Retail: good things come in threes
This week’s Retail Note focuses on far-better-than-expected retail sales figures from the ONS for October, which came hot on the heels of a surprisingly favourable outcome on business rates for the retail sector in this week’s Autumn Budget.
6 minutes to read
Key Messages
- Oct retail sales surprise on the upside
- Y-o-y retail sales values (exc fuel) up +2.9%
- But y-o-y volumes (exc fuel) down -6.7%
- M-o-m values (+1.0%) and volumes (+0.3%) both up
- We bought more and spent more in Oct than Sep
- Polarised performance by retail sub-sector
- Textiles, Footwear, Cosmetics, Carpets, Books and PCs v strong
- Electricals, DIY, Jewellery, Chemists v weak
- Online sales values down y-o-y -7.7% (-0.7% m-o-m)
- Online penetration reduces to 26.1%
- Good news for retailers on business rate reform
- Freezing of multiplier & scrapping of transitional relief major benefits
- But other pinch points (e.g. increased personal taxation, NLW increases)
- Xmas 2022 set to be a total paradox
- A record in terms of spend (values) but worst ever in terms of volume performance.
Cover your ears if you are an economist. Retail sales seldom follow a trend. Over and above seasonality, they are always erratic. They always have been, they always will be. Just because we’re in a growing cost of living crisis, don’t assume a smooth, uninterrupted, accelerating decline. There will always be surprises and this is most definitely the case with the October figures released today.
The headline numbers
Retail sales values (exc fuel) grew +2.9% year-on-year (+4.8% inc fuel). In layman’s terms, we spent +2.9% more in October than we did in the same month last year. Inflation is obviously a major factor in the numbers, but the fact that this ‘unadultered’ number is the one that ultimately feeds into GDP is significant. With GDP in decline, it seems churlish to lay the blame for wider economic slowdown squarely on the consumer when he/she continues to spend.
Of course, the y-o-y volume figures tell a very different story (exc fuel -6.7%, inc fuel -6.1%), with well-documented inflation depressing the amount of stuff we buy, rather than necessarily how much we spend.
The biggest surprises were in the far less meaningful m-o-m figures so favoured by the media and economist community. M-o-m retail sales values (exc fuel) grew +1.0% and volumes were up +0.3%. Expressed another way, we bought +0.3% more stuff in October than we did in September and spent +1.0% more. So much for a tightening consumer squeeze.
The ONS and economists have been quick to dismiss this uptick as a temporary blip on the basis that September’s figures were badly affect by the additional Bank Holiday for the State Funeral of HM the Queen. Strange that few of them made much of this when the September figures were released a month ago, preferring to major much more on the cost of living crisis narrative.
Award for the most negative agenda-suiting headline goes (as usual) to the BBC. “Shop sales up but remain below pre-pandemic levels”. Really? The statement is only true on a single technicality. Volumes (inc fuel) in October were -0.6% lower than February 2020, the most spurious comparison imaginable. And a technicality that is actually wrong – volumes (exc fuel) were actually +0.1% ahead of February 2020. Not to mention values (exc fuel) being ahead by +13.1%. Selective reporting in the extreme.
A complex picture by sub-sector
As ever, performance varied massively by sub-sector, with trends of previous months generally continuing in October. Food sales (+5.2% value, -7.2% volume) were generally far stronger than non-food sales (+1.4%, -6.3%). But within the latter, there continue to be a number of brightspots, with some categories continuing to defy expectation and achieve value and volume growth. These include Textiles (+31.0%, +21.0%), Cosmetics (+28.9%, +19.2%), Footwear (+28.8%, +20.0%), PCs & Telecomms (+23.8%, +25.9%), Books/Magazines (+15.5%, +9.4%) and Carpets (+14.9%, +5.4%).
At the other end of the performance spectrum, a number of categories saw significant value and volume declines. Some of these are logical, others completely counter-intuitive. Household Goods (-5.2%, -13.5%), Jewellery (-9.8%, -14.8%), DIY (-7.3%, -17.8%) fall into the former camp, as do Electricals (-17.7%, -17.7%) and Sports/Games/Toys (-4.6%, -10.4%) – the latter two categories traditionally seeing a lull in demand in October ahead of the Black Friday ‘extravaganza’ (sigh) in November. Less easily explained are the continued poor performances of Chemists (-26.3%, -29.8%) and Second Hand Shops (-16.2%, -21.5%).
Online’s freefall continues
The decline in online sales continued apace. Online sales values slumped -7.7% year-on-year (-0.7% month-on-month). Online grocery declined -8.3% y-o-y, while non-food online sales were down -9.7%. Factoring in inflation, online volumes would have been down ca. -20%. Yet, according to the ONS, online penetration curiously remained relatively stable at 26.1% (vs 26.5% in September).
Non-store retailing (i.e. online pure-players) saw year-on-year sales decline -6.2%, but were up +0.8% on a month-on-month basis. Evidence perhaps of Amazon’s seemingly desperate decision to kick off Black Friday deals a full month ahead of this year’s ‘event’ (sigh).
Surprise #2
Not related in any way, there was also some good news for the retail sector in this week’s Autumn Budget, with the Chancellor announcing a surprise package worth £13.6bn to help business rates payers. The package of relief measures included:
- Freezing the business rates multiplier for another year
- Extending and increasing relief for retail, hospitality and leisure businesses worth ca. £2.1bn
- Abolishing downwards transitional reliefs caps.
- Protecting small businesses who lose eligibility for either Small Business or Rural Rate Relief due to new property valuations through a new scheme.
Whilst not a silver bullet, these measures should benefit many retailers, particularly the reform of transitional rate relief. In essence, many retail stores across the country will now see the effects of significant rent rebasing over recent years reflected in the level of tax they pay. And if they are due rebates (which many will be) they will receive these at the appropriate time, rather than staggered over a number of years.
We are still working out the full implications of these measures with our Business Rates and Agent colleagues (watch this space), but tentative analysis suggests that they could lead to average 45% and 35% reductions on the western and eastern ends of Oxford Street respectively.
Of course, the Chancellor giveth and the Chancellor taketh away. Other measures in the Autumn Budget will impact negatively on the retail sector going forward. Increased personal taxation will inevitably impinge on consumer demand, while increases in the National Living Wage and Corporation Tax will weigh heavily on retailers’ balance sheets.
But, at last, some positive movement on business rates.
The next two months
Two welcome surprises, is a third too much to hope for? Black Friday cancelled?
Despite the uptick in retail sales performance in October, no one is getting ahead of themselves and the cost of living crisis is a very real issue for many. Black Friday won’t be cancelled (sadly) and is already in full swing a full week ahead of the official date (underlining the sham that it is and, quite frankly, always has been). Only the most misguided retailer will be looking at Black Friday as the saviour of the festive season and the fact that October sales were fairly strong is a good indicator that we might avoid the dangerous demand spike in late November (and subsequent troughs) that we have seen in past years.
The press have prematurely made up their minds that this Christmas will “the worst ever” for retailers. I would very tentatively predict that Q4 retail sales values will grow by between +3.0% and +3.5%, but volumes will be down ca. -5%/6%. This would indeed be the worst volume performance on record, but at the same time, actual spend would be higher than at any point in history.
The worst Christmas on record, when we actually spend more money than ever before? Who said retail sales were anything other than erratic.