lifted is hardly going to paint a meaningful picture.
As a slight aside, volume growth (i.e. the amount of goods sold) outstripped value growth in June, an indicator that the retail sector has returned to a deflationary environment. In ordinary times, this would be seen as a major development, but in a “post ground zero world” it is likely to slip under the radar. But it is significant nonetheless – retailers are discounting heavily to stimulate sales and margins are under pressure.
Perpetuating the schoolboy error of focusing on month-on-month trends, online had a miserable month, although none of the ONS nor media narrative picked this up (if you’re going to make schoolboy errors, at least be consistent). As predicted, as stores slowly reopen, online’s share of retail spending has started to decline from its high water mark of 33.3% in May, falling to 31.8% in June. Clearly, this share will fall back further still going forward in months of non-truncated lockdown, rather than the two weeks we had in June.
In terms of subsectors, the diverging fortunes of the grocery and non-food sectors could hardly be more stark. It is only the former that has nudged retail sales growth into positive territory. Foodstore sales continued their strong run in June, growing by +6.5% year-on-year. In part, this is a reflection of consumers having limited dining out options, the lifting of the leisure lockdown only being implemented from July. The pace of foodstore growth will inevitably slow as the F&B sector increasingly finds its feet (for more on the grocery market read section 2 of this note).
Non-food retail remains highly challenged. As a collective whole, non-food sales declined by -17.4% year-on-year in June. Less hefty declines than in the preceding months (March -21.2%, April -53.7%, May -42.5%), but dire nonetheless. In theory, -17.4% represents a recovery, but lays bare how relative the term “recovery” is.
Some non-food sub-sectors are showing some signs of life, particular within household goods. Household goods as a generic whole saw sales decline by -1.4% year-on-year in June, but this belies spikes in demand in some sub-sectors, notably DIY (+12.4%) and electricals (+17.3%). Others fared less well, including furniture (-16.2%), PCs/telecoms (-47.7%) and carpets (-11.8%).
Clothing remains the retail industry’s major pinchpoint. Despite many stores reopening in the latter stages of the month, fashion sales were still considerably down year-on-year by -34.8%. This follows on from three months of even more desperate under-performance (March -36.3%, April -68.6%, May -61.3%). Try telling a fashion retailer that “trade is back to pre-COVID levels”…
Much of the ONS release focuses on comparisons between June 2020 and February 2020, leading to the somewhat optimistic conclusion that “total sales return to a similar level as before the coronavirus pandemic”. The figures (volumes +2.4%, values +1.6%) apparently back this up, but owe much more to strong growth in grocery and enforced flight to online, rather than underlying recovery.
Less upbeat but infinitely more telling are the overall Q2 figures that accompany the June release. Year-on-year retail sales were down -7.9% in Q2 2020, with heavily polarised performance between grocery (+6.8%) and non-food (-36.2%). Numbers may be misrepresented, the accompanying narrative naïve, but these are the harsh realities.
2. Perspective on the rise of online grocery
On top of the official ONS retail sales data, over the last couple of weeks we have also had major releases from grocery industry commentators Kantar, plus trading updates from Tesco, Sainsbury’s and Ocado. What did we learn from these, particularly around the rise of online grocery?
Exceptionally strong grocery demand over a sustained period was re-iterated by Kantar data. Take-home grocery sales grew by 17% in the 12 weeks to 12 July, the fastest period of growth since records began in 1994. Total sales across the grocery sector reached £31.6bn for the period.
Kantar rightly flagged that this wasn’t necessarily a level playing field in that the hospitality sector was under total lockdown for much of this period, so eating out wasn’t an option. Since pubs and restaurants have slowly started to re-open from 4 July, grocery sales have already shown some signs of deceleration, although this is still very marginal at this stage (sales were still up +15% over the last four weeks, versus +19% the four weeks prior).
Interestingly, Kantar also observed that “as lockdown restrictions are gradually eased and non-essential retail outlets reopen, some consumers are slowly resuming their pre-Covid routines and shopping habits,” a challenge to the notion that behavioural changes in recent months are permanent ones. The same logic could equally apply to growth in online grocery, which, according to Kantar, accounts for 13% of the total grocery market, up from just 7.4% in March when lockdown began.
In terms of individual supermarket performance, Kantar said that the ‘Big Four’ enjoyed “strong sales growth” for the period. Morrisons in particular had fared well, with sales soaring up 17% and gaining market share for the first time since 2015. Tesco was up +15% during the period; Sainsbury’s +14% and Asda +11%. Convenience stores continued to see huge growth as well, reflected in the Co-op seeing sales increase by 31% year-on-year.
In its Q1 trading statement (for the 13 weeks to 30 May), market leader Tesco reported an +8% increase in UK and Republic of Ireland like-for-like sales to £12.2bn. Overall group sales were up +8% to £13.4bn across the group overall. Sales in the UK were up +9% in total, driven by a +49% surge in online sales during the period (and a peak of +90% in May).
A broadly similar picture at great rival Sainsbury’s in its Q1 release (for the 16 weeks to 27 June). The business posted an +8.5% uplift in overall sales (exc fuel), with like-for-like sales up +8.2%. Grocery sales rose +10.5% during the period while general merchandise sales increased 7.2%, bolstered by a +10.7% increase in Argos sales. Online sales grew by 87% year on year, with nearly half of new online grocery customers apparently also first-time Sainsbury’s shoppers.
The same picture at Ocado? Yes and no. In its first half (the 26 weeks to 31 May) sales jumped by 27% to £1.02bn, a performance heralded as a triumph by many. Yet the age-old concerns remain regarding Ocado’s ability to turn a profit – and with it the question mark as to whether online grocery can ever be a profitable undertaking. Even with demand at its highest and the business operating at full capacity Ocado’s group EBITDA was down 36% to £19.8m. It reported a loss at pre-tax level (after exceptional investment in overseas operations) of £40.6m.
Will the shift to online grocery during the pandemic endure, or is it just a temporary trend? Ocado’s CEO Tim Steiner is emphatic on the issue (effectively a self-serving prophecy): “The world as we know it has changed. As a result of Covid-19 we have seen years of growth in the online grocery market condensed into a matter of months, and we won’t be going back. We are confident that accelerated growth in the online channel will continue, leading to a permanent redrawing of the landscape of the grocery industry worldwide.”
The narrative of his multi-channel counterparts is more nuanced. There seems genuine satisfaction (surprise even) that they have been able to harness heightened online demand during the pandemic, even more so because they have been able to do so without onerous capital investment. Tesco, for example, doubled the capacity of its online delivery service over a five-week period during the crisis, with 600,000 delivery slots more than doubling to 1.3 million, at a largely minimal incremental investment of just £4m.
Why have multi-channel grocers been able to scale up without onerous capital investment – because they have physical stores upon which to leverage. Store-picking is the mainstay of online grocery for the ‘Big Four’ and this has far fewer constraints than centralised distribution. When distribution centres are at full capacity, there is nowhere for an online pure play to go. Multi-channel operators have the flexibility to scale up as demand dictates, by using their stores as hub warehouses and also by ramping up click & collect options. And this is what they successfully did during the pandemic.
Do the ‘Big Four’ think the flight to online will stick longer term? They may not say so publicly, but probably not. One senior ‘Big Four’ director puts it thus: “we’ve gone from 6% to 14% penetration in no time and we’re going to ultimately settle somewhere between the two, probably closer to where we came from than where we got to.”
But in many ways, the fabled online penetration numbers are actually fairly academic. The ‘Big Four’ now know they can scale up to meet online demand as and when it ebbs and flows. And be able to keep a relative lid on investment and associated costs. Because their store base gives them this versatility. Online does not equal non store and this is the ultimate proof.