The Retail Note | Retail sales: all that glitters is not gold
This week’s Retail Note analyses the official retail sales figures for May from the ONS, which were on the surface very strong, but not without blemish.
6 minutes to read
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Key Messages
- Strong MoM volume growth of +2.9% widely heralded…
- …belying considerable underlying weakness
- Retail sales values (exc fuel) up +2.1% YoY
- Retail sales volumes (exc fuel) up +1.2%
- Volume growth driven by non-food (+1.5%) rather than food (-1.2%)
- But non-food actually deflationary in May (-0.1%)
- Deflation rife in PCs, electricals, DIY, furniture, garden centres
- Heavy discounting in the face of weak demand
- Furniture worst performing category (vals -8.6%, vols -6.8% YoY)
- Clothing demand still very challenged (vals -3.0%, -5.4% YoY)
- But a strong rebound in footwear (vals +16.1%, vols +14.8% YoY)
- Cosmetics continues its stellar streak (vals +13.2%, vols +11.0% YoY)
- Online penetration increases 50bps to 27.2%
- Consumer demand remains fragile and volatile.
Away from all the political mud-slinging, it’s actually been quite a good week for the UK economy. The BoE predictably opted not to cut interest rates, despite the welcome news of CPI inflation falling from 2.3% in April to 2.0% in May (BoE forecast 1.9%, consensus 2.0%). And this was followed by sharp – and slightly suspicious – rebound in retail sales in May. Without wishing to rain on any parade, there is much more to these headline numbers than meets the eye…
The headlines…
So light on commentary is the ONS Retail Sales release these days, I can quote almost all of the wording verbatim: “Retail sales volumes (quantity bought) rose by 2.9% in May 2024, following a fall of 1.8% in April 2024 (revised from a fall of 2.3%). Sales volumes rose across most sectors, with clothing retailers and furniture stores rebounding following poor weather in April. More broadly, sales volumes rose by 1.0% in the three months to May 2024 when compared with the previous three months. However, they fell by 0.2% when compared with the three months to May 2023.” I doubt any journalist, or indeed economist, will delve beyond these headlines, despite having a 97 page document and two multi-worksheet spreadsheets at their disposal.
So, all these headlines are basically saying is we bought 2.9% more stuff in May than we did in April, which was a terrible month, albeit not quite as terrible as we first thought. And we bought 1% more over the last 3 months than we did in the 3 months prior, but 0.2% less than in the corresponding period last year. Despite the bullish tone of the ONS narrative, hardly cause for taking to the street in celebration. As for singling out the performance of clothing and furniture, that is frankly nonsense.
For all that, retail sales did improve in May following an abysmal performance in April. Year-on-year retail sales values (exc fuel) returned to positive territory after April’s blip (-1.1%), growing by +2.1%. The volume recovery was, on the surface at least, more impressive at +1.2%, marking the strongest performance since February 2022. But huge amounts of devil in the detail that take some of the gloss off not just these numbers, but also those for inflation.
Performance by sub-sector
As is often the case, very polarized performance between food and non-food – but the latter seemingly outperforming the former is rarely the case. But this is what we saw in May. Food sales were weak, with values up just +1.2% YoY. With implied food inflation still running at 2.4%, volumes were down by a deeply disappointing (and slightly surprising) -1.2%.
This despite market leader Tesco declaring a strong return to market volume growth in recent months. Indeed, this volume decline is at odds with much of the messaging from the foodstore operators themselves. While disappointing, this is one area of the retail economy that is likely to be currently experiencing a boost on the back of the Euros, so expect this decline to reverse as the figures for June and July are released in due course.
Arguably more worrying are the figures for non-food. On the surface (how many times have I said that now?) the figures look great – volumes up +1.5% YoY, the best monthly performance since a COVID-distorted March 2022, or since July 2019 if the COVID years are excluded. But non-food values actually only grew +1.4%. The biggest headline of all from the latest ONS release is that non-food was actual deflationary (-0.1%).
In other words, volume improvements were driven by heavy discounting of spring/summer stock, rather than measured lowering of prices on the back of easing input cost pressures. Rather than reflect robust consumer demand, they signify the exact opposite – retailers having to ‘buy’ sales through deep discounting. Not what we want to see.
A very varied picture across the myriad of non-food categories. PCs & Telecomms saw the most eye-catching growth in both value and volume terms (+52.1% and +69.9% respectively), but this is also where deflation was most rife (-17.8%). Other deflationary categories included electricals (-5.6%), household goods stores (-2.1%), furniture (-1.8%), garden centres & petfoods (-1.0%), DIY (-0.7%) and carpets (-0.1%).
For furniture to be called out by the ONS as a strong performing category is ridiculous – it was actually the worst. Sales values fell -8.6% YoY, volumes were down -6.8% despite deflation of -1.8%. So, furniture retailers slashed prices to stimulate demand, but that didn’t work – shoppers both bought less and spent less. Barely better metrics in the other call-out category of clothing. At least this wasn’t deflationary (2.4%), but values and volumes still showed significant declines (-3.0% and -5.4% respectively). In layman’s terms, spending on clothing has been going backwards since before Christmas.
While many sub-sectors floundered, select categories rebounded. Footwear saw strong value growth of +16.1% (volumes +14.8%) after three months of decline, while cosmetics continued its stellar streak with a +13.2% increase (volumes +11.0%).
Online spending values rose by +5.4% MoM and by +4.1% YoY. According to the ONS, online penetration increased from 26.7% in April (revised from 26.5%) to 27.2% in May.
For more detail on these numbers, please refer to the accompanying Retail Sales Dashboard.
Some perspective
The tone of the ONS retail sales release is bullish and the numbers have been greeted as a triumph. Twin obsessions with any sign of easing inflation and volume growth have overridden any sense of the bigger picture.
The bigger picture is this: consumer demand remains fragile and volatile in equal measure. A dubiously strong January, a weak February, an even worse March, a dire April and a supposed bounce back in May is not a pattern that smacks of a straight line recovery, yet this what many economists are having us believe.
For all the incessant talk of inflation, deflation is far more damaging to the retail sector. Low inflation is not a cause for celebration if it is merely the product of retailers slashing prices in the face of weak underlying consumer demand. To this end, hopefully May’s deflation in non-food will prove a short term blip as stock surpluses are cleared, the weather improves and we revert to more normalized trading patterns (whatever they are). Hopefully, food sales will also return to positive volume growth territory – if they haven’t already.
And hopefully no rain – figurative or literal – on any parade.