A Summer of Spend
COVID-19 Market Update – 18/06/2021
9 minutes to read
Introduction
This is the 44th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note focusses on two key themes:
- What we learned from the ONS retail sales figures for May
- End of the Moratorium: stuck in the long grass
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Retail sales values surge +23.0% y-o-y in May
- A slight degree of monthly slowdown (-1.4%)
- Still 2nd highest monthly growth on record
- Value growth = volume growth = zero inflation in retail
- Grocery sales decline vs strong comp and hospitality re-opening
- Grocery sales down -3.8% y-o-y, but not unexpected
- Non-food sales soar +87.4% y-o-y
- Clothing sales -2.5% m-o-m, +155.4% y-o-y
- HH goods +9.0% m-o-m, +92.4% y-o-y
- Online sales decline -5.7% m-o-m, increase +2.0% y-o-y
- Online penetration recedes by -150bps to 28.5%
- Online grocery down -4.4% m-o-m, -6.9% y-o-y
- Non-food multi-channel (+8.1%) out-performs pure-plays (+0.4%)
- Moratorium extended to March 2022
- Ring-fence will only apply to historic debts (from March 2020)
- U-turn likely to only defer rather than solve the issue.
1. What we learned from the ONS retail sales figures from May
Woeful misreporting of the latest retail sales figures in both the mainstream media and amongst economists. As flagged on numerous occasions in the past, the actual data will be all over the place for many months to come. Heavily distorted year-on-year figures, meaningless month-on-month ones, or spurious “pre-pandemic” comparisons, each read has its own particular limitations. But the negative conclusions so many commentators have reached on today’s numbers are desperately wide of the mark.
COVID-19 is supposed to have changed everything. It’s a shame that it hasn’t stopped the media and economists making the schoolboy error of focusing on month-on-month figures. Month-on-month retail sales values (exc fuel) declined by -1.4%. Big deal. We spent slightly less in May than we did in April, but we always tend to if the latter month includes Easter, as it did this year.
The only thing of note in the month-on-month figures was the that retail sales volumes (exc fuel) declined at the exact same rate (-1.4%). The implication – zero inflation currently in the retail sector. For all the talk of inflation, there is precious little (or indeed any) in retail at the moment. Again, this runs contrary to much of the current narrative.
The year-on-year figures paint an entirely different picture. Y-o-y retail sales values (exc fuel) surged by +23.0%, with volumes (exc fuel) ahead by +21.7%. Of course, this was leveraged against a very weak comp base (values fell -9.2% in the corresponding month in 2020), but this still represents the second highest monthly growth rate since ONS records began in 1989. +23.0% is not as good as the +37.9% witnessed in April, but that doesn’t make it bad.
So much for the meaningless and the distorted, what of the spurious metrics? Retail sales values and volumes (exc fuel) in May were both +10.6% ahead of “pre-pandemic” levels (February 2020). Only the most die-hard optimist would read too much in last month’s spend levels being higher than an arbitrary month in 2020, seasonally the quietest month in the annual retail calendar.
Many of the COVID-induced abnormalities are either annualising or unwinding. As expected, the out-performance of food versus non-food is now completely reversing. Grocery sales declined -3.8% y-o-y in May, on paper the worst monthly performance on record. But that needs to be put in the context of a ridiculously demanding comp in the shape of +8.3% growth in May 2020, when we were still firmly entrenched in lockdown.
And obviously, the bigger picture here is of grocery spend receding as the hospitality sector slowly reopens. So, nothing untoward in the grocery figures and nothing the major supermarkets weren’t generally anticipating. With the Summer of Sport now in full swing, there is still much for the foodstores to play for and if the weather plays ball too, there is no reason that both they and their hospitality counterparts cannot both reap the benefits in the coming months.
In contrast, non-food sales continue to skyrocket. In May, they soared +87.4% y-o-y, albeit against a lockdown-driven comp of -42.0% in the corresponding month last year. Less spectacular than the +122.5% reported in April, but +87.4% growth is hardly pedestrian.
The month-on-month obsessives bewailed the performance of clothing (-2.5%), but the y-o-y metrics actually showed more than stellar growth of +155.4%. Clearly, the fashion market has huge ground to make up following lockdown, but consumer demand is strong, whatever the m-o-m metrics may suggest.
Consumer demand for household goods remains robust (+92.4% y-o-y). Some of the component sub-sectors achieved triple-digit growth in May e.g. furniture (+275.1%) and carpets (+379.0%). Growth in DIY (+21.8%) and electricals (+55.9%) was slightly lower, but by no means shabby.
The only non-food sub-sector to report a sales decline in May was chemists (-4.0%). Deemed “essential”, these were able to trade during lockdown and had therefore had a challenging annual comp (+26.1%). In contrast, complementary sub-sector cosmetics saw sales surge +53.9% in May, as the post lockdown levelling-out process continues apace.
Selective media reporting meant that month-on-month trends did not extend to online – if they had, the lazy “permanent shift to online” narrative wouldn’t stand up to much scrutiny. Month-on-month, online sales declined by -5.7%, with negative growth across all sub-sectors and across multi-channel and pure-play operators.
M-o-m figures in online are no more revealing than the m-o-m ones in retail sales generally. And again, annual figures do not necessarily tell the full story either, which is one of diverging trends between food, non-food and online pure-plays. As a collective whole, online sales grew +2.0% y-o-y in May. As this was substantially lower than overall retail sales growth (+23.0), online’s share of retail spending receded by 150bps to 28.5%.
Online grocery is contracting, online pure-play is holding steady, multi-channel non-food is continuing to grow. Online grocery declined whichever way you look at the numbers (-4.4% m-o-m, -6.9% y-o-y) to account for 10.9% of spend. This is a trend I would expect to continue. Spikes in online grocery demand during the pandemic were only temporary and in the medium term, online grocery penetration will settle somewhere below 10% - higher than where it was pre-pandemic (ca. 7%), but only ever likely to again hit pandemic peaks of ca. 14% at seasonal times.
Online pure-plays saw m-o-m sales decline by -4.6%, “with feedback from [pure-play] retailers suggesting the reopening of physical stores had had an impact on sales volumes” – who’d have thought? But year-on-year sales still grew by +0.4%, pretty robust given the whole levelling off process.
The most surprising online numbers were on the non-food side i.e. multi-channel operators. Glossing over the m-o-m trends (-7.5%), non-food online still grew by +8.1% y-o-y in May. Despite the re-opening of physical stores, or rather, because of the reopening of physical stores? I would venture the latter. Multi-channel operators can only function to anything like their best when all component parts of their brand are fully operational.
In summary: whatever the doom mongers may say, there is nothing in this release to suggest that consumer demand is petering out. It may not be accelerating, but it is still very robust. Food growth may have slipped back into negative territory, but given tough annual comps and the gradual reopening of hospitality, this is hardly cause for alarm. Artificial spikes in online demand are rapidly levelling off, but it is still a very important growth channel within the wider retail space.
2. End of the Moratorium: stuck in the long grass
The UK Government clearly read my Retail Note of last week, highlighting the impending doom of a triple-whammy (end to the business rate holiday, lifting of the moratorium on forfeiture, quarterly rent day). And my arguments were so compelling that they saw no option but to do a U-turn. But one that is only going to defer (and ultimately inflate) the problem, rather than resolve it.
This week the Government announced a further extension of the commercial moratorium until March 2022. But it also stated that legislation will be brought forward in this session to put in place a scheme to ring-fence and protect certain COVID-19 arrears and create a binding arbitration backstop to deal with these if agreement cannot be reached.
Some (but not much) devil in the detail. The new measures will only protect the rent arrears owed by those occupiers who have been impacted by closures (i.e. “non-essential” retailers, but not office and logistics occupiers). Debt accumulated before March 2020 and after the date when relevant sector restrictions on trading are lifted will be actionable by landlords, as soon as the new primary legislation is in place.
There is not absolute clarity as to when this will be. Although there is an implicit message that protection will only apply to historic arrears rather than any that may accrue going forward, it seems unclear whether June 2021 sits inside or outside the ring-fence period.
The word is that it is still the Government’s intention that ‘can pay, should pay’ occupiers should not benefit from the new measures. However, it is not clear how this will be policed. The Government will reportedly develop ‘principles for arbitration’ to set out the framework for the arbitration process, which will be delivered by private arbitrators, but in accordance with an accreditation process.
Not so much a compromise, more a ‘hot potato’ deferral. A cynic could point to the fact the Government have done nothing with business rates (that line their own pockets), yet are happy to kick someone else’s problem (that is financially neutral to them) back into the long grass. The two are not inextricably linked, but there is some sense in them not decoupling as they now will.
Clearly, this U-turn on the moratorium sides with retailers and leisure occupiers rather than landlords. But not in staving off hundreds of poor tenants being forcibly evicted against their will, as depicted in some parts of the media. As explored in last week’s Retail Note, few landlords have the luxury of backfill demand to warrant kicking out existing tenants.
The U-turn will obviously be a huge frustration for landlords, effectively keeping their hands tied as to how they re-coup substantial arrears. Keeping within the parameters of impartiality, arrears that are legally owed to landlords, yet they still have no legal rights to pursue.
The extension of the moratorium may avert one of the three impending meteorites, but it will not resolve the problem. If anything, it will exacerbate it and an even bigger meteorite may appear on the horizon come next March. In my opinion, the long grass is not a good place for this issue to fester.