Online – the retail playing field starts to level
COVID-19 Market Update – 21/08/2020
10 minutes to read
Introduction
This is the 17th 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 two key themes:
- What we learned from the latest ONS retail sales figures
- The latest ‘on-the-ground’ view
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Y-o-y retail sales values (exc fuel) +3.7% in July
- Online’s share of retail spending declines as stores re-open
- Online sales decline -7.0% m-o-m in July
- Online’s share of retail sales declines to 28.9% in July
- -300bps from June, -450bps from May’s ‘high water mark’
- Questionable whether spend “has returned to pre-COVID levels”
- Non Food saw sales decline y-o-y by a further -6.2%
- Average monthly decline of ca. -46% in non-food since March
- Fashion spending down a further -25.3% in July
- More encouraging signs in Household Goods (+9.6%)
- Food growth is decelerating as the Hospitality sector re-opens
- Grocery growth still solid at +3.3%
- PE legacy as Pizza Express and New Look launch CVAs
- Further substantial job losses at Debenhams and M&S
- Sobering trading updates from Frasers Group and TK Maxx
- Footfall and mobility slowly but surely returning.
1. What we learned from the latest ONS retail sales figures
Apparently, retail sales are now above pre-pandemic levels in February. Rare for the ONS to talk up their own numbers and a valiant effort to inject some ‘feel-good’ into the narrative, but scratching away at the surface shows a very different picture. In the very simplest terms, we’ve continued to spend on food, online has picked up a bit of the slack of lost store-based sales, but by-and-large, the situation is still desperate for much of the high street.
But once again, the ONS and media didn’t major on the right headline number. Year-on-year retail sales values (exc fuel) grew by +3.7% in July. Proving what a distorting factor fuel is (and why, in my opinion, it should be excluded from retail sales altogether), the equivalent figure including fuel was a far more meagre +0.7%.
The preoccupation with month-on-month metrics remains baffling. By way of footballing analogy, Bournemouth, Watford and Norwich all performed better when the Premiership resumed in June than they did in the months prior. For all the good it did them. For what they are worth, month-on-month retail sales (exc fuel) grew +2.6% in July. For the phoniest number of all, month-on-month retail sales values (inc fuel) grew by +4.4%.
It seems disingenuous to talk about a “rebound” as most economists seem to be when non-food retail sales growth remains so firmly in negative territory. Year-on-year non-food retail sales values slumped by a further -6.2% in July. Far less worse than the declines of previous months maybe (March -21.1%, April -53.7%, May -42.4%, June -17.3%). July was only the fifth worst month for non-food since records began in 1989, hardly cause for celebration.
As in previous months, there is a very polarized picture within non-food sub-categories. Clothing sales remain absolutely dire, slumping by a further -25.3% in June. Clothing sales have averaged monthly declines of ca.-46% since March. As an already over-supplied sector and a mainstay of the high street, the pain the fashion sector is enduring is almost immeasurable.
But there was some encouragement in some other non-food sectors, particularly Household Goods (+9.6% year-on-year). Within that, certain sub-sectors had particularly good months, notably furniture (+10.3%), carpets (a whopping +40.4%), DIY (+11.7%) and Household Electricals (+12.4). Conversely, many others remain firmly in the mire, including Household Electricals’ ‘sister’ category Computers/Telecoms (-31.1%), Jewellery (-18.0%), Sports Equipment, Games + Toys (-7.4%) and Cosmetics (-9.9%).
Food sales growth remains robust, albeit showing some signs of deceleration in parallel to the gradual re-opening of the Hospitality sector. Year-on-year growth of +3.3% in July is still healthy, although a far cry from the average of ca. +8% recorded in the four preceding months. But more measured growth is still good growth. And make no mistake – grocery sales are the only thing that supports the very spurious notion that spending is back to pre-COVID levels.
Online had its worst month on record. Reported no-one, nowhere. But this is actually a fact. Online sales actually declined (repeat, declined) by -7.0% month-on-month in July. Online grocery sales were down-6.0% and online non-food sales were down -11.7% (with department stores’ online sales -18.5%, fashion’s -11.2% and household goods’ -17.3%).
The fact that online’s share of retail spending hit 33.4% in May was front page news. The fact that this was very much a “high water mark” and has slipped back significantly since then (as we predicted, in no uncertain terms) has barely been covered. By June, online’s penetration of retail spending had slipped back to 31.9% and in July, it diminished by a further 200bps (2 percentage points, if you prefer) to 28.9%.
Contrary to those that erroneously expected online penetration to kick on from the highs seen in May, there are two key moving parts that both operationally and mathematically were always going to prevent this from happening 1) “non”-essential stores re-opening 2) Online grocery sales decelerating. Both moving parts are now starting to happen and are not even yet in full flow.
Physical retail was only operating at very broadly 20-25% capacity in June (half a month’s trading, <50% of stores open, those that were on a compromised basis), yet this already saw 150bps taken off online’s share. When physical retail returns to 100% capacity (make no mistake, this will be some time), a total of 600bps+ will erode from online’s share.
Similarly, online’s share of grocery is already starting to decline. In July, according to the ONS it stood at 11.0%, having reached a “high water mark” of ca. 14% according to other industry sources (e.g. Kantar). Accounting for broadly half of all retail sales, any downwards movement in grocery will have a significant bearing on the overall “headline” number. If (as we expect), online grocery penetration settles back into high single digits, this would probably erode a further 300-400bps from online’s share of all retail spending.
All this goes to prove is that the actual online penetration numbers are increasingly irrelevant to what is actually happening on the ground. The UK high street had major structural issues coming into COVID-19 and the pandemic has merely accelerated the shake-out and pace of change. Online isn’t emerging as the ‘victor’ in this and in many ways, the pandemic has again laid bare many online retailers’ operational and supply chain shortcomings.
2. The latest ‘on the ground’ view
Little evidence of a “rebound” in much of the retail newsflow this week. New Look and Pizza Express’ anticipated CVAs were confirmed, the future of Debenhams thrown into fresh doubt, M&S to significantly cull its workforce, Frasers Group, Fenwick’s and TK Maxx amongst those quantifying the financial impact of COVID-19 on trading performance. But maybe some slight crumbs of comfort in new research by CACI.
As expected, New Look has launched a second CVA in a bid to “rebase” its existing leasing portfolio. Alongside the CVA, New Look said it would also be launching a debt for equity swap on senior debt, reducing it from £550m to £100m. While 459 of the retailer’s 496 stores have reopened across the UK since 1 Jun, the company said that sales are still down 38% like-for-like. It expects to formally launch the proposed CVA on 26 Aug.
As previously speculated, Pizza Express is to close 73 of its UK restaurants with the potential loss of 1,100 jobs under the terms of its CVA. The “no sacred cow” approach sees the chain’s original site on Wardour Street amongst those the disposal list. Pizza Express also confirmed it had hired advisers from Lazard to lead a sale process for the business. It is currently majority owned by Chinese firm Hony Capital . As we’ve said before, the issues with Pizza Express are debt- and balance sheet-, rather than necessarily trading-related.
Marks & Spencer is proving a microcosm for the retail sector as a whole – decent food sales, a collapse in clothing demand, online growing but failing to offset the balance. And a need to reduce costs. The business is to cut 7,000 roles in the next three months, with the affected areas largely in its central support centre, across regional management and in stores. The business recorded a -30% drop in clothing and home sales in the past eight weeks year-on-year since its stores reopened – with store sales down 48%. Online sales, on the other hand, were up 39% year on year. In the last 13 weeks, total food sales were up 2.5%. CEO Steve Rowe’s new “Never the Same Again” strategic strapline certainly has an eerie honesty about it, if nothing else.
Already in administration, Debenhams plans to make a further 2,500 redundancies and has appointed restructuring firm Hilco Capital to work on contingency plans. Hilco is aiming to secure the future of the department store chain before the pre-Christmas trading period. Liquidation is one potential option, but only as last resort if the business fails to find a bidder…
…Mike Ashley’s Frasers Group (a deliberate link if ever there was one) has reported that pre-tax profit declined 19.9% to £143.5m for the year ending 26 April, blaming the fall on the COVID-19 pandemic (really?) and Brexit uncertainty (really?). Group revenues increased 6.9% to £3.95 billion, but decreased by 12.6% excluding newly-acquired businesses, such as Evans Cycles and lifestyle brand Jack Wills.
Is Mike Ashley a realistic buyer of Debenhams? A fool’s errand to second guess Mr Ashley’s moves, but he tried before, was rebuffed and saw his stake wiped out as a result. Fingers burnt, money lost, but a downstream chance to buy whatever bits of it he likes at a bargain-basement price – if I were a betting man, I know where my money would be.
Department store operator Fenwick (which includes Bentalls) reported a loss of £49m in the 53 weeks to 31 Jan, with sales declining by 9% to £271.5m. Worryingly, this performance completely pre-dated COVID-19. The business said it was anticipating “a sizeable loss” for this year as the effects of the COVID-19 pandemic are felt. It announced that the group had put in place a two-year secured borrowing facility as a contingency plan.
TJX UK, the owner of mixed goods discounter TK Maxx, posted a net loss of £160.8m in the three months to 1 August as sales fell to £5 billion compared to £7.34 billion in the same period a year earlier. Sales were severely disrupted with its stores temporarily closed due to COVID-19 lockdown measures. All its stores have now reopened and it says it has experienced “very strong” sales. Nonetheless it expects store sales to drop by 10-20% in the third quarter, with certain consumers still feeling uneasy about shopping in-store.
More generally, footfall indicators continue to show a mildy positive trend. Figures from Springboard showed a +3.9% improvement in week-on-week footfall trends, although overall, footfall is still down -30.1% on where it would ordinarily be. Shopping centres and retail parks have shown a more positive trend, but high streets remain more challenged. Within high streets, “coastal and historic town centres” are in positive territory, in stark contrast to London and other regional cities.
More colour (and encouraging signs) in CACI’s “How COVID-19 Is Changing the Movement of Your Customers” report. Despite last week’s exceptional/oppressive weather, mobility patterns were largely stable at 73% of pre-COVID levels. Although this was a 2 percentage point dip on the previous week, this was entirely down to a weather-induced shortfall in London, where mobility is already below other areas of the country at just 64%.
At centre level, the unsettled weather has driven up mobility to Regional Malls (+3 percentage points to 62%), a continuation of an ongoing trend which, according to CACI has seen “managed destinations with their focused purpose and singular control accelerating their resurgence”.
The word “resurgence” may be a little strong at this stage, as much as “rebound” may be more than a little premature. But these are definitely steps in the right direction and a slow recovery is still the best thing we can realistically hope for.
Stephen Springham
Partner – Head of Retail Research
+44 20 7861 1236
stephen.springham@knightfrank.com