Pent up Xmas Demand in Need of an Outlet
COVID-19 Market Update – 20/11/2020
12 minutes to read
Introduction
This is the 25th 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:
- The latest ONS retail sales figures and prospects for Xmas
- Retailers riding the storm better than others
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Pent up demand / early Xmas shopping boost Oct figs
• ONS retail sales grow y-o-y by +7.7% in Oct
• Highest monthly growth rate in 18 years
• Non-food growth of +1.7% best since July 2019
• Grocery sales growth steady at +3.5%
• Household Goods growth of +15.5%
• 2nd best HH monthly performance since records began
• Carpets, DIY, Garden Centres, Toys/Sports particularly strong
• Clothing still dire (-13%) and showing no sign of recovery
• Online (+7.5% m-o-m) helped by Amazon Prime Day
• November will show decline despite online growth
• 62% of consumers expected to spend more this Xmas than last
• 40% of consumers waiting until stores reopen in Dec to do their Xmas shopping
• £3bn of pent up Nov spend will be made in Dec
• Footfall will be down, but average spend per visit significantly up
• EVERYTHING HINGES ON LIFTING OF 2ND LOCKDOWN
1. The latest ONS retail sales figures and prospects for Xmas
The irony couldn’t be starker. As the retail sector sits encumbered in a 2nd lockdown in its peak trading season, official retail sales figures released today by the ONS are more reminiscent of economic boom times in any period of history you care to mention. Of course, the two are intertwined and the UK government’s ‘stop-start’ approach to dealing with COVID will inevitably throw up quirks such as today’s release.
Year-on-year retail sales values (exc fuel) grew by a massive +7.7% in October, the highest level of monthly growth since April 2002 (+7.9%). When Gareth Gates was No 1 in the charts with ‘Unchained Melody’. Yes, that long ago. The only other time retail sales experienced this level of growth was in 1990, when they were routinely 8%+ every month at the tail end of the 1980s boom. The best-selling single of 1990? By sheer coincidence, ‘Unchained Melody’ by the Righteous Brothers.
There are no distorting factors to skew the data, other than a twin combination of pent up consumer demand being released and Christmas spend being brought forward in anticipation of a 2nd lockdown in November (and possibly beyond). Two ‘usual suspect’ data quirks are not in play this time around. There was no weak comp here (on the contrary, retail sales in October 2019 were a very robust +3.2%), nor was there any evidence of inflation (retail sales volumes actually grew +7.8%, implying very minor deflation rather than inflation).
On a three month basis, retail sales values were up +6.0% year-on-year, with volumes ahead by +6.2% over the same period. Including fuel, the year-on-year monthly figures were slightly more subdued (values +4.8%, volumes +5.8%), underlining more than anything why it is disingenuous to include petrol in retail sales. The meaningless month-on-month figures, so valued by economists, painted an equally positive picture (+1.5% value, +1.3% volume).
But given the current status quo, it is difficult to dress up these figures, however positive, as any sort of triumph. They will not be repeated in November and the outcome for December hangs in the balance and will be wholly-dependent on when and how the 2nd lockdown is lifted.
Even within the strong figures for October, there are ongoing polarities between performances of individual retail sub-sectors. Food sales held steady at +3.5%, in line with the average of the previous three months. But the main positive was on the non-food side (even if it does prove short-lived). Having returned to positive growth territory in September for the first time since January, non-food sales grew by +1.7% in October, the best monthly performance since July 2019.
But even within non-food, the picture is very diverse. Beyond any dispute, clothing remains completely in the doldrums, with sales declining by a further -13.0% in October, no better than the decline seen the previous month (-13.7%). Fashion sales have declined by a monthly average of -34% since March. As the mainstay of the high street and shopping centres, the plight of the clothing sector probably says more about the state of those two channels than the headline retail statistics suggest.
In contrast, the strong performance of household goods (+15.5%) continued and indeed, is showing signs of acceleration. This was the second best monthly performance since records began in 1989, surpassed only by the +17.2% achieved in June 1997 (‘MMM Bop’ by Hanson, before you ask). In terms of the constituent sub-sectors, carpets (+59.3%) witnessed the strongest growth, followed by DIY (+31.3%). Furniture was more pedestrian (+2.6%).
There were interesting divides between seemingly congruous sub-sectors. Electrical goods enjoyed stellar growth of +17.6% (unusual, as there tends to be a lull in demand ahead of Black Friday in November), but PC/telecoms declined by a dire -42.0%, the latter being the only retail sub-sector to underperform clothing over a prolonged period (average monthly slumps of -45% since March). Likewise, within Health & Beauty, dispensing chemists (+68.8%) and medical goods (+32.7%) continue to outweigh more discretionary cosmetic sales (+1.0%) by a considerable margin.
Strong growth in categories such as Toys/Sports Goods (+29.0%), Books (+10.0%) and Recorded Music/DVDs (+39.4%, yes really) bears testament to early Christmas shopping, all these categories being typical of festive gifting. As outlined in last week’s Retail Note, early Christmas trade is no bad thing, albeit better if not engineered by artificial factors such as a 2nd lockdown.
Online showed even stronger-than-expected growth, reporting a year-on-year increase of +60.1%. Although this figure is lower than previous months (and will be lower than that seen in November) it pre-dated 2nd lockdown and corresponded to a time when the high street was still open. Online penetration was 28.5% in October, with food at 10.4% and non-food at 24.2%.
Over much of the pandemic, multi-channel (physical retailers with an online arm) has grown at a faster rate than pure-play (online only operators). This trend reversed somewhat in October, with non-store retailers seeing month-on-month growth of +7.5% versus +4.7% for all retailers – almost certainly a reflection of Amazon shifting Prime day to October and kicking off Black Friday a whole month early (and others following like lemmings).
As I said last week, that was then, this is now. November’s outturn figures are likely to make for far less positive reading, even though they will not be released until 18 December. The headlines will inevitably be about “skyrocketing online demand”, but the BRC nevertheless estimates that £2bn of retail sales are being lost per week during the 2nd lockdown. Skyrocketing online demand maybe, but a net decrease in retail sales is beneficial neither to the retail sector as a whole, nor to the wider UK economy.
Despite all the noise to the contrary, Black Friday is likely to be a damp squib, just an endless barrage of marketing guff with little substance other than phony ‘deals’. Or, if it does go beyond that and retailers offer genuine bargains, the sound of same retailers desperately frittering away margin that they can ill afford to lose. In my firm opinion, no retailer that has undertaken a CVA has any enduring credibility as a brand if it wholeheartedly embraces Black Friday.
What of December and Christmas as a whole? As I’ve said before, all is not yet lost (pending the 2nd lockdown being lifted from 3 December). There is massive pent-up consumer demand, only some of which has been released in October. If anything, this demand has been put into a pressure-cooker through November, with online offering but a limited outlet. Consumers are more determined than ever to spend this Christmas, to the point that every traditional economic metric is being thrown out the window.
Our friends and business partners at CACI have helpfully gone as far as to quantify these dynamics. In their “What’s In Store For Christmas” infographic, they proclaim that “we can look forward to a bumper December” and that “£3bn of store spend that would have taken place in November staying in peoples wallets until shops reopen”. And who are we to disagree?
A bit more detail and colour on CACI’s analysis. This year, 62% of consumers plan to spend more or the same as last year. The average increase in spending is likely to be £390 per person. Of the 38% of consumers that plan to spend less, the average cut in spending is likely to be £183 per person. Refreshing to see both sides of the equation rather than the typical media interpretation of “Consumers are going to spend £183 less this Christmas”.
On pent-up demand and the fact that not all spend will simply gravitate online: “40% of all consumers are planning on waiting until the shops reopen in December to do their Christmas shopping in physical stores. 50% of these people were always going to shop in December, but 50% are intentionally delaying their shopping from November to when the shops reopen in December.”
Nor are CACI blind to online/multi-channel: “online halo uplift (already at 53%) will boost to 62% with a further £1.6bn going to the same brands, just via the online channel. If it wasn’t for the store these sales would not happen.” Of those consumers that are planning to switch from physical stores to online this Christmas, 46% are “going to purchase from the website of the specific brand they can no longer visit in person”. As we say time and time again, retail is not binary, consumers shop brands, not channels.
Consumers will be making fewer in-town visits, but spending substantially more on each visit: local high streets are likely to see higher visits, a positive trend to have emerged from the pandemic. Conversely, visits to major city centres are likely to be down -44% and to shopping centres by -34%. But counterbalanced by higher spend. Why footfall is a very one-dimensional retail barometer and why the media should stop placing so much emphasis on it.
A consumer desperate to spend, huge pent up demand. Lower footfall generally, but higher expenditure per visit. But all dependent on the 2nd lockdown being lifted (and the pressure valve released) on the 3 December as provisionally indicated by the government, but as yet unconfirmed. Anything else is frankly unthinkable.
2. Retailers riding the storm better than others
Positive retail sales figures (albeit qualified by underlying market conditions) reinforced to a string of upbeat retailer trading statements – what is the supposedly “busted flush” retail world coming to?
B&M underlined its credentials as one of the UK’s best-performing retailers (helped, in no small measure, by being classified as an “essential operator” and therefore able to stay open during lockdown) by reporting a +95% surge in group EBITDA to £296m in the 26 weeks to 26 Sep. Adjusted group pre-tax profit more than doubled to £254m. Group revenues jumped +25% (+23% like-for-like) during the period to £2.2bn.
Over the period, B&M opened nine new stores, offset against eight store closures. It created more than 1,800 new jobs over the past six months, in addition to repaying the £3.7m furlough support originally received during the height of the crisis. A retailer trading well, reliant on store- rather than online growth, still acquiring sites, increasing its workforce and paying its way on rent and tax? There’s a thing.
Strong trading and a profits upgrade from Halfords (another “essential retailer”). Despite the peak cycling and staycation season coming to an end, sales have remained strong since its last trading update earlier this month. The business recorded a +22% surge in like-for-like sales growth in the five weeks to 25 Sep. Cycling was up +46%, with motoring up +7.5% (with autocentres up +18%). Accordingly, Halfords upgraded its half-year profit targets to in excess of £55m, up from previous guidance of £35m and £40m.
Strong DIY demand since lockdown was lifted has filtered through to Kingfisher. The B&Q and Screwfix owner saw group like-for-likes increase +17% at a group level in the three months to 31 Oct 31. On a total basis, group sales increased 18% in constant currency to £3.5bn. Like B&M (and other retailers, to be fair), Kingfisher has repaid £23m it received under the government’s furlough scheme during the first half of 2020.
Growth in the UK and Ireland outpaced all of Kingfisher’s other markets during the period. UK like for likes rose +20%, while total sales were up +22% on a constant currency basis. B&Q’s like for likes surged +24%, while at stablemate Screwfix they were up +13%. Outside the UK, France and Iberia were Kingfisher’s next best performing territories, posting like-for-like growth of 19% and 18% respectively
E-commerce revenues rocketed by a headline-grabbing (and stock-market friendly) +153% during the period and now account for 17% of total group sales, compared to 8% a year ago. Notably, click & collect accounted for around three quarters of Kingfisher’s online revenue. By extension, less than 5% of group sales were non-store (and even then, a store is likely to have played some role, tangible or otherwise).
Strong retail sales when stores are able to open. Derailed by a 2nd lockdown. Black Friday noise, precious little action. Huge pent up consumer demand to defy all economic logic. A provisional date for when lockdown will be lifted in early December. Increasing uncertainty as to whether this will actually happen and the nature of it, if it does materialise. Dire consequences for the high street and UK economy if it doesn’t.
As this month I enter my 28th year of analysing the retail sector, this is as bizarre a market as I have personally ever known (November 1993 - Meat Loaf and “I’d Do Anything for Love” for anyone that’s read this far and is even remotely interested).
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com