Online’s moment in the sun?
COVID-19 Market Update – 22/05/2020
12 minutes to read
Introduction
This is the eighth 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:
- What we learned from the ONS April retail sales release
- Analysing Marks & Spencer’s and Asda’s trading updates
- Further occupier fall-out on the F&B side?
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Retail sales down -18.1% year-on-year in April
- Eclipses previous lows of -3.9% in March 2020 and -1.7% in May 2009
- 14.3% of UK stores reported zero turnover in April
- Rising to 27.6% of fashion outlets and 39.1% of department stores
- Fashion sales slump –50.2% month-on-month, -69.0% year-on-year
- Online increases its share of retail spending to a “record” 30.7%
- But this share is unsustainable in the medium to longer term
- Online pure-plays (+5.0%) lagged overall online market growth (+15.8%)
- Online fashion sales declined -14.5% month-on-month
- 41% of online pure-plays report a decline in trade during the pandemic
- Asda achieves seemingly strong sales growth in Q1
- But cautions on profit implications of adverse changes in margin mix
- M&S sees YTD clothing & home sales down -75.0% and food sales down -8.8%
- M&S projects FY sales decline of -6% in food, - 46% in non-food
- M&S implied recovery in food in Q3 (Christmas 2020)
- M&S implied recovery in non-food not until H2 2021
- COVID-19 reduced profit by £52m in March alone
- Budgeting ca. £1bn to offset additional cost pressures for FY
- “Hibernating” £200m of fashion stock in additional warehousing
- Casual Dining Group files notice to appoint administrators
- 30 Carluccio’s restaurants bought out of administration as going concern.
1. What we learned from the ONS retail sales figures for April
The unprecedented situation of lockdown inevitably saw retail sales endure their worst ever monthly performance in April. Retail sales values slumped by -18.1% year-on-year last month, more than four times the rate of decline witnessed in March (-3.9%), itself a new low. In terms of context, the previous monthly low was what now seems a relatively benign -1.7% back in May 2009.
There is a certain irony that, for once, most of the media are correctly reporting the year-on-year comparisons, rather than the month-on-month ones (which, for the record, showed that values declined by -15.3%). I suspect that this was more to do with the fact that the year-on-year figures were worse, rather than any realisation or correction of past error. But much of the ONS narrative majored on month-on-month trends, which provide less broader perspective than year-on-year ones.
Unprecedented (and largely unhelpful) spikes in demand in grocery massively skewed the foodstore numbers. Month-on-month, supermarkets saw sales decline by -4.1%. Yet, the year-on-year comparisons showed growth of +7.2%. Reading between the lines, after a pre-lockdown surge, supermarket demand has tailed off significantly since. Trade in April was still ahead of last year, but cannot be looked at in isolation from higher operating costs and unfavourable shifts in margin mix.
The picture in non-foods was universally bleak. The ONS month-on-month headline figure of -50.2% for fashion belies a far worse year-on-year (and much more realistic) comparison of -69.0%. Year-on-year stats for other sub-sectors were as follows: household goods -50.2%, furniture – 75.8%, electricals -21.7%, DIY -35.7% (despite many stores re-opening during the month), carpets -71.7%, cosmetics -36.7%, jewellery -79.4%. Despite qualifying as “essential” and being able to trade, dispensing chemist still saw a decline, albeit modest compared to other sub-sectors (-1.2%).
Online “did well” according to the ONS (really?), growing +15.8% month-on-month to reach a record high of 30.7% of all retail spending. Strange that such an artificially high figure is being treated by many as something of a triumph. Contrary to popular view, it will not be sustained at this level for a number of reasons.
Apart from the very obvious factor that April was not a level playing field in any shape or form, the spike in online demand was largely driven by growth of +55.8% in online grocery, which saw its share of all food spending rise from 5.7% to 9.3%. Not even the major grocers and online protagonists expect penetration to remain at this level beyond the next month or so.
Non-food online sales grew by +17.2% to account for 44.3% of retail sales. More naïve (less cynical?) commentators point to the fact that this growth has been driven by new “online adopters” (people that never shopped online before) and that this will be an irreversible eureka moment for them. Given that around 98% of the population already shopped online to some degree before COVID-19 came along, this seems a questionable rationale and there seems to be underlying confusion between choice and necessity.
As in March, multi-channel “out-performed” pure-play last month. Compared with overall online growth of +15.8%, pure-plays achieved more modest growth of +5.0%. The key message? The lockdown has not necessarily prompted a flight to online pure-plays, but multi-channel operators have seen some trade diverted from stores to their online arms. But not the full volumes they would have seen instore.
There are some other interesting nuggets of information in the ONS release. The notion that online is a complete safe haven is well and truly challenged. Online fashion sales declined month-on-month -14.5%, on top of a decline of -16.1% in March. Negative growth on negative growth. Barely anybody is buying clothing at the moment. Not from any channel. Period.
A survey carried out by the ONS as to whether operators from sub-sectors had witnessed an increase or decline in turnover in the wake of COVID-19 yielded some interesting results. Somewhat predictably, 100% of fashion operators reported a decline. The picture is more nuanced amongst foodstores – 50% reporting a decrease, outweighing the 46% who reported an increase. Most interestingly of all, only 55% of online pure-plays reported an increase in trade, while 41% reported a decline. Not necessarily “the moment in sun” many believe.
Most soberingly of all, the ONS reported statistics on the proportion of stores that recorded zero turnover in April. The overall figure was 14.3%. Although “essential”, 7.4% of supermarkets fell into this category, but the figures were obviously a lot higher on the non-food side, particularly amongst fashion retailers (+27.6%) and department stores (+39.1%). Zero turnover = zero cashflow, a sobering reminder as June quarter rent day looms on the horizon.
Will April mark the nadir? In fairness, May could prove even worse. Either way, the three-month March-to-May period will undoubtedly see the worse retail sales performance most of us will ever see in our lifetimes. As outlined in last week’s note, there will be an improving monthly and quarterly trend from June onwards. But any narrative of a recovery needs to be taken with a large pinch of salt until we see meaningful year-on-year growth.
2. Analysing trading updates from Marks & Spencer and Asda
Asda was the last of ‘Big Four’ grocers to report and its experiences broadly mirrored its fellow supermarket peers – seemingly robust sales performance, but pressure on underlying profitability.
For the three months to 31 March, Asda reported a +3.5% uplift in like-for-like sales, while net sales were up +2.7% for the period. Although the number of transactions fell -3.4%, Asda’s average basket value jumped +6.9% year on year as shoppers stocked up during lockdown. However, parent company Walmart (for the moment at least) said ‘higher growth in food and consumables’ during the period was ‘partially offset’ by reduced demand for Asda’s George clothing proposition.
If anything, the sales performance was a little disappointing in that it reflected the full pre-lockdown demand surge and only one week of lockdown compromises (which came into effect on 24 March). An uplift of +3.5% lags wider industry growth of +5.1% over the same period (according to ONS data).
Unlike Tesco and Sainsbury’s, Asda did not quantify anticipated hikes in operating costs in the face of ongoing social distancing compromises, although it stated “It has become increasingly clear that Covid-19 is set to be part of our lives for months to come and we know that customers have moved on from an initial worry about the virus to longer-term concerns about the implications of lockdown on their family, wellbeing and finances.”
The narrative on margin mix is more telling and is perhaps one of the most overlooked factors of the COVID-19 pandemic. The focus is overwhelmingly on how people are buying rather than what they are buying. “Essential” retailers may have traded through the crisis, but the highest volumes have been for low margin ambient goods. Similarly, mixed goods retailers have seen a skew towards electricals and toys – items that carry lower margin than, for example, clothing and health & beauty. An unsaid pressure on retailers’ bottom lines, but a very real one nonetheless.
A more detailed and enlightening release from Marks & Spencer. As with Tesco and Sainsbury’s, the full-year figures were something of a sideshow to the update on current trading and general narrative. For what they are worth, for the 52 weeks ended March 28, the business reported a decline in profit before tax of -21.2% to £403.1m, while group revenues slipped 1.9% to £10.1bn.
As ever, there were highly contrasting performances between food and non-food. In food, like-for-like sales were up +1.9% and operating profits grew by 11.2%. In contrast, clothing sales were down -6.2% and operating profits slumped -37%, impacted by poor availabilities in the first half of the financial year and “teething issues” in its new menswear lines.
The FY trading period overlapped only slightly with the escalation of COVID-19 and subsequent lockdown. Even so, there were a number of significant early impacts. M&S said the virus began to have an effect on the business in the first week of March, with significant reductions in clothing and home. When lockdown was implemented, clothing sales dropped -16% year-on-year. The business said the virus directly affected profits by £52m in March alone and added £212.8m in costs and write-downs.
An update of current trading shed light on many of the harsh realities of retail life under lockdown. In the 6 weeks to 9 May, overall group sales have been down -32.7%, with clothing and home down -75% and social-distancing compromised food sales down -8.8%. M&S.com absorbed only a proportion of the slack of lost store-based sales, growing by 19.9%.
M&S also set out its coronavirus scenario, which flagged that sales and stock flow are likely to be “depressed” for the rest of 2020 and is likely to suffer from “very substantial” reduction in clothing sales and “volatile” food trading. M&S said it had stress tested for clothing and home sales to plummet 74% in the four months to July at a cost of more than £1.5bn in sales and a 20% decline in food sales.
The FY coronavirus scenario figures provide both a sobering overview and a telling timeframe of their expected rate of recovery. FY food sales are projected to decline by -6%, with clothing and home down -46%. Food trade is expected to return to “normalised” levels in Q3 (i.e. by Christmas 2020), but clothing and home is projected to be in negative territory even in Q4, albeit with an improving trend. By extension, M&S is not projecting a return to “normalised” trade in non-food until this time next year, at the earliest.
Not to mention the £1bn it is ploughing into offsetting the costs and managing the cash issues that the coronavirus had presented it with.
Some interesting statistics on stock management (which is arguably higher up most fashion retailers’ agendas/priority lists than necessarily meeting their quarterly rent payments). M&S closed 2019/20 with clothing & home stock of ca.£500m and had committed forward orders of £560m.
- Late summer stock no longer required has since been cancelled, reducing forward commitment at cost by £100m
- Of the balance of stock and forward orders, ca. £400m is year-round basic product that can be carried forward at low risk, albeit creating a short-term increase in stock carrying levels
- Ca. £200m of unsold seasonal stock that will be “hibernated” until Spring 2021 in additional storage facilities
- The business is taking a £145.3m hit in adjusting items to reflect the cumulative impact of the combined handling, clearance, hibernation and write-off of the stock bulge described above.
CEO Steve Rowe’s closing comments that he is looking to deliver a “a renewed, more agile business in a world that will never be the same again” probably echo across the whole retail sector.
3. Further occupier fall-out on the F&B side?
Potential further fall-out on the F&B side, with The Casual Dining Group (CDG) this week filing a notice of intention to appoint administrators, a legal measure which provides protection from creditors for 10 working days. CDG operates around 250 restaurants, including the Bella Italia, Café Rouge and Las Iguanas chains and smaller brands such as Belgo’s, Huxleys and Oriel.
CDG has hired the advisory firm Alix Partners to consider all options, which could include administration for the entire group (putting 6,000 jobs at risk). But a more likely option is the closure of some outlets through a deal with landlords and administration for some of the group’s weaker chains.
While the pressure on F&B operators is undeniable (they went into lockdown the week before the rest of the retail sector and will remain inoperational until July at the earliest), the potential administration of CDG reflects an all-to-familiar trend – private equity-owned businesses with a chequered history lacking the financial defences to withstand any derailment of trade.
Marginally better news for Carluccio’s, another F&B brand that had previously succumbed to the same all-to-familiar trend. Ranjit Singh Boparan is to buy 30 Carluccio’s outlets out of administration in a deal that will save around 900 jobs. The other 43 Carluccio’s restaurants will not re-open when the lockdown is lifted.
Boparan is the co-owner of 2 Sisters Food Group, which supplies about a third of the chicken on UK supermarket shelves (and also owns turkey producer Bernard Matthews, to boot). Carluccio’s will form part of Boparan Restaurants, a stable which also includes the Giraffe, Ed’s Easy Diner, Fishworks chains and the UK franchise for the US fast food chain Slim Chickens.
Rather than re-allocate the retained sites to other brands in the stable, Boparan appears intent on continuing to run them as Carluccio’s restaurants. The Carluccio’s brand therefore looks destined to survive, albeit in a slimmed down, rebased form – a blueprint for the UK retail/F&B market as a whole, maybe?