Online not picking up the slack of lost store-based sales
COVID-19 Market Update – 24/04
11 minutes to read
Introduction
This is the fifth 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:
- Key messages from the John Lewis Partnership update
- What the retail sales figures from the ONS tell us
- Balance sheet strengthening vs further occupier fall-out
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
• March retail sales values (exc fuel) down -3.9% year-on-year (volumes -4.1%)
• Lockdown inevitably prompts worst overall monthly growth on record
• But grocery achieves record year-on-year monthly growth of +11.3%
• Non-food sales values down year-on-year by -20.9%
• Clothing at the sharp end of consumer slump – sales values down -35.7%
• Significant declines in furniture (-23%), computers/telecoms (-33%) , jewelers (-46%)
• Online penetration of all retail sales reaches record high of 22.3%
• Online grocery grows by +19.7% to account for 5.7% of grocery sales
• In non-food online, multi-channel (+16.8%) outperforms pureplay (+8.0%)
• Online sales at department stores surge by +33.7% year-on-year
• Online sales at fashion operators decline by -4.4% year-on-year
• Waitrose sales +8% year-to-date vs FY “worst case” forecast of ca. -5%
• John Lewis sales -7%year-to-date vs FY “worst case” forecast of ca. -35%
• Social distancing constraints a major drain on sales
• Lockdown lift likely to be phased and unlikely to see a prompt rebound in sales
• Laura Ashley lives to fight another day under new ownership
• Pre-pack administration of Cath Kidston likely to result in closure of full store estate.
1. Key messages from the John Lewis Partnership
A trading update from the John Lewis Partnership this week makes for fascinating reading, covering as it does both food (“essential” retail) and non-food (“non-essential” retail). Sales trends and forecasts made can be interpreted as something of a wider barometer for the whole retail market.
The performance of Waitrose reflects the rollercoaster ride of the grocery sector as a whole. An initial surge in demand prior to the lockdown as many consumers took to stockpiling - this proving short-lived and trading levelling off sharply as the lockdown was implemented - sales then falling as stores operate on a highly compromised basis as social-distancing measures remain in place.
To quantify this, sales at Waitrose year-to-date (from end of January) are up by +8% (but with a big spike in early March). But looking forward, the Partnership anticipates “significant sales declines between April and June and weak sales thereafter”. For the full year as a whole (to January 2021), it is predicting that sales will actually decline, albeit in a “worst case scenario” of <5%.
The trends at John Lewis department stores are no less stark and shed telling light on the dynamics of multi-channel retailing. On the surface, a surge in online demand of +84% after the stores closed from 24 March tells only part of the story – a story whereby only a portion of lost store-based sales gravitate to online.
Total sales at John Lewis (the department stores themselves and online) are down -7% in the year to date (from end of January). Since the stores closed on 24 March, total sales have declined by -17% (despite the +84% surge in online growth). The Partnership is forecasting that for the year as a whole (to January 2021), John Lewis’ sales (repeat, stores and online) will see sales slump by as much as -35% in a “worst case scenario”.
COVID-19 aside, these were already very challenging times for the John Lewis Partnership – arguably, the most difficult since its foundation. The release contained some detail on wider corporate restructuring, including around 1,200 redundancies last year. In the wake of COVID-19, the Partnership has furloughed 14,000 colleagues, the executive and non-executive teams have taken a three-month 20% pay cut and the marketing budget has been cut by £100m. On the property side, the Partnership has moved from quarterly to monthly rents where possible.
The release contained no detail on profit guidance (JLP isn’t a PLC, so isn’t obliged to do so), but it seems fair to assume that this paints an even more negative picture than sales. Tesco laid bare the huge cost implications of the pandemic (an additional £650m - £925m) on “essential” retail businesses. Waitrose is a far smaller business, so its comparable figures would be lower, but still very significant. On the John Lewis side, it seems safe to assume that the store closures and online demand has prompted a big shift in margin mix (lower sales of higher margin goods such as clothing and health & beauty, higher sales of lower margin goods such as electricals). The sales implications huge, the cost and margin implications bigger still.
The trend at “essential” retailers such as Waitrose is especially sobering and should serve as a sharp wake-up call to anyone expecting a sharp bounce-back in consumer demand when the lockdown is lifted. The clamor for this happen is already rising (far too prematurely, in my personal rather than professional view), but even when the lockdown lifts, it will be in a highly phased manner. “Non essential” retailers will have to conform to strict social-distancing constraints for some time and their “essential” counterparts are already counting the cost of operating under such compromised circumstances.
2. What the retail sales figures from the ONS tell us
Official retail sales figures from the ONS for March merely confirm many things we already knew. That it was the worst month on record (with a timeseries going back to 1989) should come as absolutely no surprise – at no time over the last 30 years have retail outlets faced prolonged enforced closure. For the retail sector, current conditions trump any financial crisis or recession we have ever seen. And things like ‘Brexit uncertainty’ barely register.
For what they are worth, the headline numbers were that retail sales values declined by -3.9% in March, for once not radically different from the comparable headline figure from the BRC (-4.3%). Retail sales volumes (net of inflation) were down -4.1%.
These figures are perhaps far less dramatic than we might expect given the scale of the crisis. There are two key reasons for that. Firstly, they mask huge polarity between food and non-food. Secondly, they reflect only a limited period of lockdown, which was only implemented from 24 March onwards. For the first three weeks of the reporting period, all stores (“essential” and “non-essential”) were trading as normal.
For avoidance of doubt, the figures I quote here exclude automotive fuel (these are always a major distorting factor and I struggle to understand why petrol should be included as part of retail sales in any case). Most media channels have quoted the including automotive fuel figures which show retail sales values down -6.0% and volumes down -5.8%. A year-on-year decline of -24% in fuel sales should not detract from what is happening in retail outlets.
We already know from the likes of Kantar and anecdotally from the retailers themselves that there was a pre-lockdown surge in grocery demand. The ONS figures show that foodstores grew year-on-year by +11.3% (month-on-month by +10.3%). Although lower than comparable figures from Kantar (+21%), this is still the highest monthly growth on record.
The media have put their own spin on some of the alcohol headline figures without really understanding them. “Alcoholic Drinks, Other Beverages and Tobacco” specialists (i.e. off-licences) saw year-on-year sales increase by +38.4%. This obviously excludes sales of alcohol through supermarkets etc so is very much a niche market (2.3% of total foodstore sales). A reflection of the fact that major supermarkets ran out of stock than anything else, but why let that get in the way of a good story?
The picture was inevitably very different on the non-food side. Total non-food sales values were down year-on-year by -20.9% in March. Needless to say, this was the worst monthly performance ever, eclipsing the previous low of -7.9% in May 2009. That said, performance varied massively across the sub-sectors. A couple were even in positive territory – unsurprisingly dispensing chemists (+25.8% year-on-year) and perhaps astoundingly “Music and video recordings and equipment specialists” (yes really, +12.6% year-on-year).
As widely anticipated, fashion retailers are at the very sharpest end of the crisis. Clothing sales slumped by -35.7% year-on-year in March. Footwear specialists fared even worse with year-on-year sales down by -43.6%. As I’ll go on to discuss, online sales did precious little to compensate for store closures.
The lockdown inevitably had a negative impact on virtually all store-based non-food categories, other than those already highlighted. Year-on-year sales were down in furniture (-23.3%), electricals (-2.7%), DIY (-1.5%), cosmetics (-9.7%), computers/telecoms (-33.0%), carpets (-11-7%), books (-36.4%), sport (-22.9%), jewelers (-45.7%).
What of online? The headline that online penetration reached a record high of 22.3% in March is not desperately revealing as it does not reflect a level playing field. But the figures broken down by sub-sector make for fascinating reading.
Total online sales increased year-on-year by +12.5% (+8.3% month-on-month). This was partly fueled by a flight to online grocery with saw sales increase by +19.7% (+17.9%). Stronger growth than in Kantar’s numbers (+13%) but worth stressing that this growth is still being leveraged off a low base – online grocery penetration is still low at just 5.7%, according to the ONS.
Non-food online sales grew +16.8% year-on-year (+10.8% month-on-month). This was considerably higher than the comparable figures for Non-store Retailers (effectively online pureplays) of +8.0% year-on-year (+4.5% month-on-month). The key implication of this is that multi-channel operators increased their share of online spend at the expense of pureplays
Perhaps the most interesting statistics of all were the contrasting online fortunes of the department stores and fashion retailers. The former saw online sales surge year-on-year by +33.7% (month-on-month +47.4%), no doubt in large part boosted by the +84% spike witnessed by John Lewis. In desperate contrast, fashion retailers saw online sales decline year-on-year by -4.4% (month-on-month -16.1%).
This confirms what we have been hearing anecdotally from many fashion operators. They are obviously generating no income from stores that are closed. And online sales are down on where they should be too. No one is immune from this depressed consumer demand for clothing, not even high flyers such as boohoo and ASOS seemingly immune to the high street lockdown.
April’s figures will be eminently worse than those for March and will mark a new low for monthly retail sales. Such a bold statement is actually the easiest one I’ve ever made as a retail analyst. March marked only a partial period of lockdown, April a full month. I expect this month’s figures to be as least doubly bad as these ONS figures for March. But taking a step back, for the retail sector, this crisis is actually less about the numbers and much more about survival and building a sustainable future.
3. Balance sheet strengthening vs further occupier fall-out
Further evidence of retailers’ shoring up their finances as a defense against the crisis from Joules and DFS (a trend we expect to see more of in the coming weeks). No new retailer fall-out this week, although the administrations of Laura Ashley and Cath Kidston have both moved on.
Lifestyle fashion retailer Joules has secured an additional £15m in borrowing facilities following an equity raise. The new financing capacity has bolstered its balance sheet and given it “sufficient liquidity headroom to manage a COVID-19-related downside scenario and the resources to emerge relatively stronger from this unprecedented situation”.
DFS has raised £64m through an equity fund raise. The upholstery retailer has raised the additional funds through a share placing, which represents nearly 20% of the firm’s issued ordinary share capital prior to the placing. DFS has also received credit approval for a new 12-month bank facility of £70m from its existing lending banks. Interestingly, the business stated that its contingency planning assumed a “pessimistic scenario of a lockdown to December 2020”. An alarming prospect maybe, but from a retail perspective, maybe a prudent approach.
Laura Ashley lives to fight another day. Restructuring and investment firm Gordon Brothers has bought the Laura Ashley brand and its intellectual property from administrators PwC. Gordon Brothers said it would work with Laura Ashley’s existing management to “evaluate several go-to-market strategies” for the business. The business said it could maintain “a streamlined portfolio” of stores in the UK and Ireland but will place “strong emphasis” on building Laura Ashley’s ecommerce operations and wholesale partnerships.
Less good news for Cath Kidston, which now looks destined to disappear from the UK high street. CK Acquisitions, a company controlled by Baring Private Equity Asia, has bought the brand, e-commerce platform and wholesale business from administrators. The UK shops will remain under the management of administrator, Alvarez & Marsal. It is expected that all shops will be shut, with the loss of 740 jobs in the UK. A lower cost model maybe, but the online business will be hard-pushed to flourish without the support and visibility of the store network.