Analysis: Are retailers facing a nightmare before Christmas?

Retailers have not had the best of starts to the all-important golden quarter. Like-for-like sales growth was broadly flat in October at 0.1%, and sales decreased by 0.5% in November despite Black Friday promotions, according to the BRC-KPMG retail sales monitor.

This morning, Primark, the long-time star of the sector that continually confounds high street woe, warned that November trading had been “challenging”.

“The sector has embraced Black Friday to such an extent it’s inducing people to delay their spending. It’s not very clever”

Richard Hyman

Michael McLintock, chair of Primark-owner ABF, is set to tell its AGM today: “During November, Primark trading was challenging, in a tough retail market, but with careful inventory management and improved margins, our expectation for the increase in Primark profit is unchanged.”

If this perennial overachiever, with its value stance and clear proposition, is finding life tough, you can bet the rest of the high street is too.

Is it simply a slow start or will Christmas be a washout for retail?

Analysts say the spending slowdown shows little sign of abating any time soon.

Sue Richardson, retail director at KPMG, says: “Our consumer survey suggested that 31% of consumers had already cut their spending as a result of Brexit uncertainty and a further 41% plan to do so if a deal isn’t agreed.

“While Christmas does normally mark a time when consumers throw caution to the wind and spend regardless, in all likelihood growth will be leaner than we’ve seen in previous years.”

GlobalData has forecast what it terms “modest Christmas cheer” of a 2% rise in total retail sales across the golden quarter.

‘No one is immune’

Veteran analyst Richard Hyman believes that Christmas will be “disappointing”. 

“The writing is on the wall,” he says. ”2018 has deteriorated progressively as the year has unfolded. We’ve got a perfect storm. I think it would be foolish to blame Brexit entirely but it would be equally foolish to pretend it’s not related.

“The majority of the British public are influenced by their own economic circumstances but the sheer intensity of the Brexit debate has made people more conscious of it.

“On top of that, the sector has embraced Black Friday to such an extent it’s inducing people to delay their spending. It’s not very clever. I’ve been saying it from the moment it got here. It’s obvious it’s a stupid idea.”

Hyman adds that it is not just underperforming retailers that are at risk. “No one is immune,” he says.

Changing spending trends

Lisa Hooker, consumer markets leader at PwC, predicts spending levels will be similar to last year but what people will be spending their money on may be different.

She adds: “It looks as though more money is being spent on the essentials – Christmas dinner, food and drink, and children’s clothing.”

“The main categories where shoppers will spend less on presents include adult clothing and electricals and technology, which were the two most popular categories of spending in the Black Friday sales.” 

“People are unsettled and nervous, particularly with the coverage around Brexit. I can’t anticipate any retailers doing really well”

Diane Wehrle, Springboard

Despite Primark’s warning of challenging November trade, one retail chief executive believes value retailers will be the big Christmas winners.

He says: “Last year was a value Christmas and with the Brexit deal still unresolved, consumers remain very wary of spending. But at the same time they still want to treat themselves to a good Christmas, so will seek out value for money.”

Diane Wehrle, insights director at Springboard, is less optimistic. “We’re not anticipating a footfall increase. All sectors will be pushed. There’s a slowdown on spend generally,” she says.

“People are unsettled and nervous, particularly with the coverage around Brexit. We are not in a recession but they feel recessionary because of the uncertainty. At this stage, I can’t anticipate any retailers doing really well.”

Late rally?

The discounts of Black Friday and Cyber Monday may have driven some to snap up their Christmas gifts – 20% of consumers did most of their festive shopping over the period, according to PwC research – however, analysts are still expecting a late rally.

The most popular time for buying Christmas presents is early-to-mid December, according to PwC data, but 6% of respondents – the vast majority of which were men – say they intend to shop the week before Christmas because they have no time before then.

Kien Tan, retail strategy director at PwC, said: “With Christmas day falling on a Tuesday, we believe retailers may have a bumper shopping weekend as consumers will have a full weekend to make last-minute purchases. We could even see an increase in high street footfall that weekend, which makes a change to the last few Christmases.”

One retail CEO agrees: “Christmas will come this year, but it will come late. Having Christmas eve on a Sunday last year did not help trade and people used it as another day to spend with their families. This year, being on a Monday, Christmas eve will be a big shopping day.”

“A number of retailers have been ‘on sale’ for weeks at a time when they should be capitalising on increased demand”

Retail CEO

Wehrle concedes that the relatively subdued Black Friday spending – Barclaycard data showed there was a 12% decrease in the amount spent compared to last year’s Black Friday – could indicate shoppers have held back in anticipation of Christmas.

“They may well be leaving it right until the last moment hoping that retailers will panic and discount,” she said.

There is evidence that some panic has already set in.

Deloitte consumer analytics partner Jason Gordon says: “We have seen unprecedented variation in the levels of retail discounting in recent weeks, caused by a confluence of mild winter weather, over-supply of unwanted stock and general economic uncertainty. On the one hand, deeper discounting is clearly good news for consumers, but at the same time retailers are seeing margins eroded at a time when sales volumes should be peaking.

“At this time of year, the focus is often on how events such as Black Friday are causing discounting sales periods to start earlier. However, given the current landscape, it will not be surprising to see retailers extend their Christmas sale events until deep into January, with some having little option but to run through early February and beyond.”

The retail chief executive concurs: “A number of retailers have been ‘on sale’ for weeks at a time when they should be capitalising on increased demand. It’s a worrying trend and you wonder how that will impact profitability. I think there could be a lot of fallout from that extended period of discounting early in the new year.”

Early signs suggest it will be far from a bumper Christmas this year, which could leave some of the high street’s most venerable names in a precarious position going into 2019.