UK retail: Christmas 2022 – a triumph over lazy assumptions
This week’s Retail Note focusses on unfeasibly strong retail sales figures for December from the BRC and further retailer reporting for the festive season.
9 minutes to read
Key Messages
- Further positive updates on Xmas trading
- BRC: total retail sales +6.9% in Dec (+2.1% Dec ’21)
- Like-for-like retail sales +6.5% in Dec (+0.6% Dec ’21)
- Online sales down -3.0% in Dec (-13.9% Dec ’21)
- FY22 retail sales up +3.1%
- FY22 food sales +3.0%, non-food sales +3.2%
- But volume declines on the back of high inflation
- Tesco, Sainsbury’s and M&S all report strong figures
- Sainsbury’s, JD and Card Factory issue profit upgrades
- Online pure-plays ASOS, N Brown and AO.com underperform
- Official figures from ONS to be released 20 January
- Stronger than expected Xmas should not detract from huge challenges
- Cost pressures more telling than consumer demand and inflation.
Retail performance for Christmas continues to surprise on the upside. The biggest under-statement of the year to date. The doommongers and naysayers are either having to eat humble pie, scratch their heads until they bleed or clutch at flimsy straws of explanation.
Christmas 2022 exceeded every expectation. Period. At the same time, it would be wrong to be too triumphal and ignore the immense challenges the retail sector faces in 2023.
The BRC figures
The figures from the British Retail Consortium were nothing short of staggering. Total retail sales in December grew by +6.9% year-on-year (against a decent comp of +2.1% in December 2021). This was above both the 3-month average growth of 4.4% and 12-month average growth of 3.1%, reflecting a strong pre-Christmas surge in demand.
On a like-for-like basis (i.e. adjusting for changes in space, not inflation), retail sales were up +6.5% on December 2021, when they had increased by +0.6%. Again, this was comfortably above averages for 3-month (+4.1%) and 12-month (+1.8%) growth.
The one blot on the copybook was online. Online non-food sales decreased by -3.0% in December, a decline despite a weak comp (-13.9% in December 2021). This compared to a 3-month average decline of -3.3% and a 12-month decline of -11.2% as the post COVID bottoming out process shows few signs of abating.
Over the extended festive period (3 months to December), food sales increased +7.9% overall and + 7.7% on a like-for-like basis. Non-food sales increased by a more modest +1.5% (+1.1% like-for-like basis). This figure was constrained by an unquantified decline in online sales, as store-based sales of non-food items increased +5.3% on a total basis (+4.5% like-for-like).
For 2022 overall, according to the BRC, total retail sales increased by +3.1% over 2021. Food growth was +3.0% and non-food growth was +3.2% for the year. Not bad given the supposedly all-consuming (or should that be non-consuming?) nature of a cost-of-living crisis.
In terms of context, the BRC is a representative body of the retail industry and the figures are the sum total of its membership, rather than the full retail market. At the same time, the BRC is anything but jingoistic – on the contrary, it usually supports the industry it represents by downplaying any positivity or strong growth rather than unduly bigging it up or overstating it. Accordingly, the accompanying narrative was highly cautious. And, in this instance, rightly so.
The diehard naysayers are clinging to the fact that the BRC figures relate to values and therefore include inflation. Clearly, volumes, although unquantified, showed significant decline. But few retailers seem to be bewailing the lack of ‘real growth’ so cherished by the economist community.
The retail ‘winners’
The strength of the BRC figures continues to be reflected in most retailers’ Christmas trading statements, with very few exceptions of note. As ever, I’m duty bound to reference the key caveats of retailer Christmas trading statements:
1. Unlike full year and interim accounts, the statements are unaudited.
2. They are basically a vehicle for retailers to put out any message they wish. Retailers have free rein to select whatever reporting period they want and this can massively distort which numbers are released.
3. The statements are pre-occupied with sales and contain precious little information on profits.
4. Even the sales figures are gross rather than net. They will not take into account product returns, the proportions of which continue to escalate in a multi-channel retail world.
In essence, the tone and messaging is probably more significant than some of the numbers, which may well be a bit iffy.
Following on from 20%+ growth figures from Aldi and Lidl last week, the UK’s largest and second largest grocers also reported stellar Christmas trading figures. Tesco recorded a +6.1% increase in like-for-like sales for the 19 weeks to 7 Jan 2023, up +7.8% during the key three-week Christmas trading period. Group sales for the third quarter grew +5.7%, with a +7.9% boost in the weeks leading up to Christmas and the business maintained profit guidance for the year.
Although lower headline growth than the two discounters, given Tesco’s size, this growth was equally good, probably equating to bigger increase in absolute cash terms. Also of note in the Tesco release was the fact that it saw a flight to premium products, with Finest sales up +8.2%. This dispels the somewhat lazy assumption that in times of economic hardship, consumers only trade down.
Sainsbury's joined the growing band of retailers to report ‘record’ Christmas performance (cf. last week’s Retail Note) and upgraded profit guidance. It now expects profits to be towards the top end of its guidance of £630 to £690m. For the 16 weeks to 7 January, the business reported a +5.2% increase in sales (exc fuel), with like-for-like sales up +5.9%. Trade strengthened significantly in the run-up to Christmas – in the shorter trading period for the 6 weeks to 7 January, total sales rose +7.1%.
In common with Tesco, Sainsbury’s witnessed strong growth in premium products, with Taste the Difference sales up 10% over the period. Good as food sales were, the performance of non-food was perhaps even more impressive. In Q3 overall general merchandise sales jumped +7.4%, with Argos sales growing +7.1% and clothing sales up +5.1%. Given the dismal performance of online generally, these figures from Argos appear particularly strong.
Many of the non-food operators also produced sterling figures. JD Sports also upgraded profit guidance on the back of a 10% increase in sales for the 22 weeks to 31 December – double the 5% growth reported in the first half of the year in its interim results. Over the six weeks of the festive period, JD Sports revenues were up 20% year-on-year. As a result, JD Sports said it now expects profits for the year ending 28 January to come in between £933m and £985m – the top end of previous expectations.
Commentators struggling to square such strong figures lazily attributed them to a young customer base, living at home and immune to the cost-of-living crisis. Which wouldn’t explain why the likes of Marks & Spencer also did so well over the festive period. M&S reported that its food business “outperformed” over Christmas and it saw “outstanding” results in clothing and home.
Food sales rose +10.2% in total and +6.3% like-for-like in the three months to 31 December. Clothing and home sales climbed +8.8% and +8.6% on the same bases. The business reported that it achieved a market share of “over 10%” in the period – its highest since 2015. Store sales increased +12.8% including “standout early performances from new stores… which are part of the store rotation programme”. Online sales increased by a far more modest +0.7%.
A quick shout-out to other retailers to release strong Christmas trading statements this week, amongst them: Seasalt, Topps Tiles, Majestic Wine, White Stuff, Hobbycraft, Poundland and Card Factory.
The retail ‘losers’
There have inevitably also been a few retailers reporting less-than-positive figures over Christmas – with a common denominator that they are largely online pure-players.
Former retail darling Asos reported a -3% decline in revenue in the four months to 31 December. UK sales fell -8%, US sales were down -2%, Europe was up +6%, but the Rest of the World declined -10%. The business attributed the poor performance of the UK market to “weak consumer sentiment”, which curiously didn’t seem to affect other players in the fashion space.
Fellow online pure-player N Brown reported a -7.6% drop in group revenue to £249.2m for the 18 weeks ended 31 December 2022. Product revenue also slumped -9.2% to £166.4m. Within this, strategic brand revenue was down -5.5% to £120.9m, while heritage brand revenue fell by -17.5% to £45.5m. The business’ statement that “…customers continue to be more cautious with their discretionary spending in the face of the various, well-documented consumer pressures” does not necessarily ring true with the experience of other operators.
AO.com’s figures were positively received by the market on the basis that the online electrical retailer raised profit guidance on the back of its turnaround plan. Revealed in November 2022, the turnaround plan focuses on reducing costs and improving margins. Earnings are now likely to be in the range of £30m to £40m, rather than the previous estimate of less than £30m. But this masked a huge -17.2% decline in sales at its core business in the third quarter. The turnaround clearly has to do more than simply hack costs and ultimately the business will have to arrest this huge slump in top line growth.
For much more on the trials and tribulations of the online market, please refer to our Retail Property Market Outlook Report for 2023 – ‘Riders on the Storm’.
Some perspective
Another week of seemingly unbridled positivity for the retail market. The official ONS figures for December (and Q4/FY 2022) will be released next Friday (20 January) and will rubberstamp what we’ve already learned.
The ONS retail sales values figures for December probably won’t be quite as high as their equivalents in the BRC release (+6.9%), I would tentatively anticipate more in the order of +4% (higher than KF’s original forecast of +2.5% to +3.0%). But we stand by our projection of ca. -6% decline in retail sales volumes and obviously the doommongers will major on this figure.
For all the surprises on the upside, we still need to strike a heavy note of caution for the rest of the year. While all the focus is squarely on inflation and consumer demand, the real pressures on the retail market in 2023 will be on the cost and operational side. Inflation and consumer demand are not red herrings by any means, but are something of a sideshow to the crux of the real challenges.
On this basis, it would be wrong to interpret the better-than-expected performance of the retail sector over Christmas as a triumph, other than over low expectations and lazy assumptions.