UK retail: Christmas 2023 off to very slow start
This week’s Retail Note focuses on the October retail sales figures from the ONS and outlines KF’s expectations for the wider festive period.
7 minutes to read
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Key Messages
- Disappointing retail sales performance in Oct
- Retail sales run counter to other positive consumer metrics
- Retail sales values increase +4.0% YoY
- Worst monthly performance since Jan
- Retail sales volumes down -2.4% YoY
- Easing implied inflation (6.4%) provides limited solace
- Very difficult month for non-food (values -0.6%. volumes-4.9%)
- Slow start to the festive season
- But Xmas itself is likely to be decent rather than disastrous
- KF predicts spending will increase by +5% to 6% YoY in Q4
- But volumes will be down by -1% to -2% YoY in Q4
- Food volumes potentially to return to positive growth by YE
- KF forecasts relate to non-seasonally adjusted (NSA) figures
Christmas has been cancelled. That seems to the summation of media (over)reaction to today’s retail sales figures from the ONS. Undeniably weak rather than totally disastrous, the figures make a mockery of the narrative that was doing the rounds that consumers had started shopping early for Christmas.
And oh the irony. Having been surprised on the upside virtually all year when the macro-economy was mired in gloom, retail sales suddenly surprised on the downside just as everything appears to be on the up. Consumer confidence is rising, footfall is building, and wages are rising faster than inflation. Yet, paradoxically, retail sales suddenly go into reverse.
Headline retail figures
Well, not technically into reverse. Year-on-year retail sales values (the most meaningful measure in the whole release) actually grew +4.0% (+2.2% inc fuel). Although positive, this marked the weakest monthly performance since January (+3.4%) and was significantly lower than the monthly average YTD (5.6%).
And, of course, value growth was purely inflationary. Retail sales volumes (exc fuel) were down -2.4% (-2.7% inc fuel). Although this is better than the monthly average YTD (-3.1%), it is nevertheless a very disappointing reverse on the direction of travel in previous months, with volumes in September down just -1.5%.
Little comfort in the fact that inflation is tangibly declining. Implied inflation for retail was 6.4% in this latest ONS release (foodstores 9.0%, non-food 4.4%). The fact that this figure is higher than CPI (4.6%) underlines that the latest easing of inflation was largely driven by energy rather than retail prices.
It is perhaps also a timely and sobering reminder that a return to ‘normalised’ inflation may not necessarily be the panacea that it is purported to be. A situation whereby inflation returns to ‘normal’ yet retail sales volumes do not recover would be infinitely worse for the retail sector than we have seen to date. Hopefully, this is a situation that will not come to pass.
For what they are worth (IMHO precious little) the widely-reported month-on-month figures showed a decline in retail sales volumes (exc fuel) of -0.1% (-0.3% inc fuel). MoM value sales were flat (+0.1% inc fuel). Not great, but not as dire as all that.
Food vs Non-Food
The usual variations between different product categories, but a discernible gulf between food and non-food. Grocery sales grew by +7.7% YoY, but volumes were down a disappointing -1.3%. This figure was better than the monthly average YTD (-2.6%), but a setback on the -0.8% recorded in September. The return to positive volume growth by the end of the year still remains a possibility, but October’s figures were certainly a setback.
Non-food generally had a terrible month. Non-food sales values declined -0.6%, the worst monthly performance since the dark days of lockdown (Feb 2021 -23.1%). Volumes were down -4.9%. Hardest hit were sectors such as Textiles (values -27.3%, volumes -30.0%), PCs & Telecomms (-14.0%, -9.2%), Garden Centres / Petshops (-9.2%, -12.1%), Chemists (-7.9%, -17.9%) and DIY (-6.0%, -7.5%). Clothing, too, had a rare disappointing month (-1.1%, -7.2%).
Few non-food sectors bucked this general trend, although a handful did report positive value and volume growth, including Footwear (+7.6%, +3.7%) and, perhaps more surprisingly, Furniture (+3.9%, +1.3%).
The media somehow construed that it was a strong month for online growth. MoM online actually underperformed the wider retail market (-1.2% vs 0.0%), with online grocery down -1.7% and online non-food down -2.8%. The only real positive was the performance of online pure-play which saw +7.1% growth YoY and +0.2% MoM, no doubt a reflection of Amazon’s latest Prime Day campaign.
Knight Frank Christmas predictions with ONS data caveats
It is always dangerous to read too much into one month’s retail sales figures, so it is far too early to write off the prospects for Christmas. The fact that the ONS data is always a few weeks lagging means that November is already half over and the horror that is Black Friday is nearly upon us and, by my reckoning, there are just 37 shopping days left until Christmas Day itself. All still to play for.
No doubt a weak October will raise expectations for Black Friday. Vain expectations that are unlikely to be fulfilled by Black Friday in isolation, but retailers will nevertheless be looking for momentum to build in November generally. The early indications are of a late Christmas surge this year rather than an early one.
Making Christmas predictions is both ridiculously easy and difficult at the same time. Easy in that the ‘big picture’ is essentially always the same – Christmas will happen and whatever the mood music socially, politically or economically, consumers will still spend huge amounts of money, enough to go around. The nuances are around the patterns and timings of demand, whether retailers hold their nerve and maintain their margin position (and don’t do silly things around Black Friday) and whether they make the right calls on stock (for example, not over- or under-buying).
Difficult in that it is increasingly challenging to put numbers to retail sales. Or rather, ones that are reflective of what actually happens on the ground. The ONS are increasingly unhelpful in this regard, so any forecasts need very strong caveats.
The key shortcoming is the extent to which the ONS “seasonally adjust” the raw data. In recent times, this has been extreme and this extract from their Glossary beggars belief: “Seasonally adjusted (SA) estimates are derived by estimating and removing calendar effects (for example, Easter moving between April and May) and seasonal effects (such as increased spending in December because of Christmas) from the non-seasonally adjusted (NSA) estimate.”
Glossing over the obvious error that Easter could ever fall in May, this is essentially saying the ONS adjust their December data to exclude Christmas. Which is unbelievable. Of course, the non-seasonally adjusted (NSA) figures are in the wider release, but are squirreled away and none of the ONS narrative (nor media coverage) even mentions them. The purest NSA volume figures are on ca. P.38 of a 100+ document, the NSA value equivalents on ca. P.58 onwards.
Seasonally adjusting the data gives rise to any number of inconsistencies. Take last Christmas as an example. MoM figures showed that November declined on October and December declined on November. In essence, saying that we spent more in October than we did in December, which is not true in any universe, real or parallel. And of course, weird and wonderful figures create an uneven comp base a year on, which is where we are now.
The differences between SA and NSA figures can be huge. Take the December 2022 release as an example. SA retail sales values (exc fuel) +3.3%. NSA (i.e. undoctored) +6.0%. SA retail sales volumes (exc fuel) -6.1%. NSA (i.e. undoctored) -2.9%. In essence, ‘real performance’ nearly twice as good as the ‘headline’ numbers upon which the ONS (and media) lead.
These lengthy caveats notwithstanding, our Christmas predictions are: retail sales values will grow by between +5% and +6% in Q4 and between +6% and +7% in December. Volumes will decline by between -1% and -2% in Q4 and between 0% and -1% in December. For tighter predictions, go mid-range on any of these figures. Behind the numbers, the key thing to look out for will be potential bottoming out of volume declines, which are more likely in food than non-food. But hopefully a positive direction of travel on both.
Final thoughts
The figures for October were disappointing, but all is not lost. Despite all the inevitable white noise, Black Friday will not provide salvation in itself, nor should anyone expect it to. Christmas will still happen and should be decent, not necessarily outstanding, nor a disaster.
But come it will. Unless the ONS have their way.