The Retail Note - Retail sales: more of the same

Key Messages

• Feb figures stronger than reported
• YoY retail sales values +4.7%, volumes +3.4%
• A slight deceleration on an exceptional Jan
• Headline MoM volume decline of -0.4% very misleading
• YoY grocery spend +3.7%, volumes +1.1%
• YoY non-food spend +3.6%, volumes +3.2%
• Strong month for Garden Centres, Jewellers, Cosmetics
• Soft demand for Chemists, Footwear, Carpets, Sports
• Online sales +0.6% MoM, +11.4% YoY
• Online penetration increased by +20bps to 28.2%
• Spotlight very much on inflationary trends, but data lagging
• Implied food inflation in Feb +2.6%
• Implied non-food inflation in Feb of +0.4%
• Many non-food categories actually deflationary
• Rising fuel and energy prices will impact retail going forward
• Higher operating costs in grocery likely to be passed onto consumers
• A more nuanced inflationary picture in non-food markets
• Consumer confidence is under pressure
• But this may not necessarily filter through to retail sales.

The somewhat lazy narrative is that events in the Middle East are having a profound impact on the UK consumer. Consumer confidence will supposedly collapse, fuel and energy costs will rise and we will return to a high inflation environment which will again put pressure on retail spending. While some of this will inevitably be true (and is already coming to pass) the reality is likely to be far more nuanced and complex.

There is no read on any of the above in the latest retail sales release from the ONS. The attacks on Iran commenced on 28 February, whereas the ONS figures refer to the month of February and predate what has transpired since.

A strong month regardless

The media are nevertheless looking for a story to fit the narrative and majored on the fact that February supposedly saw a month-on-month decline in retail sales (it didn’t and even if it did, frankly it wouldn’t matter much).

Retail sales values (exc fuel) grew year-on-year by +4.7%. Retail sales volumes (exc fuel) increased by +3.4% year-on-year. In both cases this marked a deceleration of the growth recorded in January (+6.9% and +5.9% respectively) but that is largely academic – January’s figures were distorted by an exceptionally weak comp the year before and those levels of growth were never going to be sustained. Real growth of +3.4% is not to be sneezed at in the current, or indeed any, economic climate.

Of course, none of this has been picked up in the media, who have majored on the ‘bad’ (fake?) news story that the ONS estimated that retail sales volumes declined month-on-month by -0.4% (following a rise of +2.0% in January, revised up from a +1.8% rise reported previously). The operative word here is ‘estimated’, the figures subject to their usual ‘seasonal adjustment’ at the hands of the ONS. The accompanying raw pounds dataset shows that on a non-seasonally adjusted basis, February volumes (£34.2bn) were actually up +0.8% on January (£33.8bn).

Once again, endeavours to present an economist-friendly view of the retail world superseding what is actually happening on the high street. To be fair, the ONS did attempt to put something of a positive spin on things by focusing on three-month comparisons in their narrative, which showed a volume increase of +0.7%. But frankly, quarter-on-quarter comparisons are only marginally more meaningful than month-on-month ones and neither come anywhere close to year-on-year ones.

Performance by sub-sector

The usual mix of the weird and wonderful amongst the retail sub-sectors. As collective wholes, both food and non-food enjoyed strong sales growth in February. Supermarket sales values grew YoY by +3.7%, with volumes ahead by an encouraging +1.1%. Non-food value growth was broadly similar at +3.6%, but volume growth was significantly higher at +3.2%. Analysis of interesting inflation implications to follow in due course…

In terms of headline growth, the standout categories were Garden Centres / Pet shops (values +22.4%, volumes +22.2%), Books (+11.5%, +8.0%), Jewellery (+10.6%, +2.5%), PCs & Telecomms (+10.4%, +16.7%) and Cosmetics (+9.4%, +7.7%). Clothing also continued its sustained run of strong performance (+5.6%, +4.1%).

At the other end of the performance spectrum, demand was soft for Music & Video (-21.1%, -17.0%), Chemists (-14.3%, -16.2%), Footwear (-9.3, -8.0%), Carpets (-7.6%, -9.5%), Sports & Toys (-7.1%, -5.6%) and DIY (-0.9%, -1.5%).

The dismal weather in February was predictably conducive to online. Online sales were up +11.4% year-on-year (+0.6% month-on-month) in February and online penetration increased by +20bps to 28.2%.

For more detail, please refer to our accompanying Retail Sales Dashboard.

All eyes on inflation

Even before events in the Middle East, the direction of travel of inflation was firmly in the economic spotlight. The spotlight will now turn to a microscope.

The ONS retail sales release remains a highly revealing barometer of inflationary trends, arguably even more so than the official ONS CPI release. Albeit lagging, it gives us a very granular view of movements across all retail sub-categories and the contrasts within these can be huge.

The latest figures imply that food inflation was +2.6% in February. This was considerably lower than +3.0% reported in January. The expectation prior to recent geopolitical events was that grocery inflation would come down significantly this year. I was (and remain) slightly skeptical given the operating cost increases that will kick in from April in the shape of another increase in the minimum wage and the business rate revaluations. I would have expected grocery inflation to remain sticky at +2.5%+ for the rest of the year, regardless of global shockwaves.

In contrast, non-food inflation was just +0.4% in February and this headline figure masks a myriad of variances across the component categories. Only Jewellery (+8.1%) and Books (+3.5%) are proving heavily inflationary, most other non-food categories are already sub +2%. In fact, a significant number are already deflationary, including PCs & Telecomms (-6.3%), Music & Video (-4.1%), Electricals (-3.5%), Sports & Toys (-1.5%), Footwear (-1.3%) and Furniture (-0.6%).

With renewed fears of hyperinflation going forward, surely any whiff of deflation is good news? For the consumer maybe, but absolutely not for the retailers themselves. Whatever any economist may say to the contrary, deflation is actually a hallmark of weak consumer demand, not a stimulus for growth. Retailers are effectively having to reduce prices and take a gross margin hit to drive demand. Not a healthy state of affairs for the high street.

Then vs now

The February figures are lagging and we are very much in a ‘then versus now’ scenario. This is perhaps best illustrated by deflation in Automotive Fuel (-3.9%) in February. There will clearly be a massive reverse on this in the March figures onwards and we are obviously unlikely to see this again for some time.

Events in the Middle East are likely to have limited supply chain disruption for UK retailers – most food imports to the UK come from the EU and not through Persian Gulf, in non-food little container ship traffic has passed through the Red Sea/Suez Canal since 2023/24 and has rerouted via the Cape of Good Hope.​ But rising crude oil prices will definitely result in higher operating costs, and this will prove inflationary, one way or another.​

How inflationary is subject to nothing more than speculation and conjecture at this stage. Respected retail industry body the IGD has suggested that in a worst-case scenario, food price inflation could rise to over 8% by June and equate to 6.4% for 2026 as whole. Their middle scenario projects inflation at around 4.8%. A scenario with no further escalation still comes in at around 3.8%. Any which way, higher than the government-proposed target of 2%. Wasn’t going to happen before, certainly isn’t going to happen now.

Inflationary patterns are far more nuanced in non-food. Retailer operating costs will rise, but will this necessarily be passed onto consumers as economists presume? The fact that many non-food categories are already deflationary suggests that retailers may have less latitude to increase prices, as consumer demand is not strong enough to support them. So, hyperinflation in non-food is anything but a given. Instead, a massive headache for non-food retailers and a very fine balancing act between chasing volume and maintaining gross margin.

Final thoughts

Forget the supposed month-on-month volume decline in retail sales widely reported by the media. Monthly patterns are largely meaningless given the huge seasonality of retailing. The ONS’ efforts to ‘seasonally adjust’ the raw data almost always results in a perpetual good-month bad-month yo-yo and this is what we are seeing here. January very / artificially strong, February seemingly weak in comparison, but actually not that bad at all.

Retail never sleeps, but it does have its downtimes. And January and February remain two of the quietest months in the retailing calendar. Retail sales have been strong year-to-date, but we probably won’t have a true read on the state of the consumer economy until we have the outturn figures for March and April, to include the often under-estimated Easter period (which is actually bigger than Black Friday).

My broad expectations for the coming months? Very negative reads on consumer confidence and footfall that will be magnified in the press and taken out of all proportion. Very sticky (3%+) inflation in food, but a very mixed picture across non-food categories (+1%+ overall, but with a spread from ca. -5% to +10%). But erratic rather than totally destabilised consumer demand.

Underestimate the UK consumer at your peril.