Christmas: a Melange of Mixed Messages

Written By:

Stephen Springham, Knight Frank

05 Jan 2024

10 minutes to read

Categories: Property Sector Retail World Regions UK London

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This week’s Retail Note provides an initial read on the performance of the retail market over the festive period – and why much of the narrative needs to be taken with a pinch of salt.

Key Messages

• Early indications are that Xmas was decent, rather than disastrous
• Extremely strong Nov retail sales figures flew under the radar
• Nov retail sales values +5.7% y-o-y, +1.2% m-o-m
• Nov retail sales volumes +0.3% y-o-y, +1.3% m-o-m
• First month of ‘real’ volume growth since March 2022
• But retail market actually deflationary in Nov
• Heightened concerns of excessive promotional activity in Xmas run-up
• Xmas very strong for grocery (record £13.8bn spend)
• Predictably, Aldi and Lidl both report “record-breaking” festive periods
• Lidl’s total sales +12%, Aldi’s +8%, but no like-for-like or profit guidance
• Next upgrades profit guidance…
• …but JD warns on profits
• Retailer Xmas trading statements still need very strong caveats
• BRC retail sales figures due out next week
• Official ONS retail sales figures not due for release until 19 Jan
• KF forecasts Q4 retail sales value growth (NSA) of +5% to +6%
• With Q4 retail sales volume decline (NSA) of -1% to -2%

Confused? You will be. The barrage of post-Christmas newsflow from the retail sector will, as ever, throw up a mass of contradictions. And, as ever, it will be hard to discern a definitive picture.

Some will declare it “the worst Christmas ever”, others “the best”. The media will inevitably take a facile view and glibly divide retailers into “winners and losers” camps. Yet one retailer releasing seemingly poor trading figures may actually have outperformed another reporting headline-grabbing ones. Even official retail sales figures are massively nuanced – Q4 vs December in isolation, month-on-month vs quarter-on-quarter vs year-on-year, values vs volumes, excluding fuel vs including fuel, food vs non-food, seasonally-adjusted vs non seasonally-adjusted etc etc.

An absolute minefield – which I’ll do my best to navigate in the coming weeks.

Conflicting and contradictory information

To date, the only real reads on Christmas trading are footfall data, grocery figures from Kantar and a handful of early bird festive trading statements from a select few (but significant) retailers. The British Retail Consortium (BRC) will put out their retail sales release next Tuesday (9 January) but the official retail sales figures from the ONS will not come out until 19 January (ironically, by which time, everyone has already made up their mind based on all the other newsflow).

So favoured by the media due to their immediacy and simplicity, footfall data are a notoriously weak barometer of actual retail trading. In an increasingly complex multi-channel world with a plethora of distinct shopping missions, merely counting people walking by seems a very analogue method of assessing the health of retail trade. Without going into the detail of the data, the general trend of footfall data is completely as you’d expect – increases in the week(s) of Black Friday, but lulls before and after. But footfall building slowly during December, peaking in the days in the run-up to Christmas Day itself. Nothing particularly revelatory there.

I personally never read much into the actual figures themselves. Footfall data and retail sales seldom, if ever, correlate. In general terms, footfall is always down year-on-year, reflecting more purposeful shopping trips as much as gravitational shifts to multi-channel. Yet retail sales are invariably always up. And this will ultimately be the case for last Christmas – footfall data points to a decline that simply won’t be reflected in the actual retail sales figures, as and when they are released.

In contrast, the Kantar release is an extremely good barometer of the grocery market. And the messaging here is overwhelmingly positive, as we predicted it would be. Consumers made 488 million trips to UK supermarkets over the four-week period to 24 December – 12 million more than last year and the largest numbers during the Christmas period since before the pandemic. And, far more significantly, a record £13.7bn of sales were made at the grocers across the period, with the average household spending at an all-time high of £477 during the month, up £28 on 2022.

Kantar head of retail and consumer insight Fraser McKevitt said: “As we expected, this Christmas was a whopper. Friday 22 December turned out to be the most popular shopping day, when just over 25 million trips were made, and consumers spent £803m in physical stores – that’s 85% more than the average Friday in 2023.” More detail will follow in the coming weeks from the retailers themselves, but Kantar data suggests that Sainsbury’s, Tesco, Aldi and Lidl gained the most market share over the period.

So, food definitely had a strong Christmas and given the fact that grocery accounts for around half of all retail sales, this augurs well for the final outturn figures. More encouraging still, the early signs are that the grocery sector returned to volume growth ahead of Christmas and that some of this headline growth was ‘real’, as opposed to being purely inflationary.

November’s figures fly under the radar

Arguably the most significant read on Christmas trading has completely flown under the radar – the official retail sales figures from the ONS for November. These were released on 22 December and were therefore completely overlooked in the pre-Christmas rush. But they were highly significant on a number of counts:

- The November figures were exceptionally strong
- They marked the first month of volume growth since March 2022
- Robust growth on both a month-on-month and year-on-year basis
- Previously weak October figures were also significantly upgraded

As previously covered in a Retail Note, the festive season got off to a disappointing start in October. But the ONS has since decided that October wasn’t as bad as all that after all. Retail sales volumes were originally reported to be down -0.3% in October, but they have subsequently been upgraded to flat.

Even against these upgraded comps, November’s figures were extremely robust. Without going into the customary full analysis, the highlights were that retail sales values (exc fuel) were up +5.7% year-on-year and +1.2% month-on-month. More significantly, retail sales volumes were up +0.3% year-on-year and +1.3% month-on-month.

Exceptional growth, but with both positives and a few negatives. A long-heralded return to volume growth will please the economist community (incidentally, economist consensus forecasts were for a decline of -0.1% vs actual growth of +1.3%) and inflation is clearly receding. On a slightly less positive note from a retail perspective, volume growth (+1.3%) actually outstripped value growth (+1.2%). Which equates to actual deflation, when all the narrative generally is still of inflation.

The red flag here is that Black Friday reverted to type and was actually a destabilizing factor in festive trade. An artificial boost to sales, but retailers going too far with promotional activity and this having a negative impact on margins. December’s figures and the slew of Christmas trading statements will prove this either way.

Of course, the other by-product of these strong headline November numbers is that they will provide a challenging month-on-month base which will no doubt influence the media messaging about Christmas. Effectively, bad news in October (but no coverage of the subsequent upgrade), zero coverage of strong figures in November and then more bad news as the December figures fall short of November’s high water mark (particularly as the ONS clumsily “seasonally adjusts” the December figures to downgrade the positive uplift of Christmas).

Confused? I said you would be.

Retailer reporting to date

Sadly, nor are retailer Christmas trading statements as bullet-proof as they may appear. They come with a number of key caveats:

- Unlike FY accounts, they are unaudited
- The reporting period is arbitrary and even a day’s shift either way can heavily distort the numbers
- Retailers basically have free rein to put out whatever messaging they wish
- They are predominantly sales-based, with limited or no reference to profits or margins

This makes the whole “winners vs losers” game all the more arbitrary. Unless the reporting period is directly comparable, it is impossible to pit one retailer’s performance against another’s in any meaningful way.

The contradictory nature of retailer trading statements is already apparent in the major operators that have reported to date – JD Sports issuing a profits warning, Next delivering a profit upgrade.

Next posted a +5.7% increase in sales for the nine weeks to 30 December, which was £38m “better” than its previous guidance of a +2% sales increase for the period. The business said performance in both stores and online during the Christmas trading period was “ahead of expectations”, with online performing “particularly well”. As a result, Next has upped its full-year profit guidance before tax by £20m to £905m. In terms of outlook, the retailer has also posted its sales and profit guidance for the 2024/2025 full financial year, with group sales expected to rise by +6% and group profit before tax by +5%.

In contrast, JD Sports has lowered its full-year profit guidance after revenue growth was hit by “milder weather”, “cautious” consumer spending and a peak trading season “softer” than anticipated. The business said both constant-currency organic revenue growth and like-for-like growth for the 22 weeks to 30 December were “slightly behind expectations” at +6% and +1.8% respectively. JD Sports attributed the slow sales across its apparel ranges to “milder weather” from the second half of September, also stating that Christmas trading had also been more promotional than expected, reflecting “cautious consumer spending” from shoppers (cf. my earlier red flag comment re. Black Friday). Profit before tax for the full year to February 2024 is now expected to be between £915m and £935m, down from the previously pledged guidance of £1.04bn.

So, Next in the “winners” enclosure, JD in the “losers”? Much more nuanced than that. JD’s figures cover a much longer trading period and incorporate a particularly weak September (when Next too toiled, but this was not reported in its Xmas figures). Next is also ultra-conservative in its outlook and projections and continually surprises on the upside (this latest profit upgrade represents its fifth in eight months). Whilst not exactly gung-ho, JD is not as ultra-conservative as Next. And it has not become a ‘bad’ business overnight.

Lidl and Aldi are the other two major retailers to “report” to date. Interesting that the fierce competition between the two extends as far as who can put out the least edifying Christmas trading statement.

Lidl reported a +12% increase in overall sales in the four weeks to 24 December. Over the same period, Aldi saw sales increase +8% as it reported sales of more than £1.5bn for the “first time” in the run-up to Christmas. Both reported that Christmas was “record-breaking”, but then again, with grocery inflation in high single-digits and both still opening new stores at a rate of knots, anything but record-breaking would have been nothing short of a disaster.

As ever, no steer from either Aldi or Lidl on like-for-like sales performance, not any indicators on profit. But Aldi customers did buy 42 million pigs-in-blankets in the run-up to Christmas and Lidl sold a turkey every two seconds in the week leading up to Christmas Day. And 2,000 tonnes of British potatoes and 1,600 tonnes of carrots. Wow.

What might we expect in the coming weeks

More madness, more conflicting and contradictory newsflow. The retail sales figures from the BRC next week should suggest fairly modest growth (+2% to +3%?), but this will undershoot the official figures from the ONS when they are released in a few weeks, for the simple reason that they always do (for example, in November 2023 BRC’s +2.7% vs ONS’ +5.7%). And don’t expect much positivity in the BRC narrative either, simply because there seldom is any these days.

We would still stand by our original projection that Q4 retail sales values will grow by +5% and +6% year-on-year (on a non seasonally adjusted basis). Our projection that volumes would decline by -1% to -2% may actually (and hopefully) prove a little aggressive. The numbers aside, the key trends to watch out for are whether the return to volume growth in November is sustained (more likely in food than non-food) and whether excessive promotional activity severely dented industry margins.

Hopefully a bit more clarity amidst all the confusion.