Black November
COVID-19 Market Update – 03/11/2020
11 minutes to read
Introduction
This is the 22nd 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 three key themes:
- Impact of Lockdown 2 on
o The grocery market
o The F&B/hospitality sector
o The non-food retail market
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
To register for our ‘Commercial Conversations; webinar “Debunking the Retail Myths” on Thursday 5 Nov @ 9.30, please hit the link below:
https://event.on24.com/wcc/r/2599137/50FA9A0300ABD6E69DA372FF07A663C5?partnerref=retailteam
General Points
“The Nightmare Before Christmas”. The headlines were already written before the latest lockdown was officially announced at the week end. The second lockdown, again only affecting “non-essential” retail, with run from 5 November until 2 December at least, with a possibility that it may extend beyond this period. Cue equally predictable lamentations of “Christmas being cancelled” or “How the Grinch Stole Christmas”.
The last thing the retail sector needed, at the worst possible time? Those of a “glass half-full” persuasion can point to the fact that Lockdown 2 is likely to be significantly shorter than its predecessor and that retailers are if not more prepared, then at least more battle-hardened this time around. But the counter arguments probably carry more weight: a fresh lockdown will derail what fragile recovery we were seeing and that November is a far more important month in the retail calendar than those affected earlier in the year.
There is something of a misconception that retailers make all their money at Christmas and the festive period is the be-all and end-all for most operators. But at the same time, it is hard to deny that it is the busiest time of year for the retail sector as a whole and that any respite it may have offered has now been put under renewed pressure.
But ultimately Christmas will still happen, albeit in a very different guise that those that have gone before. How this second lockdown will play out will vary across different parts of retail. Rather than proclaim it a universal disaster for the retail sector or lazily jump on the “digital Christmas” bandwagon as so many appear to be doing, trading patterns and fortunes in the coming few weeks are likely to be highly nuanced.
1. Impact on the grocery sector
As we saw during the first lockdown, a simple dividing line between “essential” and “non-essential” does scant justice to far deeper nuances. It remains far more telling to separate out the food retailers from the rest of the pack, “essential” or otherwise.
While not necessarily a major boon, a second lockdown nevertheless plays into the hands of the major grocers, with the pendulum swinging in their favour on a number of competitive fronts. Grocery demand is likely to hold up in the face of wider lockdown and uncertainty and, if anything, it will accelerate. The level of panic buying we saw in the early stages of the pandemic is unlikely to be repeated, but a degree of stockpiling amongst certain consumer groups is also highly possible.
One sector’s ruin is another’s gain. The grocery market will undoubtedly benefit from the closure of the hospitality sector, as it did during the first lockdown. Put simply, with eating and drinking in restaurants and pubs not an option, that cash will instead transfer directly from hospitality to supermarkets, rather than fester and wait for an alternative outlet further down the line.
A similar dynamic, but slightly less clear-cut, on the non-food side. All the major grocers (Big 4 and the discounters) are major players in key non-food sectors and will be able to make hay in this market while many of their specialist non-food counterparts remain closed or limp on relying solely in their online divisions. A competitive advantage maybe, but worth flagging there is nothing they can do about ongoing soft demand for key non-food categories such as clothing.
The Welsh government’s attempts to restrict the sale of non-food items sold through supermarkets during lockdown is absolutely farcical. Artificial means designed to “level the playing field” should not be replicated in England. A situation whereby a store is open yet cannot sell certain goods, yet those same goods can be purchased online (even through that same retailer) is a ludicrous situation.
But where does this stop? The two “grey area” supermarkets are M&S and Waitrose, both of which, directly or indirectly, are even bigger in non-food than the Big 4 operators. What is to stop either of them arguing the case for devoting more floorspace to non-food during lockdown? A clampdown on this would give rise to other ludicrous scenarios of consumers not being able to buy an item they are stood next to on the shopfloor, but being able to buy the exact same item from the M&S/JLP website for pick up in the same store through click & collect.
For all the COVID-induced pain in the retail sector, grocery demand has been fairly buoyant throughout 2020. Grocery sales have grown at a monthly average of 6.0% since March, with peaks (March +10.4%, +7.9% in May) giving way to more measured growth (ca. +3-4%) in recent months. As “non-essential” retail languishes behind closed doors, grocery could conceivably grow by ca. +5-6% in November, particularly given a relatively benign comp in the corresponding month last year (+2.3%).
As a general point, the overall retail sales figures for November may not appear as dire as many would predict, for this very reason. Positive growth in food (which accounts for broadly 50% of retail sales) may gloss over a far more challenged non-food sector and gave a false illusion of what is actually happening on the high street.
Will this food growth by instore or online? Frankly, it doesn’t really matter either way. COVID-19 has reignited the whole online/physical narrative and restored artificial barriers that don’t really exist in reality. The vast majority of online grocery orders are serviced through stores (Ocado being the only real exception), so the two are effectively one and the same. All that ultimately matters for the major grocers is that they have the supply chain capability to meet demand – having learnt many lessons during the first lockdown, that experience will now be well and truly brought into practice.
2. Impact on the F&B/Hospitality Sector
The impact of a second lockdown on the F&B/Hospitality Sector is more dire than nuanced. Any feelgood around Rushi Sunak’s ’Eat Out to Help Out’ scheme back in August now sadly seems a very distant memory.
To state the blindingly obvious, another month of enforced closure will devastate the hospitality sector and sadly see many operators lose their very livelihoods. There will obviously be a big rise in takeaway and delivery sales, but this will by no means offset the huge volumes of onsite business that will be lost.
For the operators themselves, a second lockdown represents a huge double-whammy. On the one hand, there is substantial loss of sales and trade volumes. On the other hand, there are also major operational headaches – (re)furloughing staff, managing existing perishable stock and dealing with a month’s break in supply chain. More generally, any momentum that has been built up since the first lockdown was lifted has now been unceremoniously derailed.
Could it be any worse for the hospitality sector? Only if the timing were December, rather than November (but even that prospect isn’t off the table completely). There will still be three full weeks of pre-Christmas trade when (if?) the second lockdown is lifted on 3 December. Fewer Christmas parties, social-distancing compromises still in force, but expect the sector to come out all guns blazing to salvage what it can in a desperate bid to survive during December.
3. Impact on the Non-Food Sector
The death of Black Friday and a return to more normalised trading patterns over the whole festive period. Positives are few and far between as the non-food sector faces up to another month of lockdown, but these would be significant ones.
COVID-19 could potentially be the Great Fire of London that supersedes the Great Plague that is Black Friday. That is not to say that Black Friday will fall by the wayside completely (on the contrary, I would expect more Black Friday “noise” this year than ever) but its negative influence on the retail sector will hopefully wane as coronavirus accelerates an evolution that was happening in any case.
Black Friday was conceived in the US as a one-day store-based shopping bonanza. In its relatively short history in the UK, it has morphed away from this. This year it will be tangibly different on two counts: firstly, it will take place over a prolonged rather than a pre-determined period and secondly, it will barely be a store-based event at all. Neither of these are new phenomena and neither a bad thing for the retail sector as a whole.
Black Friday/Black Friday Week End/Black Friday Week/Black Friday Month – essentially Everyday is Black Friday (to paraphrase Morrissey). Even Amazon ran Prime Day in mid October this year and has been running Early Black Friday deals ever since. Black Friday as an event or “thing” no longer really exists, it’s just a strapline for any promotion or deal (genuine or phony) that a retailer (or any company whatsoever, for that matter) chooses to run at this time of year. Consumers are increasing wising up to this and Black Friday is increasingly little more than white noise (pun 100% intended).
In addition to undermining industry margins, Black Friday has in past years massively disrupted traditional seasonal trading patterns. In broad terms, a slow start to October, a huge peak around Black Friday itself, but significant troughs either side. And a mad scramble amongst retailers In December trying to make sense of it all. Black Friday has never incrementally increased spend, it has merely introduced a series of deeply unhelpful peaks and troughs.
For all the disruption of COVID-19 otherwise, there is a possibility of us defaulting to a more ‘traditional’ trading pattern this year. Consumers starting their Christmas shopping earlier giving rise to early momentum in October, a less ‘peak-and-troughy’ November, renewed momentum in early December reducing the likelihood of a last minute frenzy. If, of course, it plays out this way.
Black Friday has increasingly become an online event, for the simple reason it is a normal week-day in the UK (as opposed to a Public Holiday in the US). This year, of course, that trend will be massively accentuated by the fact that physical stores will not be open. It is inevitable that online’s share of retail sales in November will surpass the ‘high water mark’ seen in May of ca. 34%. But this spike will again be temporary.
Crucially, as with the first lockdown, online will only pick up a proportion of lost in-store sales in November. Whatever its cheerleaders may say, online is neither a direct substitute nor sponge for store-based sales. In a multi-channel world, nor does it function well in splendid isolation from physical stores. Retail sales across the piece will be higher in the three days this week before we go into lockdown and once again when we re-emerge (all being well) in early December.
Despite some online absorption, overall retail sales will be down in November, despite a relatively benign comp last year (+1.0%). The comp figure for non-food is even softer (-2.1%) making it very difficult to even have a stab at this year’s outcome. But the troughs seen in April (-18.3% overall, -53.5% in non-food) will not be repeated this time around. Perhaps more in the order of negative low single digits overall and negative high single digits in non-food?
Of course, it would be wholly disingenuous to focus purely on positives such as the demise of Black Friday. November will be an exceptionally tough month for the UK retail sector, particularly on the non-food side. Primark has already laid bare the top line implications, stating that it anticipates losing £375m in sales during second lockdown. Rather than a bellwether Primark is an outlier to much of the non-food market in that it doesn’t have an online business to compensate in any way. But it is also an outlier in terms of its strength as a retail operator. When its stores are up and running, it is one of the few clothing retailers to achieve growth in what is still a heavily contracting fashion market.
As with the hospitality operators, a second lockdown does not just affect the topline. It also throws out untold operational challenges of managing temporary store closures, inventory levels and supply chain and staff / payroll. A lot of time and effort, and indeed cost, involved at a time of reduced sales volumes is far from an ideal scenario.
But all is not lost and there is still plenty to play for. However challenging November is, there is still time for retailers to generate business – and pre-plan for a full assault when lockdown is totally lifted in early December. Three weeks would still be a decent window to claw back what momentum may have been lost in November.
A second lockdown looms. Ideal? Absolutely not. A “Nightmare Before Christmas”? For some retailers, yes, and hospitality operators, most certainly. But Christmas is not cancelled by any means.