2017, looking back, looking forward

2017 has been a challenging year for retailers, though better than we were expecting this time last year. Although we are cautious about the prospects for 2018.

Worsening economic background

12 months ago it was obvious that inflation was going to rise and that real incomes were being squeezed. Logically, therefore, retail sales should have come under pressure. But that hasn’t really happened because people have been prepared to borrow to spend. The year is ending on a weak note mainly, we think for two reasons. The comparison is with a remarkable boom in sales in the final quarter of 2016. That boom took us all by surprise and was driven by people bringing sales forward because of fears of rising prices in 2017.

So the bar was set very high for Black Friday this year and the BRC data makes it clear that November sales of non-foods were lower than last year. But food volumes have suffered as well. Deflation in food prices is now over and prices are rising quite fast. Overall in the final quarter sales values may rise, but volumes will be lower.

Growing focus on C-stores

2017 was a better year for the superstores, though the hard discounters were still growing strongly. But the perception that superstores have gone ex-growth is now firmly established and the focus is shifting elsewhere, particularly into the convenience sector. C-stores are the natural counterpart of both hard discounters and superstores and they have been growing. So we have seen four of the majors (Tesco, Sainsbury’s, Morrisons and the Co-op) try to expand into the wholesale sector.

Tesco bid for Booker and that deal has had a provisional go-ahead from the CMA. Sainsbury’s looked hard at Nisa and then pulled back, allowing the Co-op to step in and take control. Morrisons has opted to set up its own wholesaling operation initially supplying Amazon, but then agreeing to take over McColls from Palmer and Harvey. That was the last straw for Palmer and Harvey which called in administrators in early December. Nisa stepped in to supply McColls in the interim before the Morrisons deal took full effect in January.

If all that sounds complicated, that is as it should. The wholesaling and symbol group sector is ripe for rationalisation. There are too many fascias now. Tesco – Booker alone will operate 4 – Premier, Londis, Budgens and One Stop, in addition to the Tesco Express fascia.

2018 will see further rationalisation and it may be that Sainsbury’s will step in, though it may well now wait to see how the other three fare with their acquisitions. The focus for the superstore operators will be to concentrate on improving returns from their large stores in the face of falling demand. But we think that the underlying driver of that decline is the move of population back into inner cities and that trend is unlikely to reverse.

Homewares

It has been a mixed year for household goods retailers. Currys has fared well, thanks to its much improved store and a policy of price matching Amazon.

DIY has been struggling. In part this reflects a weaker housing market, but also major disruption among the market leaders. Kingfisher is in the middle of its One Kingfisher programme, bringing systems and range into line across all of its stores around Europe. Naturally there have been teething problems, but nothing yet to suggest that the whole programme is misguided. However, it is very early days. The biggest problems have been at Homebase/Bunnings. Bunnings is converting all the Homebase stores to its own warehouse stores. But sales at Homebase have been falling sharply, a function, we think, of taking out all the concessions and lack of investment or management attention to what is left.

Furniture has been mixed. Sales have held up reasonably well and we had good figures from Scs, though disappointing ones from DFS, which may well have shifted its marketing positioning too much. At the end of November MultiYork called in the administrators. With the exception of the market leader, IKEA, the sector is fragmented and likely to remain so.

Clothing

There’s a mismatch between the ONS data and the companies performances in clothing. In part this is because the ONS would have us believe that small clothing retailers (who account for 10% of the sector) have been growing at over 50% pa. But even when compared with the large retailers, the market leaders have been underperforming. M&S, Next and Arcadia (as far as we can tell) have all been losing market share, both of clothing specialists’ sales and of clothing spending. There are signs that M&S may be improving under its new management, but the business is still losing market share. M&S is coming from a relatively low base, but Next is struggling to put on growth after several years of outperformance, so its poor showing is a little more excusable.

Three of the top 5 in the sector are underperforming, but it is less easy to see where all their market share is going. The other two in the top five – Primark and TK Maxx have been gaining share as has Gruppo Inditex (which ranks 10th). Matalan ought to have benefitted from the disappearance of Bhs, but in fact its sales fell. Supergroup grew modestly and one of the big winners has been Uniqlo, whose range of good value fashion basics is moving into the space which should have been M&S’ preserve.

Online

Online continues to grow fast, outperforming all the store based retailers. It is led by Amazon which we have argued more than once in recent analyst comments, is the most innovative retailer around at the moment. It is not just that it is trading online, the only retail sector which could still be said to be immature, but that it seems to see deeper into what is happening in consumer lifestyles and how best to respond to it online. Amazon is never constrained by a narrow view that a retailer should stick to retailing.

Looking forward

Amazon is looking outside retailing, taking a “holistic” view of how best to serve consumers. But it is not alone. Tesco sees potential in the food service market and we have long argued that the distinction between C-store retailing and food service will and should become blurred.

Paradoxically, perhaps, the next couple of years should be good for retailers who are prepared to take a wider view and innovate beyond the strict confines of retailing. 2018 is going to be tough for retailers. Real incomes are being squeezed and interest rates are rising. People will cut back on borrowing as well as cutting back on spending. It is very likely that retail sales volumes will fall in 2018.

It will be the retailers with the deepest understanding of what consumers want who will prosper. Amazon must top that list. Tesco and Currys should be on it as well. 2018 will be the year we get a better idea of whether Kingfisher’s One Kingfisher programme will work and a major test of that is whether it is sufficiently customer-centric in its attitudes. It is also going to be challenging for Bunnings – can it make the format work in the UK?

Beyond that the outlook is very unclear. 2019 is the year we may leave the EU, though any underlying impact of that will only become evident over the following years. It is hard to be optimistic for 2019, though perhaps by the end of the year there may be some sort of recovery.

Back to top