The retail note - 11 January 2018

Written By:

Stephen Springham, Knight Frank

11 Jan 2018

5 minutes to read

Categories: Retail UK

Christmas Trading – Round 2

Retail sales figures from the BRC, Christmas performance figures from the major grocers (Tesco, Sainsbury’s, Morrison’s, Waitrose, Aldi and Lidl) and fashion operators (Marks & Spencer, HoF, Moss Bros, Superdry, Ted Baker, Joules  and Fat Face)

• At last, the first ‘semi-official’ read on Christmas trading in the shape of December figures from the British Retail Consortium. Despite largely negative narrative, the top-line figures themselves were fairly good – against a strong comp, year-on-year retail sales were up by 1.4% overall and by 0.6% on a like-for-like basis. But the performance of food far outstripped that of non-food categories (see below).
• With the caveats outlined in last week’s note, a number of smaller, ‘lifestyle’ fashion retailers reported strong festive trading figures. The highest growth figures were reported by Quiz (+31.9% for the 7 weeks to 6 Jan) and Joules (+19.2% for the 7 weeks to 7 Jan), but larger, more established brands such as Superdry (+13.6% for the 10 weeks to 6 Jan) and Ted Baker (+9% for the 8 weeks to 6 Jan) also reported highly creditable sales figures. Fat Face (+12% for the 5 weeks to 6 Jan) and Jigsaw (+7% for the 5 weeks to 31 Dec) proved that it was possible to thrive without partaking in Black Friday.
• Joining Debenhams as under-performers were Moss Bros and House of Fraser. The former issued a profits warning, with total sales up just 1.1% in the 23 weeks to 6 Jan and like-for-likes down 8% in December. Having requested rent reductions from landlords and with ongoing concerns over its covenant, HoF saw sales decline 4% in the 6 weeks to 23 Dec, with in-store sales down 2.9% and e-commerce down an unfathomable 7.5%.
• As ever, a mixed bag from M&S. Total Q3 (13 weeks to 30 Dec) sales were up 1.1%, but were down 1.4% on a like-for-like basis. Food (+3.6% overall, -0.4% like-for-like) had ‘better’ headline figures than clothing and home (-2.3% overall, -2.8% like-for-like), but in the context of the respective performances of the food and non-food markets (see below), the grocery business under-performed. Although sales growth in clothing was lacklustre, the company did not resort to heavy discounting (c.f. Debenhams) and was thus able to maintain margins.

Stephen Springham, Head of Retail Research:

There is a tendency to read too much into the festive reporting season. This last week we have seen the media trying to square their early summation that Christmas was a complete write-off and that UK retail is entering 2018 on its knees, with relatively robust retail sales figures for December and a string of largely positive trading statements from the retailers themselves. Rather than backtrack completely, the usual cop-out is to conclude that ‘online was the winner’. Online is a channel, it can’t be a ‘winner’ any more than football can ‘win’ the Premiership.

The festive season is more an indicator of broader trends, rather than the ‘make or break’ period which sorts out winners from losers as it is usually depicted. And if there was one clear trend last Christmas it was the polarisation of food and non-food performance, the former significantly outperforming the latter.

What a difference 2/3 years make. 2015 undoubtedly marked the nadir of the UK grocery market. Back then, the market was hugely deflationary, volume growth was non-existent and the Big Four toiled. And some.

The market was extremely polarised, with the discounters (Aldi and Lidl) and upscale operators (Waitrose and M&S) squeezing the Big Four’s ‘middle ground’.  Fast forward to 2017 and the grocery market enjoyed growth of 3.8% in December (according to Kantar), with total festive spend up by around £1 billion in absolute terms. The market is now inflationary, but there is still a modicum of volume growth and the Big Four prospered.

In last week’s note I highlighted the pitfalls of directly comparing retailers’ trading figures, unless they correspond to exactly the same trading period. Whatever the actual numbers say, there wasn’t much to choose between Tesco, Morrison’s and Sainsbury’s respective performances – they all did well.

Morrison’s reported the ‘best’ headline numbers (and certainly the best ‘beat’ of analyst expectations). Like-for-likes grew 2.8% in the 10 weeks to 7 Jan, split between retail (+2.1%) and wholesale (+0.7%). Against strong comps last time, this performance further underlined the sustainability of the group’s recovery plan under David Potts – not bad for a retailer that 2/3 years ago some of my fellow analysts (I won’t name and shame) were saying had no future.

Tesco may have come in slightly lower than some analysts’ expectations, but it nevertheless reported like-for-like sales growth of 2.3% for Q3 (13 weeks to 25 Nov) and 1.9% for the Christmas period (6 weeks to 6 Jan). The figures would have been higher still (ca. 0.5%) had it not been for disruption around tobacco sales following the collapse of Palmer and Harvey. Sainsbury’s saw retail sales up 1.2% and like-for-like sales up 1.1% over the 15 weeks to 6 Jan. The business also raised its profit guidance on the strength of synergies with Argos. 

What of the polarisation of 2/3 years ago? Some of this remains to this day – Aldi and Lidl reported sales growth of 15% and 16% respectively in December. Neither provided like-for-like figures (and characteristically scant detail in general), but both continue to put on significant market share.

But there have been some changes at the more premium end of the market. Waitrose is still more than holding its own (overall sales +1.4% overall and +1.5% like-for-like for the 6 weeks to 30 Dec), but M&S’ food business saw like-for-likes decline. If there has been a victim of the resurgence of the Big Four, it appears to be M&S – it is perhaps no coincidence that virtually all the grocers, including the discounters, reported stronger than average growth in their respective premium ranges over Christmas.

It has certainly been a painful few years for the UK grocery market and the road back has been a long one. Nor has the well-documented structural change fully played out. But now at least we have some positive narrative. 

Read the Retail Property Outlook 2018 here