Could have been worse - under the circumstances?
COVID-19 Market Update – 22/01/2021
15 minutes to read
Introduction
This is the 30th of a series of weekly notes (and 3rd of 2021) analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores three key themes:
- Official retail sales figures for Christmas
- Definitive retail sales for 2020 FY
- Other festive reporting to date
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• Retail sales values (exc fuel) +5.5% in Dec
• A far better performance than widely reported
• Fuel sales distort picture, but are irrelevant
• Huge polarity between grocery and non-food
• Food sales +3.7%, non-food -3.4% in Dec
• Clothing improved on Nov, but down -15.5% y-o-y
• Xmas gifting categories weaker than HH ones
• Jewellery -5.7%, cosmetics -8.8%, books-33.6%
• DIY +27.5% - a reflection of being “essential” and open
• Online growth in Dec: +61.4% y-o-y, -6.2% m-o-m
• FY2020 retail sales values (exc fuel) +0.4%
• Lowest rate of annual growth on record (since 1989)
• Food growth (+5.0%) best since 2009 (+5.2%)
• Non-food sales decline of – 12.5% completely unprecedented
• Clothing sales down -25.8% in 2020
1. Official retail sales figures for Christmas
Today is one of the most important days in the diary of a retail analyst – the day the ONS releases its retail sales numbers not just for December, but also for Q4 and full FY outturn figures. We finally have full quantification on how much consumers spent over the festive period and how the retail market fared in the face of the pandemic in 2020 as a whole. It’s just a shame that much of this is shrouded in misleading commentary in both the media and, to be fair, in the ONS’ own narrative.
Firstly, taking December in isolation: the ‘purest’ headline number (year-on-year retail sales values exc fuel) showed an increase of +5.5%. To spell this out, we spent +5.5% more in December just gone than we did in December 2019. The comparable retail sales volumes figure showed growth of +6.4%. In layman’s terms, we bought +6.4% more stuff in December 2020 than we did in December 2019.
There is obviously considerable detail and deviance below the headline figures, but in themselves, they are quite extraordinary in the circumstances. Lockdown V2 was not lifted until 2 Dec and there was a limited window between then and 20 Dec, when large portions of the country again became subject to restrictions that saw many “non-essential” stores face enforced closure. Many were deprived of their busiest week of trading and any post-Xmas sales uplift. But consumer demand held up, some finding an outlet online, but most concentrating itself in such times as stores were open.
A crying shame that the ‘purest’ headline numbers are not being picked up anywhere else. Fuel is a hugely distorting factor in retail sales numbers and is not even a retail product. Including fuel, retail sales values growth was watered down to +1.3% (volumes +2.9%) in Dec, with a -33% decline in fuel the driving force behind this. What consumers do at the petrol pump has no bearing on what they do in the real retail world of shops.
Our friends in the economist community inevitably latched onto the month-on-month performance metrics and lamented the relatively anemic growth in both volumes and values of just +0.4%. As I say every month, retail is highly seasonal in a way that the wider economy is not, rendering month-on-month comparisons meaningless. Their limitations are laid completely bare in this very release, in the clothing figures particularly, as I will go onto discuss.
The third “folly” in the ONS release (or rather the narrative) is the obsession with comparisons to “pre-pandemic levels”. Whereas the other two follies (including fuel and month-on-month comparisons) understate underlying performance, “pre-pandemic” comparisons overstate it and give a very false sense of recovery. Comparing one month’s performance to that of February (the quietest month in the whole retail calendar, by far) neither makes for a meaningful base for a comparison, nor factors in the volumes of lost trade that were incurred in the intervening period. The ONS figures relating to this (value +4.8% and volumes +5.8%) are best ignored.
Delving more into the relevant detail, the huge rider on the headline numbers is that they mask huge polarities in the performance of grocery and non-food, as they have throughout the pandemic. Food sales grew by +3.7% y-o-y in Dec, while non-food declined by -3.4%. Clearly, the latter figure is far more reflective of the high street than the former, which tempers the headline figures quite considerably.
Although positive, the ONS figure for food growth in December was decidedly more measured than earlier reads from both Kantar and the BRC had us believe (the former even implying double-digit growth). But it is worth stressing that the +3.7% in Dec followed a particularly strong +6.6% in Nov (a -1.6% m-o-m performance if you must). The trend here appears to have been consumers bringing forward food purchases to Nov during Lockdown V2 and being more planned in their festive preparations. Ironing out monthly spikes, for Q4 as a whole, food sales were up a healthy +4.6%.
Most of the ongoing pain in the retail sector remains on the non-food side. The decline in non-food sales of -3.4% in Dec was less severe than the -8.2% reported during Nov, but is still a stark reminder of the challenges many retailers face. For 2020 as a whole, non-food growth was only in positive growth territory for three months. Even then, this growth was marginal and by no means came anywhere close to offsetting declines during the rest of the year.
Staggeringly, the ONS hailed the performance of clothing in Dec, celebrating a +21.5% month-on-month performance and a supposed rebound from a large fall in Nov. The year-on-year figures tell a very different, but far more accurate story. Clothing sales fell by a further -15.5% in Dec. A fall of -15.5% is not a triumph in anyone’s book and Christmas provided no respite for fashion retailers after the toughest year imaginable.
Other non-food categories fared considerably better, although the irony was that few of these were traditional “Christmas categories”. For example, DIY sales grew +27.5%. Probably more a reflection of DIY stores being classified as “essential” and therefore able to trade across the full period, than a surge in power tool gifting. Less easily explained is strong growth in furniture (+10.7%) and household goods (+13.7%). Consumer demand also held up exceptionally well in chemists (+28.7%) as it has during most of the pandemic, for obvious reasons.
Ironically, traditional Christmas gifting categories fared less well. Sales of books were down -33.6%, watches and jewellery were down -5.7% and cosmetics were down -8.8%. Electricals managed growth of just +0.3%, but computers/mobile phones capped a miserable year, with a further -11.0% decline in sales in Dec. A (temporary) trend away from gifting more towards spending on the home? Possibly, but worth flagging that some of these sales were pulled forward to Oct, in anticipation of further lockdowns in Nov and Dec.
With astounding inconsistency, in online the ONS majored on year-on-year performance, rather than month-on-month. Y-o-y online sales increased by +61.4% in Dec, to account for 29.6% of all retail spending. As in previous spikes earlier in the year, the jury is still out as to what levels of penetration of sustainable in times of non-lockdown. For what they were worth, m-o-m online sales were down (repeat down) -6.2%. No more reason to read anything into that as there is any other m-o-m figure.
Some interesting dynamics beneath the headline online growth number. Online grocery grew y-o-y by a headline-grabbing +126.4%. Obviously a relatively weak comp last time but a measure nonetheless of how far the market has come in a year. Online grocery penetration has receded to 11.0% from peaks of 14% at the height of the pandemic and will probably settle in high single digits, but this is still significant movement.
Online non-food grew by +70.1% in Dec. Interestingly, non-store retailers (i.e. online pureplays) grew by ‘just’ +42.2%, therefore ‘underperforming’ the overall online market (+61.4%). Multi-channel outperforming pure-play suggests that consumers largely gravitated to online platforms of multi-channel retailers when their physical sites were closed during lockdown. By extension, the switch is likely to be fairly temporary, but doesn’t really make much odds either way – consumers shop brands, not channels.
Christmas 2020 in summary: traditional trading patterns turned on their head by a series of restrictions and lockdowns. An early start to the festive season, with some sales brought forward to Oct, Black Friday in Nov effectively a damp squib. Consumer demand in Dec most heavily concentrated in the window between restrictions, consumers juggling purchases between physical and online platforms. Food sales strong throughout, helped by enforced closure of the hospitality sector, but positive evidence of consumers trading up. In contrast, demand in non-food very patchy, with household goods surprisingly enjoying better growth than traditional Christmas gifting categories (e.g. clothing, jewellery, cosmetics, books). Consumer demand generally strong, but the retail sector only operating to its full potential when all channels are open and able to support each other.
2. Definitive retail sales figures for 2020 FY
So much for the Dec and Christmas figures, what do the FY 2020 figures tell us? In truth, not too much more than the 11 months to Nov ones, but now we can at least quantify the COVID-ravaged annus horribilis that was 2020.
Throughout recent history, the media have cried wolf on any given year being “the worst ever for the retail sector”. Inevitably, this was true of 2020, underlining how ridiculous previous proclamations of this were.
There are similar frustrations with how the annual data is construed, even without the distraction of month-on-month figures and spurious “pre-pandemic” sideshows. The headline numbers are that total retail sales values (exc fuel) grew (repeat, grew) by +0.4% in 2020. Volumes (exc fuel) grew slightly more by +0.5%, implying very marginal deflation, rather than inflation.
The figures including fuel are deeply misleading and unfortunately are the ones that are being widely reported. Including fuel, retail sales values and volumes in 2020 declined by -2.6% and -1.9% respectively. To repeat my earlier caveat, a slump of -27.8% in fuel demand has no bearing on what we know and recognise as the retail sector.
Growth of +0.4% is indeed the lowest level of annual growth in the full 30 year retail sales timeseries of the ONS, surpassing the previous low of +0.8% in 2005. And well below the 30 year annual average of +3.6%. But given the circumstances of the last year and everything that has been thrown at both the consumer and the retail sector, it could have been so much worse.
Of course, the headline figures never tell the full story and it would be wrong to be in any way triumphal, but there is underlying resilience in retail spending. Compare this performance with that of the wider economy, for example, with 2020 GDP likely to show a decline of -10% to -11%, when all is said and done.
Quantification of the polarity between grocery and non-food in 2020. Food sales grew +5.0%, the highest level of growth since the +5.2% recorded in 2009 at the height of the GFC. Probably no coincidence that in times of social and economic crises, there is consumer flight to the more fundamental, non-discretionary parts of retail.
A totally different story on the non-food side. Non-food retail sales declined by -12.5% in 2020, by far the worst performance on record, eclipsing the two other years of negative growth over the last 30 years (2009: -1.8% and 2005: -1.0%). No dressing up how desperate these figures are and the fact that they are representative of significant portions of the high street.
In the final analysis, clothing sales were down -25.8% in 2020. For a sector that is so oversupplied and a large constituent of the high street, such soft demand will clearly have a devastating effect. Other sectors deeply in negative growth territory included footwear (-26.0%), jewellery (-25.1%) and cosmetics (-15.5%).
And the sector with the ignominy of the worst annual performance? Computers and mobile phones, with year-on-year sales down -35.0% in 2020. Does that mean no one has a PC or a mobile phone any more? Of course it doesn’t and this is why it is always wrong to confuse “ex-growth” with obsolescence – a parallel with the retail market itself maybe? Just because it is never likely to achieve historical levels of growth again doesn’t mean it’s going to cease to exist.
Selected non-food sub-sectors did defy the odds and achieve positive growth in 2020, some more predictable than others. Chemists sales grew by +39.9% and electricals were up by +2.5%. DIY sales were up +12.8% for the year as a whole, but this masked significant troughs and peaks (Q1: -0.8%, Q4: +33.0%). Garden centres / pet shops also enjoyed annual growth (+2.9%).
The common denominator between all the sectors, both food and non-food, that were able to report positive growth in 2020, despite the pandemic? They were all classified as “essential” and therefore able to open their doors. To state the blindingly obvious once again, dazzlingly high online growth figures are a smokescreen to the damage lockdown has had, and continues to have, on the ongoing health of the retail sector.
For full analysis of both the December and 2020 FY retail sales, please refer to the accompanying Data Dashboards.
3. Other festive reporting to date
To repeat the soap box narrative of the past two Retail Notes: retailer Christmas trading statements need to be taken with a large pinch of salt. These caveats apply to all the analysis that follows.
The ONS figures have put many of the retailers’ trading statements into context, particularly the fashion operators. For the first half of its trading year (26 weeks to 24 Oct), Superdry posted a 23% fall in group revenues to £282.7m, with the business losing 23% of store trading days due to lockdown restrictions. As a result, store sales were down -44.8%, which was only partially offset by growth on online sales (+49.8%). Over Christmas (the 11 weeks to 9 Jan) group revenue fell -27.2%, with store sales down -52% and online sales up just +13.3%.
Matalan fared marginally better, with sales falling -11.2% to £119.2m in the five week period to 2 Jan. The value operator unequivocally blamed the shortfall on reduced footfall and enforced store closures, which +84% growth in online failed to offset. The quarter leading to Christmas was particularly affected by the second national lockdown and sales fell by -21.4% to £244.8m over the longer trading period.
Better figures at some of the smaller, more lifestyle-driven fashion brands. In the year to 29 Dec, Sweaty Betty reported a 27% increase in turnover year-on-year on the back of strong consumer demand for athleisure and sports fashion during lockdown(s). The business also invested heavily in online and this channel accounted for 46% of total sales.
Cornish lifestyle retailer Seasalt firmly bucked the trend, reporting +17% growth in sales in the five week period to 2 Jan. Online sales surged +95% versus last year and more than counterbalanced a -44% drop in store-based sales. The business also saw international sales grow by +20% year-on-year in the period. But it still expects sales for its full financial year (ending 30 Jan) to be down -9%. A relatively immature business, Seasalt is in the an enviable position of being able to develop its physical and online strategy in parallel - its main challenge will be ensuring that its brand and product remain as relevant as they clearly are at the moment.
Strong figures from another niche but very strong brand. Hotel Chocolat saw sales increase +11% in the 26 weeks to 27 Dec, accelerating to +19% in the second half of the trading period (13 weeks to 27 Dec). This was despite the closure of two-thirds of its store estate in the second national lockdown in Nov.
Dixons Carphone’s online growth of +121% grabbed most if the headlines and was undoubtedly a key driver behind ostensibly strong festive trading. For the 10 weeks to 9 Jan the business achieved total like-for-like sales growth of +8.0% in electricals in the UK and Ireland, with particularly strong demand for large screen TVs, food preparation and computing/gaming equipment. Key components of its online proposition were its 1-hour drive-thru Order & Collect and ShopLive initiatives, neither of which could have been leveraged without physical stores.
Robust figures from Pets at Home. The business reported revenues of £302m for the 12 weeks to 31 Dec, with like-for-like sales up +17.6% on last year. The retailer’s omnichannel operation (including order-in-store and e-commerce) grew by +70.7% in the period, benefitting from recent investments in distribution capacity and the launch of a one-hour click & collect service.
Award for the most upbeat-in-the-face-adversity Christmas trading statement must go to WH Smith. The business reported that it delivered “a good” performance over the Christmas period, “ahead of its expectations”. Indeed, in the 20 weeks to 16 Jan, group revenue was at 59% of the previous year’s levels. So often the poor relation, the High Street stores were at 92% of pre-COVID levels, while the more celebrated Travel division was at just 36%. A novel way of reporting massive sales declines and shortfalls.
Such is the weird nature of a COVID-ravaged retail world that WH Smith’s figures could in any way be described as “good”. And I rest my case re retailer Christmas trading statements…