The retail note - 17 November 2017

Written By:

Stephen Springham, Knight Frank

17 Nov 2017

4 minutes to read

Categories: Retail UK

• Significant consolidation in the convenience store market. In a surprisingly straightforward ruling, Tesco’s £3.7bn takeover of food wholesaler and retailer Booker has been given provisional approval by the Competitions and Market Authority, with no apparent stipulations. Separately, Nisa members have voted to go ahead with the Co-op’s proposed £143m takeover of the business, albeit by a small margin (the final vote of 75.79% was just ahead of 75% required).
• The slow recovery continues at Asda, with the business reporting its second consecutive quarter of underlying growth. For the 12 weeks to 30 September, like-for-like sales increased by 1.1% and overall sales rose 3.6%. A very weak comp (-5.8%) and inflation of ca. 3% put this growth into more realistic context. Gross profits declined, primarily driven by a combination of commodity price increases and price investments.
• Two retailers at different ends of the pricing spectrum released strong trading figures this week. Value retailer B&M recorded a 17.8% leap in pre-tax profits to £86.8m in the 26 weeks to 23 September, driven by a 7.5% jump in UK like-for-like sales. Group revenue was up 21.7% to £1.3bn, boosted by the acquisition of Heron Foods and new store openings (33). Upmarket fashion retailer Ted Baker announced that group revenues increased by 7.3% in the 13 week period to 11 November. Retail sales rose by 4.6%, whilst e-commerce sales increased by 30.5%.

Stephen Springham, Head of Retail Research:

What to make of the official retail sales figures for October, dubbed the “first year-on-year fall since 2013” in most quarters of the media? 

There is a huge irony that, for once, the media is focussing on the right and most meaningful figure in the whole 115-page release – year-on-year retail sales volume growth (excluding fuel). Had they fallen into their usual trap of majoring on the month-on-month figures, they would have been reporting growth in both volume and value terms of 0.3% (0.1% excluding fuel). As usual, the focus is on the most negative number and in this case it is the -0.3% decline in year-on-year volumes. The overall market grew by 2.8%, but obviously this growth is purely inflationary.

Earlier releases from the BRC had already signalled that October was a bad month for the UK retail sector and the figures from the ONS more than underline this. There are a number of possible explanations as to why the going was so hard last month.

Firstly, there is the old chestnut of the weather. Too readily dismissed as a feeble excuse, it’s still hard to deny that conditions in October were deeply unfavourable for fashion retailers in particular and that kept consumers away from the high street generally.

Secondly, the comparable figures from October last year were incredibly tough (values +6.2%, volumes +7.6%). This undoubtedly depressed this year’s growth figures. As a word of warning, this will also be a major factor in the remaining two months of the year – in November 2016, values and volumes were up 5.8% and 6.6% respectively and the corresponding growth figures in December were 5.1% and 4.9%. These figures will be hard to top.

Thirdly – and most tenuously – is the notion that consumers were simply holding back their spend in anticipation of Black Friday. Black Friday has most definitely displaced traditional seasonal trading patterns and has in the past (particularly in 2014) resulted in an unhealthy sales spike at the end of November. However, Black Friday has increasingly become an electricals-dominated event – and electricals was the best performing product category in October, somewhat undermining the argument that demand was being deferred until November.

Or fourthly, are consumers finally feeling the squeeze of higher inflation and low wage growth? It’s been talked about a lot, to death in fact, but there has been precious little evidence to support the notion. Only several months on a similar trajectory will confirm if this is indeed the case.

Or, most likely, a combination of all four of the above.

It would be dangerous to read too much into October’s figures in isolation and wrong to conclude that it is a worrying portent as to the outcome of Christmas as a whole, as some are inevitably doing. In past years, a slow October has resulted in higher pent-up demand for December. Obviously, this makes for a nervous waiting game for the retailers themselves, but a late Christmas is better than no Christmas at all.