Retail sales will be resilient this Christmas, weather-permitting
…even though consumers tell us they’ll buy fewer presents
Young people expect to spend more, but on different categories to their parents
Inbound tourism will benefit destination retailers
Black Friday: more noise, for longer, but retailers take control…
…but many of us won’t wait till Black Friday to get our shopping started
There’ll still be a last minute rush, but stock and logistics will be the key challenge
Will the leisure sector feel the squeeze if retail is resilient?
Big ticket and electronics under pressure…
…and this could affect retail park footfall. Will there be a high street renaissance?
The “Want It Now” generation can shop more easily than ever from home
Christmas is all about dinner… (and the kids)
Retail sales have held up against the odds in the past year. The British Retail Consortium announced that overall sales increased by 1.4% on a like-for-like basis in the three months to the end of September 2017, with growth in both food and non-food sales.
Given our latest consumer sentiment results, perhaps this shouldn’t be a surprise. Net sentiment, calculated by subtracting those who think they will be worse off from those who think they will be better off in the next 12 months, remains higher than at any point during the last recession up till the end of 2014.
Over one in four consumers think they will be better off next year, almost matching the number who think they will be worse off, and giving them the confidence to keep spending. We think this will be good news for retail sales over Christmas, with negative factors such as an interest rate rise being too small and coming too late to affect consumer spending intentions in the short term.
The one proviso is that the weather remains favourable. Last December saw settled and milder-than-average weather across the British Isles, benefitting retailers and shoppers alike. Storm Barbara and Storm Conor only made themselves felt from Christmas Eve, so wind, rain and power cuts in parts of the country were unable to dampen shopping plans for all but the most last minute shoppers.
This year, the weather has already proven to be a challenge in October, with milder temperatures and the wind and rain from Storm Brian and ex-Hurricane Ophelia impacting high street footfall and uptake of critical autumn fashion ranges.
Despite stable consumer sentiment, our survey found that Britons are planning to spend less overall this Christmas, with 31% of adults saying they will spend less vs. 11% saying they will spend more. Those spending less expect to do this by buying fewer presents (63%), with the rest saying they’ll buy cheaper ones.
Digging further into the data, women are planning to tighten their belts more than men; while the most generous gift givers are from Yorkshire, with one in five planning to spend more and a similar proportion to spend less.
Your best chance of getting a present? That’s in the South West, where only 2% say they won’t buy any presents at all, compared with 11% in the South East.
The only demographic group expecting to spend more on balance this Christmas are young people. 30% of under 25s say they’ll spend more on Christmas presents vs. 25% saying they will spend less.
This is not surprising given that young people have been consistently the most optimistic in our consumer sentiment survey: in September, 53% of under 25s thought they would be better off next year vs. 15% worse off. This compares with 16% of the most pessimistic age group, the 45-54 year olds, believing they would be better off, and 35% worse off.
Part of the reason for young people’s optimism will be the fact that many are entering the workplace for the first time, or still in the early stages of climbing their career ladder. They will also tend to be more insulated from factors such as grocery price inflation and interest rate rises, which will disproportionately affect their parents’ generation.
Not all of their additional income will be spent, with one in three under 25s and 25-34 year olds saying they’ll save more next year. However, when young people do spend, their priorities are quite different to their parents. For example, under 25s are much more likely to say they will spend more on clothing, technology, beauty and health than 45-54 year olds.
The other category of shoppers who will spend more this Christmas will be tourists. The weakness of Sterling in the past year has made the United Kingdom more affordable for foreign visitors than it has been for many years.
The Office for National Statistics reported that visitors to the UK numbered 4 million for the first time ever in July, with a particular surge in US tourists, increasing over 20% this year. And the popularity of the UK seems set to continue with the Lonely Planet guide book naming the country one of its top 10 best value destinations to visit in 2018.
While hoteliers and leisure attractions have been the major beneficiaries of the increase in overseas visitors (see our 2018 UK Hotels Forecast), retailers also stand to gain. Destination shopping centres, flagship department stores, luxury retailers and high streets in key tourist destinations will be the biggest winners. Indeed, Harrods has already cited overseas tourists, particularly from China, as a key contributor to its 23% sales growth in the past year.
In the past 4-5 years, the Black Friday phenomenon has crossed the Atlantic to assert its presence in the UK retail calendar, despite the lack of Thanksgiving to anchor the date in consumers’ minds. The success of Black Friday initially caught retailers unaware, with well-publicised stories of crowds fighting over widescreen TVs and websites buckling under the pressure of demand.
We believe that 2016 was a turning point for Black Friday in the UK. According to our own research on the high street and online (see chart), more retailers than ever participated in some form of promotional activity over the Black Friday period, but a third of these reverted to full price during the key early December trading period (when 46% of consumers say they will do their Christmas shopping).
Last year, we also saw more planned and targeted promotions, and, in more promotionally driven sectors, these were sustained over a whole week, rather than just the weekend of Black Friday and Cyber Monday.
Following the success of this strategy, this year looks likely to be the same: more noise from more retailers, but with products carefully selected to manage margin, rather than the blanket promotions of earlier years. Indeed, given the benefits to retailers of a more prolonged promotional period, in particular to reduce pressure on warehouses and stores, some observers are even expecting ‘Black Friday’ to turn into ‘Black Fortnight’.
A ‘Black Fortnight’ would not only benefit retailers, but also be welcomed by shoppers. Only one in five say they plan to do their Christmas shopping over Black Friday weekend. Conversely, nearly half of all shoppers expect to get started sooner, while, for many, early-to-mid December is the preferred time to shop.
In fact, prior to Black Friday is the single most popular time for consumers to at least start their Christmas shopping, particularly amongst women (55%), as well as 35-44 year olds (53%), perhaps in search of a particular present that the kids are after. That’s in spite of the fact that 62% of us say we’ll be shopping later for presents this year.
While only 9% of consumers think they’ll still be doing their Christmas shopping in the week before Christmas itself, there will inevitably be a last minute rush, particularly for supermarkets as shoppers stock up on food for the extended holiday.
Last year, with Christmas falling on a Sunday, Friday 23 December was the busiest trading day for many retailers, with reduced trading hours for last minute shoppers on Christmas Eve.
This year, Christmas falls on a Monday, the first time this has happened since 2006. With even more restricted opening hours on Christmas Eve due to Sunday trading regulations, there’s even more likelihood of a rush on Saturday 23 December. While we expect supermarkets to be busiest on that day, we also expect shoppers to be out in force on the high street, particularly if any ecommerce deliveries fail to arrive by that morning.
The last minute rush presents a number of stock and logistics challenges for retailers. For grocers, it’s about balancing the right level of stock to avoid empty shelves and minimise wastage, but over a weekend with limited Sunday trading and no Monday trading; they certainly don’t want to undo the hard work that the sector has done to stem its working capital growth in the past year (see our latest Working Capital Report). For online players, their reputations will lie in the hands of their logistics partners and their ability to deliver to customers on Saturday 23 December, or potentially even Christmas Eve.
Although there has been much talk in the past few years of a shift in spending from products to experiences – what some observers have dubbed ‘Peak Stuff’ –earlier this year in Retail Week, we argued that there might be signs of a shift back from experiences to products.
This was a trend first identified by our US colleagues in their annual holiday report last year, notably amongst younger people in the post-Millennial ‘Generation Z’ age groups, whom they found wanted ‘tangible gifts, such as clothes, personal electronics, accessories, rather than travel or entertainment options’.
It’s also reflected in our UK consumer survey results, with almost a third of consumers saying they will spend less on both eating out and going out in the next 12 months. Although we don’t believe consumers’ taste for eating will go away, any short term squeeze on disposable income will affect leisure as much as retail, and some parts of leisure more so than others, given the additional capacity added to the market since the last recession (e.g. restaurants).
After sustained market weakness following the last recession, the big ticket sector saw a recovery in the mid-2010s as consumer sentiment improved and they caught up with furniture and appliance purchases postponed from previous years.
Conversely, as inflation has begun to grow faster than wages, we expect big ticket purchases to be one of the first casualties of tightened purse strings, with one in three saying they would spend less on the category (see above). This has already been borne out by a number of high profile profit warnings across the furniture sector.
Meanwhile, electronics have been a stalwart category in previous years, with new technology, mobile phones or games consoles high up on many present lists. However, 2017 is proving to be a tougher market, with no major technology launches, and 29% of consumers in our survey saying they will spend less on the category this Christmas. Even the much anticipated Apple launches were relatively muted this year, and the later release and limited stocks of the iPhone X will limit its sales impact on this festive season.
The recovery in big ticket sales in mid-2010s helped drive increased footfall to retail parks, even as the high street and shopping centres continued to be hit by the continuing growth of online. While this trend is still apparent in the latest September figures, any slowdown in interest in big ticket purchases will remove one of the key attractions of retail parks, so we could see a pattern more similar to the second half of 2016 and pre-2013 (see chart). We would expect those retail parks with a higher leisure component (cinemas, restaurants, bowling, etc.) to be more insulated from this effect to some extent; this is because, even if frequency of visits declines due to any reduction in leisure spending, they still provide a ‘reason to visit’.
There are also other reasons to be more bullish about high street prospects, even if there is a squeeze on wider consumer spending. These range from the resilience of spending on smaller treats (such as coffee shops or beauty salons), to the rapid growth of click and collect networks (such as Collect+ and Hermes Parcel Shops), all of which are typically hosted on high streets.
Even traditionally out-of-town retailers are experimenting with high street formats, with B&Q recently opening a 3,000 sq ft store on the Holloway Road in London.
While ecommerce has been the unequivocal success story over the past decade, for a while it didn’t look like they could successfully tackle the challenge of the ‘final mile’. Late and missed deliveries have historically been the biggest bugbear of online shoppers, but this looks to have changed last year. According to our post-Christmas survey, while 24% of shoppers complained about late delivery and 10% about missed delivery, these numbers have fallen materially since Christmas 2015 (see chart).
As delivery innovation raises consumers’ expectations from ‘sometime next week’ to named day and next day, the battleground in 2017 has moved to same day delivery. This year saw the likes of Tesco and Asos join the ranks of Argos and Amazon in offering same day delivery in selected areas.
The growth in delivery options, improving reliability of deliveries and increasing penetration of click and collect, we believe, will enable ecommerce to continue to be the star performing channel for retailers this Christmas.
If there will one big winner in UK retail this Christmas, we expect it to be the grocery sector, with food and Christmas dinner top of consumers’ spending priorities for the festive season (closely followed by toys and children’s’ clothing).
Indeed, consumers have consistently told us that they expect to spend more on groceries in the coming year, primarily because of price inflation. While retailers have reengineered products and changed pack sizes to lessen the impact of input cost rises on customers, the entire sector has experienced price inflation throughout 2017.
We expect the combination of price inflation and the return of volume growth to boost the performance of the whole grocery sector this Christmas, following several years of price deflation and volume declines.