Christmas 2017 – The story so far

We’re now well into the Christmas trading reporting season. We’ve had the BRC data to indicate the total sector trends and enough of the major players to get a better sense, in more detail, of what is happening by sector.

We’ll pull the story together in more detail for the Christmas Shopping Habits – UK, February 2017 report which we plan to publish in Mid-February. The latter will also contain consumer research to get a better sense of how consumers were behaving and what they are likely to do next year.

The big themes

For us there are two big themes behind the figures.

  • Macro-economic – demand has held up well

  • Retail specific – retailers who have tried to cut back on discounting have been rewarded with stronger sales growth

We’ll have more to write about the success of online retailers and of the differences in performance between the key sectors in due course. But for now, we want to concentrate on these two, which we think are also the most important looking forward.

Retail sales in December

The BRC data showed retail sales up 1.7% in December and like-for-like sales up 1.0%. Food retailers have seen a recovery in sales with final quarter trading up 1.3%.

We had been forecasting sales growth of 2.5% in December as reported by the ONS (and due on Jan 20th). The ONS has tended to come out ahead of the BRC, so our forecast looks as if it is about right. Our expectation was that Christmas would be OK – not outstanding, but not bad either and that has proved to be the case.

After all, the economic background for consumers is still good. Real incomes are rising, the housing market is holding up, interest rates are low and there is deflation in many markets. It’s true that consumer credit is at worryingly high levels, but that was not a concern for consumers over Christmas. People should have been feeling well off and they have indeed spent as if they did.

Discounting

One important negative for demand in December was always going to be Black Friday – to what extent was it going to take spending power from December. There’s no doubt that it was bigger than in 2015, but the pattern of trading is beginning to shift.

A number of major retailers – notably M&S decided not to take part. But others did as well – Next, SuperGroup, Fat Face stand out for ignoring it. That suggests that sales over the Black Friday period were even more heavily biased to electricals and large homewares than in previous years. There is evidence in the consumer research in forthcoming Mintel reports, notably Electrical Goods Retailing - UK, February 2017, that people were buying because they expected prices to rise in 2017.

Trust

One of the major themes of the Christmas Shopping Habits – UK, February 2016 report was that the emphasis on cutting prices to stimulate sales was undermining customer trust in retail pricing. When we put the statement “Promotions available mean that you don't need to pay full price for gifts” only 6% disagreed. As we argued at the time, that is an appalling indictment of retailer strategies. Retailers needed to pull back from discounting and re-establish trust in their pricing.

That is what has been happening and the retailers who have been leading that move – notably M&S, but also in a more gradual way, Debenhams – have been rewarded with stronger sales growth over Christmas.

Of course, restoring pricing integrity is only part of the story. The new management team at M&S has been doing much more than just stopping discounting. The new management team faced an enormous task, but was able to get enough new merchandise into the stores in time for Christmas as well. The figures for M&S over Christmas were the best to have been reported for over 6 years and mark the end of a decline which culminated with an over-reliance on discounting to stimulate sales.

Food retailers

There’s a similar story apparent in food retailing. Tesco produced excellent results against a period when it had done a major clubcard promotion. Morrisons has re-established its credibility and repositioned itself in the lower mass market. We know that Aldi and Lidl both had an excellent Christmas, and so did M&S and Waitrose. For all of them price consistency and great value for money are the basis of their attraction. We have not yet had any figures from Asda, but the most recent data (for the third quarter) showed it losing over 5% of like-for-like growth and it is the company that shouts loudest about being cheapest and puts headline grabbing price cuts at the top of its marketing efforts.

Who’s best placed for 2017?

So we feel that the most important trend of Christmas 2016 was that retailers who have striven to restore trust in the business and their pricing have been rewarded with the strongest sales growth.

There’s no doubt that 2017 is going to be a much tougher year for retailers. Inflation is going to rise and there is some evidence that it has begun to do so already. The major unknown is how real incomes will behave and the extent to which they will be able to compensate for the rise in inflation. One would normally expect real incomes to lag inflation, so some squeeze is almost inevitable. Beyond that there is all the uncertainty that leaving the EU would engender.

It seems to us that the retailers who will be best placed in such circumstances will be those that consumers trust most. Value for money is always absolutely key in retailing. That is the basis of the success of Aldi and Lidl. We think that re-establishing trust in value for money underpins the results from Tesco and M&S, among others, this Christmas.

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