- REUTERS/Andrew Winning
- Marks & Spencer and House of Fraser are the latest big retailers to report bad Christmas sales.
- Conditions on the High Street are “very difficult” as consumers cut spending to cope with inflation and retailers engage in discounting battle to win the pounds that are being spent.
- Supermarkets are the only bright spot.
- A sustained slump for retail could have a serious knock-on effect on economic growth.
LONDON – Britain’s retailers delivered Christmas trading updates over the past two weeks and the main takeaway is the trading situation on the High Street is bad. Very bad.
Multiple retailers have put out profit warnings in recent weeks after weak sales over the crucial Christmas period. A slump in consumer spending on leisure and fashion appears to be behind the trend, and it could indicate serious issues for UK economic growth.
Marks & Spencer and House of Fraser became the latest retailers to report problems on Thursday:
- Marks & Spencer’s third-quarter sales fell by 0.1%, with UK sales down by 1.4%. Clothing and home sales fell by 2.8%.
- House of Fraser reported a 2.9% slump in sales at its shops during the six weeks to December 23 and a 7.5% slump in online sales. “In line with the market, sales during the first week of the post-Christmas sale were disappointing,” the retailer said. Frank Slevin, House of Fraser Executive Chairman, blamed a “very difficult retail market.”
M&S and House of Fraser are not alone: Debenhams’ share price collapsed 20% last week after reporting a Christmas sales slump; Mothercare sales dropped 25% after a 7% drop in Christmas sales; and suit maker Moss Bros cut its profit forecast after “lower footfall than anticipated during December”.
Upmarket department store John Lewis, which also owns supermarket Waitrose, bucked the trend by reporting a 2.5% rise in sales over Christmas on Thursday.
But even this silver lining had a cloud. John Lewis chairman Sir Charlie Mayfield said the sales rise only came because John Lewis kept its prices “competitive, despite higher costs mainly due to the weaker exchange rate.” Profit margins will suffer because John Lewis is eating the rising costs, rather than passing them on to consumers.
“Looking ahead to 2018/19 we expect trading to be volatile due to the economic environment and anticipate that competitive intensity will continue, driven by the structural changes taking place in the retail industry,” Mayfield said in a statement.
Why retailers are hurting
Retailers are facing several headwinds: National Living Wage, pension deficits in many cases, rising business rates, and competition from online-only rivals such as Amazon or ASOS. (Online fashion retailer Boohoo reported 100% growth on Thursday.)
- Thomson Reuters
But the thing that has tipped many over the edge – going from low growth to negative growth – is a protracted slump in consumer discretionary spending.
Steve Rowe, Marks & Spencer CEO, said on Thursday: “In our Food business, ongoing trading pressures continued in the lead up to Christmas as consumer spending and choices reflected tighter budgets.”
The pound slumped against the dollar and the euro after the 2016 Brexit vote, pushing up the cost of importing goods from overseas. This led to inflation peaking at 3.1% last year, a 6 year high.
The rising prices coincided with slow wage growth and, after initially raiding their savings, Brits slowed their spending on discretionary goods: fashion, leisure, restaurants.
This is highlighted by the fact that it’s not just retailers suffering at the moment. Byron, a trendy burger chain that expanded rapidly at the start of the decade, said this week that it could be forced to close 20 restaurants due to “gathering economic headwinds [that are] starting to impact the sector more profoundly.”
All of this has created a brutal trading environment for High Street shops. Consumers are cutting spending at a time when retailers’ import costs are going up.
Not only are many retailers absorbing cost rises rather than passing them on to customers – meaning profit margins suffer – but many are in fact cutting their prices in a bid to boost sales.
Both Mothercare and House of Fraser blamed their particularly bad performances on the fact that they are not engaging in the discounting arms race that’s going on right now.
Alex Williamson, CEO of House of Fraser, said in a statement on Thursday: “Our focus is on driving profitability rather than chasing revenue at any cost. We are not a business determined to sell everything to everyone at any price.”
One bright spot: supermarkets
Not everyone is suffering.
- Getty Images/Oli Scarff
The one bright spot on the High Street is the supermarket. Tesco, Sainsbury’s, and Morrisons have all reported decent Christmas trading figures over the last two weeks.
Supermarkets have been hit by inflation just the same as other retailers, but consumers appear to have cut back on entertainment and treat spending before changing their weekly big shop habits.
Still, even that could be changing. Discounters Lidl and Aldi were the fastest growing supermarkets over Christmas, according to recent data from Kantar.
Jefferies’ supermarket team said in a recent note: “A further step up in discounters’ growth over that period suggests that UK consumers remained, unsurprisingly, defensively minded.”
Bad for retail = bad for the economy
All of this is not just important for investors who have put money into a supermarket or retailer’s shares. It matters for the wider UK economy, in a big way.
Over 60% of all economic growth in Britain comes from people blowing their wage packet on everything from groceries and meals to new clothes and cinema tickets. If discretionary spending keeps slumping, so will economic growth.
Retail administrations jumped by 28% last year, data from Deloitte showed at the start of this week. It was the first rise in retailers going bust in five years.
Richard Hyman, an independent retail analyst, told Business Insider at the time he expects the trend to continue. He said: “Not only will it continue this year, but it will accelerate. All the headwinds gaining ground in 2017 will gain still more in 2018.”