The Autumn results season is now getting underway. We have only had the first few results, but it is worth taking stock of what has been happening and what the prospects for the second half of the year are.

There are underlying trends that are evident in all sectors. The market is very price competitive and even companies such as John Lewis are cutting costs and cutting back on capital expenditure in order to be more price competitive and to protect their balance sheets.

Retail sales in the first half

Retail sales growth was weak in the first half of 2016 – just 1.6% ahead. One reason for that was deflation, as volume growth has remained strong. We think that consumers have taken advantage of deflation to maintain spending in retail and spend more on leisure. We expect that to continue to be the case in the second half of the year.

Food retailers

Morrisons produced great results with like-for-likes up 1.4%. That could quite possibly be the best figure of the results season. Tesco and Sainsbury’s will produce their interim results after this report is published. Their like-for-likes were +0.3% and -0.8% in the first quarter, so even with an improving trend they are unlikely to match Morrisons. To be fair to those two, Morrisons is coming from a very low base and a prolonged period of underperformance. But that is still an impressive result.

Morrisons was also helped by the worsening performance at Asda – like-for-likes there fell 0.7% in its second quarter (to the end of June).

Asda has also published its annual report for 2015. On the face of it they were encouraging – profits rose and gross margins rose. But it is not clear how a company whose main marketing message is to be the price leader could have achieved that. Costs have been cut and it is probable that the company has put pressure on suppliers. But we suspect that service levels have also suffered. Whatever the reason, customers are drifting away.

Aldi and Lidl are still reporting double digit growth. That rate of growth is slowing, but it is still a long way ahead of the rest of the sector.

Food retailers in the second half

The sector as a whole has seen an upward trend in the first half, though there is still deflation. All the leaders claim to be cutting prices and Waitrose confirmed that in its first half results. And yet, an element of these price cuts is probably taking marketing advantage of underlying price falls in the marketplace.

We think that the second half will see more of the same as the first. The market is very price competitive. Tesco should continue its remarkable recovery – a tribute to the strength of the new management team.

We are concerned that the task of integrating Argos may prove disruptive at Sainsbury’s. But overall we think that the upward movement seen in the first half and if Black Friday is smaller than last year, then that should also benefit the sector in December.

There is no sign yet of any improvement at Asda, though the company has a new chief executive.

Clothing retailing

Clothing retailers have had an exceptionally tough time for the last 12 months. It has seemed that the weather has been consistently unseasonal and most clothing retailers have complained about how tough it has been. Even Primark reported a 2% like-for-like decline last time it reported.

Next’s figures were also a little disappointing with operating profit marginally below last year. But Next did manage to report sales growth, indicating a further increase in market share. We think that Next has been too cautious. It effectively admits that stocks in-store have been too low. We suspect that it should increase its stock levels and be prepared to accept a high level of stock going into the sales in order to achieve better service levels.

Next shows that even at a time when clothing retailers as a whole saw sales fall, it was possible to report growth. John Lewis also reported strong growth and sales in menswear and womenswear were up around 5%, thanks mainly to strong own brand development.

We have yet to see the consumer spending data for the second quarter, but spending in the first quarter was up around 4%, against sales by specialists which fell by 4%. The specialists have been losing market share and that decline in market share will continue in the second half if only because Bhs has closed down.

Not just online

It would be easy to complain that store based clothing retailers have been hit by the growth of online businesses such as Asos and Amazon. But Next and John Lewis (and many others) just demonstrate that that is not true. We know that M&S is currently doing badly, Bhs has closed down and so has the Austin Reed group. To us that shows that people shop where they find the best ranges and retail proposition. Bhs and Austin Reed failed because they failed to give their target markets what they wanted.

Where next for clothing retailers?

The second half will be down simply because of Bhs and Austin Reed. Their combined annual sales were probably over £900m (it is hard to tell because of the Arcadia concessions in Bhs), about 2.5% of all clothing specialists sales. The new team at M&S has not been in long enough to make any significant changes before the start of next year at the earliest.

If clothing demand remains reasonably strong – as it was in the first quarter, then other sectors will pick up much of these lost sales – especially the food retailers, the department stores and online pure players.

Department stores

John Lewis reported steady growth in the first half and there was a good performance from fashion. House of Fraser is doing well and Debenhams could be a lot worse. We think they will be beneficiaries of any weakness in the clothing sector.

Other stores

The latest figures from Dixons Carphone showed UK sales up 6% for the year to April. As usual, there was little indication of how Currys and Carphone Warehouse performed separately, but that is hardly surprising since the strategy is to bring the two together and develop a “connected” business. The strategy is clearly working, as is the policy of price matching online.

The rest of the electricals sector had a weak first half, while furniture performed well, although there was a slowdown in the second quarter, and DIY was weak. Kingfisher reported 5% growth, but almost entirely down to Screwfix. Homebase has been taken over by Bunnings, the Australian market leader in DIY.

Online

Online’s growth is well ahead of the retail average, but almost equally divided between online sales by store based retailers and those by pure players. Asos reported sales up 28% in the four months to June. There is no sign of much of a slowdown at Asos in spite of its rapidly growing share. AO sales rose 25%.

Online will continue to gain share in the second half, though the rate of growth of the pure players as a whole is slowing. In the first half sales were up around 10% against overall retail sales growth of 1.6%.

Black Friday

We think that Black Friday was damaging to the retail sector. It took full price sales from December and channelled the money into low margin sales of special purchase merchandise. The consensus view of retailers is that it is here to stay, even though Asda decided to stand aside from it last year.

Asda’s decision last year could be seen as giving others permission to do the same this year. Asda found that the promotion was highly successful the first time it did it, in 2013, when everyone else was taken by surprise.

We think it is likely that the prevailing strategy this year will be to minimise the impact. It will happen, but it is likely to be lower key.

Mintel carried out consumer research into buying behaviour over Black Friday (See Christmas shopping habits - UK, February 2016) and we found that 27% actually bought something. But there was a balance of people who were disappointed with the promotions (33% against 25%). In spite of that almost half said that they would put off making big purchases until they have seen the end of November promotions.

Those findings suggest to us that retailers were already pulling back from Black Friday and we expect them to do so more this year.

Brexit

The EU referendum result seems to have taken everyone by surprise. Mintel’s own consumer research shows that there was a dip in consumer confidence, but that it proved short lived. All retailers who have commented have said they have seen no impact.

We think that people spend on the basis of how they see their own finances. If there is to be any negative impact on the retail sector it would have to come from the performance of the economy as a whole and that cannot happen before 2017 at the earliest and perhaps not before 2018.

The second half and Christmas 2016

The economic background for consumers continues to be favourable. Real incomes are rising and unemployment is falling. There are some worrying signs – consumer credit has risen back to record levels and the housing market has weakened a little. But overall we think that the prospects for Christmas remain good.

Much will depend on what retailers do about Black Friday, but if they cut back on such promotions then there would be a knock on benefit to December. December 2015 was weak, partly because of Black Friday and partly because of the unseasonal weather which seems to have been a constant story over the last year. So the comparisons this Christmas are easier.

It is never easy to come off the fence and make a Christmas forecast and this year seems more difficult than usual.

Just looking at the recent retail performance, we think that retail sales growth in the second half is likely to be between 2% and 2.5%. On that basis, the figure for December should be around that level too. But if Black Friday is a smaller event, then December could turn out to be stronger.

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