Retail recovery: a marathon not a sprint
COVID-19 Market Update – 16/04/2021
8 minutes to read
Introduction
This is the 37th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key themes:
- Easing of Lockdown V3 – the first week
- What we learned from Tesco’s and JD’s results this week
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Lockdown lifted on “non-essential” retail from 12 April
- Year-on-year footfall surges +516%
- Week-on-week footfall +225%
- But down -15.9% on equivalent day in 2019
- Retail sales grow by +8.3% in March
- Grocery positive despite tough y-o-y comp
- 8 out of 13 categories were “in significant decline”
- Only 2 in 5 pubs able to open thus far
- Restaurant bookings still down -31% on 2019
- Robust FY performance from JD Sports
- JD to recommence full rent payments to over 75% of landlords
- Calls for rent rebasing for Central London stores
- No detail on rent arrears resolution
- Tesco sees UK FY sales up +8.6%
- But pre-tax profits decline -19.7%
- Tesco incurs £892m of COVID-19 costs; forgoes £535m of business rate relief
1. Easing of Lockdown V3 – the first week
A marathon not a sprint. One swallow does not make a Summer. Not out of the woods yet. Whatever your favourite idiom, it would be wrong to read too much into patterns seen in the first week since the latest lockdown was lifted on Monday. But the re-opening of “non-essential” retail and outdoor hospitality is clearly an important first step on an unfeasibly long road to recovery.
That there was swift rebound amongst consumers was a foregone conclusion. Equally predictable was the media coverage of queuing crowds outside Primark stores. Having been denied the privilege of visiting stores for the best part of four months, pent-up demand amongst consumer is palpable and inevitably resulted in an initial surge.
Footfall figures only go so far in quantifying the surge in demand. On Monday itself, footfall across All Destinations was up by a massive +516% year-on-year, with Shopping Centres seeing the largest uplift (+657%), followed by High Streets (+544%) and Retail Parks (+308%). The week-on-week figures were less dramatic, but still showed triple digit growth (All Destinations +155%, Shopping Centres +225%, High Streets +176%, Retail Parks +36%).
Despite being dubbed “an amazing positive result”, it would be dangerous to be too seduced by these numbers. Comparisons versus times of lockdown are always going to throw up massively distorted results and this is going to be a recurrent theme in any number of data releases over the coming year. As I’ve said on many occasions, retail’s recovery is about so much more than the numbers.
If anything, the most meaningful footfall figures were the two year ones, comparing 12 April with the corresponding Monday in 2019 (15 April). These reveal a more sobering picture, with footfall across All Destinations down -15.9% (Shopping Centres -16.5%, High Streets -26.7%, Retail Parks +7.8%).
Not to major on the most negative numbers for the sake of it, but this is a more realistic reflection of a market that is still constrained by a number of factors. Some consumers (34%, according to Mintel) still feel unsafe visiting stores while ongoing social-distancing, however necessary, is still a constraint on capacity. These will ease over time, reinforcing the “marathon not a sprint” mantra.
Somewhat lost amongst all the euphoria of stores re-opening, the BRC released its retail sales figures for March this week, which presented a very mixed picture. The headline figures were very strong, with total retail sales up +8.3% year-on-year (+8.4% like-for-like). Food was the main driver behind this growth, which is significant given that it was against a tough comp in March 2019 when consumers started stockpiling ahead of Lockdown V1. But, of course, in March 2020, the grocery market continued to benefit from the fact that the hospitality sector was still closed.
Of the 13 categories tracked by the BRC, eight “remained in significant decline”. Key categories such as fashion and beauty “remain in double-digit decline compared to pre-pandemic levels”. Over the three months to March on a two-year basis, in-store sales of non-food products fell 44% in total and 44% on a like-for-like basis. Online non-food sales rose 94% on a two-year basis. Thankfully, the last set of BRC figures to reflect a full month of lockdown.
The hospitality sector faces an even longer haul. Only around two in five pubs actually opened this week. And pity the many landlords that woke up on Monday morning to see their carefully-curated outside space covered in a dusting of snow, despite it being mid-April. But clearly this didn’t deter many drinkers. But media images of crowded beer gardens shouldn’t detract from the severe capacity and operational constraints the F&B sector is still operating under.
In terms of eating out, the ONS reported that reservations for a meal out on Monday rose to 79% of the level recorded on the equivalent Monday in 2019. Apparently, this was the first-time seated dinner reservations have exceeded 2% of 2019’s level since the latest lockdown was announced in January.
Again, without wishing to be the voice of doom, surely it is more accurate to say that reservations were down -31%, rather than “79% of the level”? Realistically, we can only start to gauge F&B performance and recovery when the sector returns to something like full capacity from 17 May. With hopefully no more snow on the horizon…
Ultimately, it’s not about what happened on Monday. Nor this week, nor the next. It’s about what happens over the coming months and indeed, years. Retail is again taking its first tentative steps on the long road to recovery. The hard work (re)starts here.
2. What we learned from Tesco’s and JD Sport’s results this week
Annual results from two of the UK’s most significant retailers in the shape of Tesco and JD. One food, one non-food. One “essential”, one “non-essential”. Both multi-channel. Both leading practitioners in their particular field. A good cross-section of the retail market, but not necessarily representative of all operators.
JD Sports has “retained substantially all of its record profitability” despite facing “unprecedented challenges” over the past year. The business posted pre-tax profit before exceptionals of £421m in the year to 30 January, down from £439m the previous year. Sales were just ahead of the previous year, at £6.17bn. Profit guidance for the new financial year is between £475m and £500m.
JD Sports executive chair Peter Cowgill put the strong performance down to factors including the strength of the JD brand, product relevance and an “agile multichannel ecosystem”. “You cannot transmit the same energy online as you can in a store,” he said, adding that he was confident stores would play a significant part in younger shoppers’ post-pandemic spending.
Such a strong performance from a “non-essential” retailer in the face of adversity will inevitably raise questions from landlords as to non-rent payment during the pandemic, as well as those that were left out of pocket through the pre-pack administration of Go Outdoors (JD Sports’ outdoor division, which includes Blacks and Go Outdoors, reportedly returned to profitability in the second half).
JD confirmed that it would recommence paying full rent to “over 75%” of its landlords now that stores have reopened. But negotiations on rent arrears are presumably ongoing and precedents on this are yet to emerge. “Non-essential” retail may have re-opened, but there is still so much to resolve.
Central London was also called out by JD. Although the retailer’s performance on reopening day was “at the upper end of expectations”, overall footfall in Central London would take some time to recover and the capital had been “battered to death”. Although Cowgill said JD Sports remains committed to its city centre locations in London, in the mid to long term rental prices would need to fall for those locations to continue to be viable.
As predicted, Tesco’s fortunes largely reflected those of fellow ‘Big 4’ operator Morrison’s, which reported its numbers a few weeks back. In essence, a highly impressive top line performance, leading to a slightly tenuous conclusion that the grocery sector has been a “winner” from the pandemic, when actually profitability has come under fierce pressure.
The UK’s largest retailer reported an increase in full-year sales (exc fuel) of +7% on a constant currency basis to £53.4bn (+6.3% like-for-like). UK and ROI sales increased +8.6% (+7.7% like-for-like) during the period to £48.8bn. In terms of wider context, the comparative data from the ONS (covering March 2020 to February 2021) all grocery sales at the multiples grew by +4.7%, so this constitutes significant out-performance by Tesco.
But the business incurred a staggering £892m in COVID-19-related costs across its UK business during the financial year, which the retailer said set it up for “a strong recovery in profitability” in its current financial year as the majority of costs incurred would not be repeated. Operating profits for the group declined -21.3% to £1.7bn while pre-tax profits were down -19.7% to £825m.
Business rates were a major factor in the profitability equation. Had it not made the decision to forgo £535m of business rate relief (another staggering figure), UK and ROI operating profit would have increased by +11% to £1.86bn.
For the first time ever, Tesco gave a precise figure for its online sales - £6.3bn, a year-on-year increase of +77%. At the height of the pandemic, it doubled its online fulfilment capacity to 1.5 million slots per week. Easy to forget that Tesco’s share of the online grocery market (30%) is in fact higher than overall grocery market share (27%). But no reference as to the profitability of its online operations and whether such explosive growth would be maintained, nor to what extent it was earnings dilutive.
Two of the UK’s strongest retailers emerging from the crisis only slightly scathed. Sadly, not all operators will be in the same boat. Onwards nevertheless.