Retail sales downturn: waiting for Godot?
This week’s Retail Note focuses on the official retail sales figures for May from the ONS, which surprised on the upside – yet again.
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This week’s Retail Note focuses on the official retail sales figures for May from the ONS, which surprised on the upside – yet again.
Key Messages
- Retail sales improve on both a m-o-m and y-o-y basis
- This despite a strong performance in April
- Retail sales values +0.8% m-o-m in May, volumes +0.1%
- Despite inflation, consumers bought and spent more
- Retail sales values surge +7.7% y-o-y
- Y-o-y volume decline of -1.7% lowest in over a year
- Cosmetics, footwear, garden centres top performing categories
- Textiles, jewellery, electricals, PCs & Telecoms worst performing categories
- Grocery sales values +12.7% but volumes -1.1%
- Implied inflation in grocery (13.8%) much higher than in non-food (6.3%)
- Considerable rebound in online (+2.5% m-o-m, +6.7% y-o-y)
- Figures are lagging latest interest rate hikes
- Still limited evidence of a consumer slowdown.
Interest rate hikes: a very blunt instrument in curbing consumer spending. Discuss.
A contrarian argument that continues to be supported by retail sales performance. In the space of a week, further evidence of inflation remaining stubbornly high. An inevitable subsequent hike in interest rates. And then a big two fingers up from the consumer in the shape of robust retail sales figures.
There are obviously significant nuances here (not least the fact that retail sales figures are lagging by a whole month and won’t reflect the latest rate increases), but that is still the general narrative. The widely-anticipated consumer downturn has yet to materialize.
The ‘headline’ numbers
A rare thing – two consecutive months of growth, as opposed to the good month / bad month yo-yo pattern (exposing the limitations of month-on-month comparisons). A rare thing, but obviously a good thing (unless you’re craving a recession).
Such as they mean anything, retail sales values (exc fuel) grew m-o-m by +0.8% in May. Even factoring in inflation, retail sales were in positive growth territory, with m-o-m volumes (exc fuel) up +0.1%. Nor was May a one-off – for the last 3 months, values and volumes were up +2.2% and +0.5% respectively. In very base terms, we bought more and spent more in May than we did in April, as we did in March / April / May versus December / January / February. Unbelievably.
It is difficult to rationalize the monthly sales figures. Obviously, May benefitted from an extra Bank Holiday to mark the Coronation. But at the same time, the figures exclude the Spring Bank Holiday on 29 May. So, two Bank Holidays rather than three. Attributing the strong performance to good weather also seems highly tenuous – from memory, the weather was fairly lousy for most of May, only improving in recent weeks.
Arguably, the most telling factor of the month-on-month comparisons is that April included Easter, seasonally one of the most important events in the retail calendar. Normally we might expect a peak then a trough the subsequent month. But any April peak this year was in fact trumped in May.
The y-o-y numbers
Blatantly overlooked by the economist community and the media, the year-on-year figures are actually far more meaningful. And equally, if not more, positive.
Y-o-y retail sales values (exc fuel) grew +7.7%, by my reckoning the sixth-best monthly performance since records began in the late 1980s. And those months that eclipsed it were heavily distorted post-COVID bounce-backs.
The context of this is obviously two-fold: a relatively modest comp from the previous year (May 2022: +1.0%) and ongoing inflation. To the latter point, retail sales volumes (exc fuel) were down y-o-y by -1.7%. But even this figure is trending in the right direction, having averaged -5% to -6% every month for over a year.
Performance by sub-sector
As ever, considerable variation in performance across retail sub-sectors. Foodstores saw values grow by +12.7%, the highest rate of growth on record. But volumes declined -1.1%, implying inflation of 13.8%. Misguided as they may be, the accusations of profiteering are going to rumble on for some time.
Inflation is far more measured in non-food. Non-food values grew by +4.2% in May, with volumes down -2.1% and implied inflation of 6.3%. Within this, a number of sub-sectors continue to enjoy both value and volume growth, including cosmetics (+27.0%, +14.9%), footwear (+23.1%, +18.2%) and garden centres (+17.3%, +7.1%). Having previously been in this top-performing camp for many months, clothing saw sales values increase (+5.6%), but volumes dip (-1.9%).
At the other end of the performance spectrum, a number of other non-food sectors saw both value and volume declines. These included textiles (-17.1%, -21.7%), PCs & telecoms (-10.7%, -9.0%), jewellery (-7.5%, -11.2%), electricals (-6.0%, -10.0%0 and DIY (-2.1%, -7.2%).
Online rebound
The online figures were the strongest since the pandemic. All online sales grew by +2.5% m-o-m and +6.7% y-o-y. Given the latter figure lagged overall retail sales growth (+7.7%) it is mathematically curious that online penetration rose from 26.0% to 26.5%.
Online grocery grew +7.7% y-o-y (+2.9% m-o-m), while non-food was up +3.9% y-o-y (+3.7% m-o-m). The only blot on the online copybook was a -3.1% y-o-y decline in household goods.
Where now?
The wait for the consumer downturn goes on. The preoccupation with month-on-month comparisons dictates that sooner or later, we will inevitably see a decline. Equally inevitably, there will be an overreaction to this. Given the strength of April and May, this blip could come sooner rather than later, perhaps even in the June figures when they are released in a month’s time.
A profound consumer reaction to interest rate rises or merely a seasonal correction or a blip? Only when we have experienced an extended run of monthly under-performance can we conclude the former.
En attendant Godot?