Xmas 2020: making sense of the nonsensical
COVID-19 Market Update – 07/01/2021
12 minutes to read
This is the 28th of a series of weekly notes (and 1st of 2021) analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:
- Retailer post Xmas trading statements – more caveats than credence
- Grocery market performance over the festive period
- Non-grocery reporting to date
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Retailer Xmas trading statements carry heavy caveats
• Ambiguity around reporting periods and product returnst
• Unaudited and limited reference to profits
• Grocery sales surge by +11.4% in Q4
• Record grocery spend of £11.7bn in Dec
• Previous record of £10.9bn set in Nov
• Transfer of trade from hospitality and “non-essential” retail
• Morrison’s sales +9% (+8% like-for-like)
• Sainsbury’s sales +6.8% (+8.6% like-for-like)
• Sainsbury’s online grocery sales +128% y-o-y
• But FY profits expected to be down -44% to £330m
• Aldi’s sales +10.6%, but losing market share
• Next’s group sales down -1.1%
• Online (+36%) doesn’t counterbalance lost store sales (-43%)
• Primark predicting £650m in lost FY sales in 2020/21
1. Retailer post Xmas trading statements – more caveats than credence
COVID-19 has changed virtually everything, but some things remain depressingly the same. Retailer Christmas trading statements remain as notoriously unreliable as ever, but are still treated as gospel by the media. This year, more so than ever, they need to be taken with a heavy pinch of salt.
Rather than wholesale fabrications, retailer trading statements are just one version of the truth – and two versions of the truth can be highly contradictory. Either way, it is difficult for the uninitiated to derive a meaningful read on the current state of the market from them. Very little is as it appears on the surface or from the headline numbers.
Why the ambiguity? Four key factors conspire to muddy the waters. In no particular order, these are:
1. The statements are unaudited
2. Reporting periods are selective
3. Sales are invariably gross and do not include returns
4. They only focus on turnover and not profit
Unlike full year and interim accounts, the statements are unaudited and are basically a vehicle for retailers to put out any message they wish. Retailers have considerable latitude on what they report.
The factor that provides the most scope for ‘selective reporting’ is the actual time period the retailer provides data for. Even a single day’s difference can provide a double-digit distortion in the numbers. For the same reason, it is wrong to directly compare the relative performance of two retailers, unless their reporting periods are exactly the same.
The third of these factors has become significantly more prevalent over the years in parallel with the rise of online. And with online penetration inevitably reaching new lockdown-enforced peaks over Christmas 2020, this will be more an issue than ever before.
Product returns from online purchases are substantially higher than store-based ones, especially in areas such as fashion. Nor do the original sale and return happen simultaneously and time lags can be considerable. In many cases, retailers are only reporting gross sales that do not factor in returns. True cash flow may ultimately tell a very different story than ‘upfront’ online sales.
The issue of product returns is a very real one for the retail market and will have accentuated over Christmas period. In many ways, we are in uncharted territory in that high proportions (50%+) of online returns usually go through stores. With most “non-essential” stores closed pre- or post-Christmas, the normal “returns model” is missing its key outlet – will this reduce the volume of returns and how will retailers account for product that comes back, if they can’t net it off against stores? New challenges for a new year.
On the final point of ambiguity, most trading statements will major on sales rather than profit data. Only in the event of a profit warning will we get much of a steer on profit performance. Even in desperate times such as these, industry margins are key and sales can to a degree be “bought” through aggressive promotion and desperate discounting.
One thing is certain: most retailer Xmas trading statements will include eye-watering online growth figures. Many will see these as a triumph, even the City requires these as an assurance. Even glossing over the artificiality of these in a time of lockdown, those that understand retail will be more concerned at the cost and margin implications of this channel shift, over and above the level of product returns.
These caveats notwithstanding, the media game over the next few weeks will be of putting retailers into “Winners” and “Losers” enclosures. As ever, this is woefully over-simplistic. With large proportions of its store estate closed, Primark will inevitably be put in the latter camp. Yet one of the strongest brands and retailers out there barely deserves such classification on the basis of such a short timeframe. It will endure, others won’t.
The true picture of Xmas 2020 will emerge over the coming weeks, with the BRC releasing its December retail sales figures next week and the official ONS figures not coming out until 22 January. But even these may not be particularly edifying. The exceptionally weak historic figures for Q3 2019/December 2019 will make for a very soft comp and may artificially boost the figures for the Christmas just gone.
But strong headline growth figures clearly do not reflect retail market health. Nor will they distinguish between the huge performance polarity between food and non-food. Nor will they provide any illumination on industry profits and margins. In fact, retail sales figures are likely to pose more questions than they provide answers.
2. Grocery market performance over the festive period
One of the easier things to predict in such an uncertain retail market – grocery sales would be very strong over Christmas. A combination of factors made this a foregone conclusion. As “essential” retailers, grocery stores continued to trade through lockdown (albeit still with social-distancing compromises). More generally, history has shown that consumers tend to “trade up” in food in times of crisis and hardship – in simple terms, as a treat to themselves, buy more expensive and luxurious items than they otherwise would.
These two factors had a significant (and possibly unexpected) fillip when large portions of the country moved into Tier 3 and Tier 4 during December. That prompted the closure of large proportions of the hospitality industry and out-of-home food spend rapidly transitioned in-home. In simple terms, the hospitality industry’s desperately unfortunate loss was the major supermarkets’ gain.
Our own predictions of food growth of +5-6% (made before the latest round of lockdown measures were introduced) now appears significantly under-cooked (pardon the pun). The latest figures from Kantar show take-home grocery sales rose by +11.4% during the 12 weeks to 27 December 2020. The period culminated in a record month, with grocery sales in December hitting £11.7bn, up from the £10.9bn record set the previous month, when restrictions were not as tight or as widespread.
This strong sales performance is clearly reflected in the grocery retailers that have reported to date – but note my earlier comments re profitability. Morrison’s led the way and is a classic case in point. Morrison’s reported that sales rose by over +9% during the Christmas and New Year period, with like-for-likes (excluding fuel) up +8% in the 22 weeks ended 3 January. But it stopped short of issuing new guidance on profits due to the “extremely unpredictable current circumstances and the consequences for both consumer behaviour and our COVID-19 costs”.
A similar picture at Sainsbury’s. In the 15 weeks to 2 January, the business reported an increase of +8.6% in like-for-likes, with total retail sales up +6.8%. Grocery sales grew +7.4% and online grocery sales increased by a headline-grabbing +128%. Total online sales increased by +81% and accounted for 44% of total sales. In contrast, clothing sales grew by just +0.4% - but ironically, this is arguably a better performance in the context of the wider fashion market.
Sainsbury’s made some interesting comments on profitability. Gross margins in general merchandise and clothing held up through better-than-anticipated full price sales, driven by customers shopping earlier for Christmas and “successful changes to [their] Black Friday trading strategy” (presumably doing less??). After laudably forgoing business rates relief of £410m, Sainsbury’s guided that underlying profit before tax (UPBT) would be £330m in the financial year to March 2021. This would nevertheless represent a -44% decline on the £586m recorded the previous year.
Aldi is always a strong contender for the most ambiguous Christmas trading statement and this year was no exception. Predictably, it hailed “record Christmas sales”, with sales up +10.6% year-on-year in the four weeks to 24 December. But it did not provide a like-for-like figure. Figures from Kantar (relating to a different reporting period) suggest that Aldi’s underlying growth (+6.3%) lagged that of the wider grocery industry and that, unusually, it had lost market share.
Did Aldi lose market share because unlike the ‘Big 4’ it doesn’t have a scaleable online arm (only offering a limited click & collect service and tie-up with Deliveroo)? But was Aldi’s profit performance actually superior to that of the ‘Big 4’ for the very same reason and the fact that it saw significant trading up from customers towards its premium product ranges? Two very real and extremely interesting COVID-19 dynamics to ponder, as opposed to lazy summations about “permanent shifts to online”.
3. Non-grocery reporting to date
In starkest contrast imaginable, few non-food retailers are likely to have enjoyed anything like a record Christmas. Most non-food operators are designated as “non-essential” and are therefore at the full mercy at the UK government’s “stop-start” approach to lockdown and wider restrictions.
Many non-food stores effectively had the rug abruptly pulled from beneath their feet when many areas of the country moved into Tier 4 on 20 December. This abruptly derailed the momentum that had been engendered after the 2nd national lockdown was lifted on 2 December and coincided what would otherwise have been the busiest few days in the retail calendar. Many more areas moved to Tier 4 from Boxing Day – less calamitous in terms of lost trade, but no more helpful either.
The “stop-start” approach undoubtedly wreaked havoc on most non-food retailers over Q3 as a whole and this will inevitably be reflected in trading statements. Weekly, even daily, peaks and troughs in trade, supposedly rocketing online sales failing to offset declines in store-based trade largely a sideshow to huge and costly supply chain, operational and management upheaval. Few retailer trading statements will do full justice to this.
“Next online sales compensate for lost trading in stores over Christmas” ran most of the media headlines (expect the same for any number of other non-food operators in the coming weeks). Except they didn’t. Online sales were up +36% in the 9 weeks to 26 December, but store-based retail sales were down -43%, leading to an overall shortfall in group sales of -1.1%.
It is a sign of the times that this reflected “much better” sales over the Christmas period than expected, as well as underlining Next’s ongoing conservatism to trading performance (a compliment, rather than a criticism). Looking beyond the festive period, the business expects a -14% loss in full-price retail sales this month alone due to the 3rd lockdown.
Based on the assumption that it will recoup only 50% of lost store-based retail sales online, Next now expects sales for the full year to January 2021 to be down -16%, compared with a previous forecast of -17%. For the 2021/22 year, Next expects to report a pre-tax profit of £670m, based on the assumption that there will be some disruption in the first half and a recovery in the second. Wise words and telling statistics from one of the UK’s best run retailers and leading exponents of multi-channel retailing.
A broadly similar story at Joules. The lifestyle fashion operator reported that total retail sales in the seven weeks to 3 January were up +0.3%, with online sales up +66%, but store-based sales down by -58% due to COVID-19 closures. The business estimates that if lockdown restrictions continue until the end of May, it will accrue a loss of between £14m - £18m in its full-year results.
More sobering market updates from both Primark and Paperchase. Without an online business, the former is very much at the sharpest end of lockdown. With all 253 of its stores closed from 1 January, Primark’s owner AB Foods has indicated that it expects to lose £650m in sales for the year ending September 2021, £220m more than the £430m it had projected on 4 December. Will this spark a U-turn on online strategy? I doubt it and unless lockdowns become the norm ad infinitum (who knows?) this remains the right strategic course for Primark’s business model.
Paperchase is facing the ignominy of being the first retail casualty of the year. The business has reportedly filed notice to appoint administrators from PwC to advise on insolvency process. A unique retailer selling proprietary high-margin products with decent stock turn through well-presented stores and a decent online platform – sadly, these attributes are trumped by two ticks in the “watch list” boxes of previous distress (it launched a CVA last March) and historic private equity ownership.
Retailer Christmas trading statements are, by their very nature, retrospective. In the context of where we are now i.e. in full lockdown for an undetermined period, they appear utterly historic. We made a number of bold predictions for the retail sector in 2021 in our ‘The Show Must Go On’ report (see accompanying link). Sadly, we did not foresee a 3rd national lockdown and the only crumb of comfort is that it is occurring at a much quieter time in the retail calendar, January and February tending to have much lower retail sales volumes than other months of the year. But that will be of scant consolation to most “non-essential” retailers and hospitality operators especially, for whom an unfeasibly challenging year has already become much tougher.