The Retail Note | Retail sales: the curse of deflation
7 minutes to read
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This week’s Retail Note analyses the official retail sales figures for September from the ONS, which were on the surface strong and warmly welcomed, but with major stings in the tail.
Key Messages
• Strong headline MoM volume growth of +0.3%
• Far better the economist consensus forecasts of -0.3%
• This belies a far more nuanced picture
• Retail sales values (exc fuel) up +3.6% YoY
• Retail sales volumes (exc fuel) up +4.0% YoY
• Implied deflation of -0.4% a significant concern
• Bad month for grocery (vals -0.3%, vols -1.4%)
• Buoyant non-food growth achieved through discounting
• Deflation rife in PCs, electricals, DIY, furniture, garden centres
• But encouraging performance in clothing (vals +2.6%, vols +1.7%)
• Strong demand for cosmetics, jewellery and textiles
• Online grows +6.7% YoY, +1.3% MoM
• But online pure-plays decline -1.1% MoM
• Multichannel outperforms pure-plays by some margin
• Momentum builds in Q3 after a challenging Q2.
Economists are happy. Seasoned retail analysts less so. Today’s retail sales figures ostensibly surprised on the upside, but as ever, the headline narrative provided a mere veneer over a whole host of nuances and nasties lurking beneath. Not least, the retail sector is now deeply deflationary – and not in a good way.
The headlines…
As ever, the headlines draw exclusively on the economist-friendly but largely meaningless month-on-month (m-o-m) volume performance. The fact that these figures were good(ish) hides a multitude of other sins. Retail sales volumes rose by +0.3% in Sep 2024, following a rise of 1.0% in Aug (unrevised from the ONS’ last publication). This was way better than expected, with economists again getting it spectacularly wrong (consensus forecasts were of m-o-m decline of -0.3%).
So scanty is the ONS narrative these days that most of it can be quoted verbatim: “In Sep, sales volumes were at their highest index levels since July 2022. During the year to Sep 2024, sales volumes rose by 3.9%, the largest annual rise since February 2022. When compared with their pre-coronavirus (COVID-19) pandemic level in Feb 2020, volumes were down by 0.2%. More broadly, there was a 1.9% rise during the period from July to Sep 2024 (Quarter 3) when compared with the three months to June 2024 (Quarter 2), the joint largest, shared with March 2024, since July 2021. This quarterly rise was across all main sectors. When comparing with the same period last year, there was a 2.6% rise, the largest since March 2022.”
Plus: “the strongest sub-sector growth was from other non-food stores, which rose by 5.5% over the month to Sep 2024. Within “other non-food”, computer and telecommunications retailers had the strongest contribution to growth. Partly offsetting this, supermarkets sales volumes fell by 2.4% during the month to Sep 2024, leading to the largest month-on-month fall for food stores this year. Comments from retailers pointed to unseasonably poor weather and consumers continuing to cut back on luxury food items”.
So, in a nutshell the ONS is saying, volumes up +0.3% m-o-m in Sep and up +1.9% q-o-q in Q3. Supposedly the best performances since July 2022 and March 2022 respectively. Non-food, spearheaded by PCs and telecoms, played a blinder, grocery had a mare.
An alternative view
A deeper dive into the actual numbers and a focus on the metrics that actually matter tells a much more nuanced, and possibly contrary story. Absolutely no mention of retail sales values in the ONS narrative, limited year-on-year comparison and zero analysis on inflation implications.
Delving into the numbers, y-o-y retail sales values increased by +3.6% in Sep, the best monthly performance since the slightly dubious growth of +4.4% reported in Jan. Y-o-y retail sales volumes grew by an even healthier +4.0%, the best monthly performance since a COVID-distorted Feb 2022. Strong volume growth ordinarily a cause for celebration, except where it outstrips value growth and the deflation red flag is raised – as it most certainly is here.
In terms of quarterly performance, in Q3 retail sales values were up y-o-y by +2.8%, a strong and welcome improvement on Q2 (+0.1%). Q3 retail sales volumes were up y-o-y by +2.6%, the best quarterly performance since Q1 2022 (a period, again, heavily distorted by COVID). In Q3 as a whole the balance between value and volume growth is nicely measured, with low implied inflation of +0.2%. But the monthly direction of travel is worrying, with healthy inflation in July giving way to low deflation in Aug and this exacerbating considerably in Sep.
Why does deflation set alarm bells ringing, when receding inflation in the wider economy is (rightly) greeted with relief and triumph in equal measure? Deflation in retail is a silent killer. On a financial level, it means that retailers are generally taking a hit on gross margin, the backbone of their very business. And they are doing so largely in response to underlying weakness in consumer demand. Consumers are reluctant to spend, the only way retailers can entice them is by slashing prices.
Strong volume growth in retail sales is usually interpreted by economists as a barometer of robust consumer demand. Often, it reflects the diametric opposite.
Performance by sub-sector
Corroborating the ONS narrative (for once), food did indeed have a bad month. Y-o-y values were down -0.3% and volumes were down -1.4%, implied inflation of 1.1% the only saving grace. Grocery sales seldom go backwards – Sep marked the third time this has happened this year. It is difficult to explain this weakness in demand and whilst not gushing, the supermarket operators themselves are not pointing to anything out of the ordinary.
Supposedly strong performance in non-food (y-o-y values +6.8%, y-o-y volumes +7.8%) needs substantial qualification. Over and above the implied level of deflation of -1.0%, there was, as always, hugely variable performance between sub-sectors. PCs and Telecoms were indeed the standout category in terms of headline growth (values +85.4%, volumes +102.3%), but deflation of 17% is not much to shout about. In essence, a lot of stock shifted, but no one made much (if any) money for the effort.
A similar (but less extreme) story in a number of other non-food sub-sectors, including garden centres (values +14.1%, volumes +17.1%, deflation -3.0%), carpets (+13.0%, +15.6%, -2.6%), DIY (+6.8%, +9.3%, -2.5%) and sports/games/toys (+21.2%, +22.6%, -1.4%). The ignominy of worst performing category again went to furniture (-11.8%, -11.0%, -0.8%). Furniture demand was weak. Furniture retailers cut prices. And still nobody bought anything.
But thankfully there were also some bright spots in non-food. Chief amongst them was the performance of clothing, which had its best month in a year (values +2.6%). Not only did this mark an acceleration on the inflection point in Aug (+0.6%), it was also achieved without recourse to mass price reductions – volumes were up +1.7%, with implied inflation of 0.9%.
Other sectors to enjoy a solid performance included textiles (+20.9%, +21.0%, -0.1%), jewellery (+10.5%, +8.8%, +1.7%) and cosmetics (+8.7%, +7.0%, +1.7%).
Online seemingly had a strong month, with values up +6.7% y-o-y (but implied deflation of ca. -2% blotting the copybook somewhat). Online penetration rates increased from 27.5% to 27.7%. M-o-m values increased by +1.3%, but interestingly, online pure-plays saw a decline of -1.1%. By extension, multi-channel operators outperformed their pure-play counterparts by a considerable margin.
For more detail on these numbers, please refer to the accompanying Retail Sales Dashboard.
Some perspective
As I say every month, retail is highly seasonal and understanding the patterns of demand is fundamental to assessing the strength (or otherwise) of performance.
September is a fairly significant month in the retail calendar. As well as being one of the busier months in terms of underlying demand, it is also the gateway to the festive period (which I flatly refuse to call ‘The Golden Quarter’ – a ridiculous label for Q4). The hope generally is that September is strong and this momentum builds as we go through to Christmas.
Maybe not as rosy as the headline m-o-m volume growth of +0.3% may suggest, today’s figures are nevertheless not a disaster. There is encouragement in the performance of clothing, we can have confidence that grocery demand will recover in the coming months, but all eyes are (or rather should be) on what happens with deflation in non-food and whether this remains in check or spirals further.
Consumer confidence remains erratic. In general terms, it reacted positively when the new government was elected, then negatively when they actually said or did anything. With the Autumn Budget pending, surely there will be nothing in there that completely destabilises retail sales? Surely being one of the most dangerous words in the English language...