Retail sales are falling. Or are they rising? There is a range of contrasting figures on the health of the retail market, but which tell the true story? George MacDonald investigates.

Every passing week and month brings new tales of retail woe.

Most recently Karen Millen, Coast and Jack Wills all went through insolvency processes – the first two will in future only trade online while the latter was bought by acquisition-hungry Sports Direct – and the latest BRC-KPMG retail sales data for July showed “consumer spending languishing”.

According to the BRC, it was the lowest July sales figure since records began in 1995.

It was not an atypical update – retailers have become used to “lowest since” statistics that have stimulated many headlines that portray a dying industry.

But reading the official ONS data for July paints a different picture of an industry that achieved value sales growth of 3.4% year on year or a 2.9% volume advance.

Other data and events appear equally perplexing. While old-established names such as Debenhams and House of Fraser have floundered in a tsunami of change, some of the newer names that appeared destined to ride the crest of the wave – such as Asos – have also fallen off their surfboards.

And the growth of online retail overall, seen by some as the fundamental disruptor of the status quo, was actually at its lowest level ever in the first half of 2019, according to trade body IMRG.

What’s going on?

No wonder retailers are scratching their heads as they try to make sense of it all.

In an industry such as retail, so centred on daily and weekly trading, it is unsurprising that there is such focus on monthly data and day-to-day developments.

But standing back from the immediate, what is really going on with retail sales, and what does it mean?

According to ONS head of retail sales Rhian Murphy, “if you look at the general trend, it’s a trend of growth” – albeit slowing.

The frequent differences between, for instance, the BRC and ONS monthly data are attributable to various factors.

Although the BRC is supplied weekly sales data by retailers accounting for more than 50% of industry sales, some very big names do not contribute.

Amazon, the biggest etailer and fashion giant Primark are two of retail’s biggest names not reflected in the BRC data.

The absence of at least some of biggest, most successful names makes some observers wonder whether the BRC figures reflect parts of retail under the greatest pressure. 

The ONS – which samples 5,000 businesses with more than 100 employees or turnover of more than £60m – also draws criticism from observers, such as analyst Nick Bubb.

He prefers to look at the agency’s non-seasonally adjusted data, which does not take into account the timing of key trading periods like Easter, and questions the influence of small businesses whose performance is, in his words, “suspiciously high-looking” and distort the overall picture.

Murphy acknowledges that the small businesses – defined by the ONS by employee numbers below 100 – are a “mixed bag”. She says by no means all are doing well but factors such as a small business growing its online operations, or opening temporary Christmas space, can affect the findings.

Mediocre sales

One factor that all the data compilers would agree on is that sales numbers do not necessarily reflect profitability.

Sales, whether up, down or flat, are being delivered in a high-cost retail environment that erodes earnings. Such costs have sliced retail margins from 4% a decade ago on average to 1.5% today, according to the BRC. Discounting and inflation are also having an impact.

Retail Economics founder Richard Lim observes: “We’re bobbing along but top-line performance is not a measure of profitability. We estimate costs have been rising by between 2% and 2.5% – that might be wages, rates, the apprenticeship levy, rental bills in primary locations, utility bills.”

Lim thinks the truth on retail sales lies between the BRC and the ONS. He maintains: “The general point is we’re in an environment of mediocre sales performance. It’s not stellar, but not the kind of performance you’d associate with the aftermath of the financial crisis.”

That is reflected in the data Retail Economics compiles. 

Annual retail sales growth, year on year

YearONSBRCRetail EconomicsConsumer spending (ONS)
2017 4.3% 1.5% 2.0% 2.2%
2018 4.1% 1.2% 2.2% 1.8%
2019 to date 4.1% 0.4% 2.0% 1.9%


Online discounting

Adding to the complexity, both the BRC and ONS have recorded big rises in online sales. For example, in July the ONS reported internet sales up 12.7% year on year, giving a market share of 19.9% of total retail.

But at the same time, trade body IMRG’s data released at the end of last month, tracking about 200 companies that attract combined spend of £28bn, showed growth in the first half of this year of 5.4% – the worst ever, and compared with a rise of 16.9% in the same period last year. (It should be noted, like with the BRC, Amazon does not contribute to IMRG data).

Online began to slow down fast in the second half of last year, according to IMRG. That followed a big increase in the first half because of one-off factors such as the men’s football World Cup, and searing summer weather.

“When people are overstretched, that forces retailers to do things they don’t want to do, like discount more”

Andy Mulcahy, IMRG

As a result, observes IMRG strategy and insight director Andy Mulcahy, shoppers reached the half-year point having overstretched themselves financially. He points to Visa’s monthly survey for July last year which flagged that “household budgets are stretched”.

Mulcahy says: “That’s where you start to run into problems. When people are overstretched, that forces retailers to do things they don’t want to do, like discount more.

“Running into Black Friday you don’t want to be discounting. When Black Friday arrives you need to go even deeper. In the lead-up [last year] there was already widespread discounting and it was a pretty underwhelming event.”

That, in turn, stimulated further discounting in an attempt to gain lost ground – exacerbated in fashion by unseasonably warm autumn weather. Mulcahy says that trend has continued in 2019: “We haven’t really got out of it and we’re heading into that time again, into a discounting period.”

Shoppers’ multichannel fears

Another important pattern has emerged in online – a greater reluctance to buy from multichannel retailers, thought to be linked to high-profile collapses such as House of Fraser.

Multichannel retailers generated online sales growth of 5.2%, compared with 7.4% achieved by pureplays in the first half of this year.

Mulcahy said at the time of the IMRG update: “We have a tendency to regard online retail and physical retail as being completely separate – an idea that has been fed over the past few years by the consistent growth in online even as the high street struggled. What we are now seeing is that they are not separate at all, but in fact deeply interconnected.

“With so much media coverage of well-known retailers announcing profit warnings and store closures, customer confidence in shopping with them is low. This forces them into heavy discounting to drive sales and their competitors get dragged into it too.

“It may be that the old perception of getting better value online still persists and that shoppers associate high street retailers with the highest chance of falling into administration, so they are having to work even harder than their online-only competitors to build sales.”

Where are people spending their money?

Retail sales may be rising annually but this does not take inflation into account. Retail as a proportion of overall spend is actually falling and Lim expects this trend to continue.

The proportion of household spend on retail in 1963 was 29.5%, in 2004 it was 26.5% and by 2028 he forecasts it will be 20.2%.

If people aren’t spending on retail, what are they spending on?

Much has been made of the rise of the experience economy with consumers spending more on holidays or meals out.

However, the latest Consumer Trends report from the ONS, covering the quarter from January to March, gave a snapshot of where the money is going, and restaurant and hotel spending was actually the biggest area of decline. Interestingly, the biggest area of increased spending was on life insurance.

People are spending in different ways. While online may have slowed, it is still growing. The IMRG expects growth of about 9% this calendar year. 

The ongoing shift will bring further structural change. Lim observes: “In 10 years’ time, Gen Z and millennials will make up the majority of consumers – digital natives with online habits deeply ingrained.”

He says: “Younger customers are spending more on rent and digitalisation of services like Spotify or Netflix, etc. They’ve already become the norm.

“The way gen Z and millennials shop, what inspires them and how they’re made aware of new brands is completely different from even five years ago.”

The new norm is affecting areas of spend such as food, as online services such as Deliveroo and Just Eat grow, eating into traditional grocery spending.

Mulcahy is waiting for a “new shopping context” to kick-start the next significant phase of online growth. He points to how the emergence of the tablet created a new shopping time between 9pm and 10pm, while the smartphone led to commuting time becoming a significant retail opportunity.

“When you get a new device you get a new context for how people shop,” he says. “I think at the moment we’re waiting for the next kind of boost. A lot of people would have said voice, but I’m not sure that’s happened. Maybe it could be people shopping through social channels.”

Whichever channel it is, it is clear that retailers face much competition to win consumer spend – and there are many demands on that spend. In the year to March 2018, the most recent period covered by the ONS’ Family Spending in the UK survey, households spent 40% of average weekly expenditure on transport, housing, fuel and power, along with recreation and culture. 

With more competition for spend and retail accounting for a lesser proportion of consumers’ expenditure, retailers need to be more on their game than ever before and provide the most compelling products, services and experiences they can.

What will influence future spending? 

Brexit

As new Prime Minister Boris Johnson’s Halloween Brexit deadline nears, the effects on spending remain unknown. The most recent GfK confidence data has held up, but if fears of food shortages are realised, that may lead to consumers drawing the curtains and keeping their purses shut.

In the past, people have generally proved willing to spend at Christmas, but a disorderly Brexit could subdue this year’s golden quarter. Alongside basics such as quality and value, retailers will need to tell convincing stories about why shoppers should spend with them. That may also allow retailers to break out of unending promotions.

Changing lifestyles

Retailers are increasingly not just in competition with each other, but with rival industries such as communications and media – a pound spent on Netflix is a pound diverted from another business.

Retailers need to look carefully at where consumers are choosing to spend their cash and work out what adjacencies they can exploit through the creation of experiences and new services.

That might come through partnerships, for instance. As renting rather than homeownership becomes increasingly common, John Lewis has struck a deal with Tipi to furnish apartments.

Similarly in food, as the lines blur between traditional grocery and bought-in meals, retailers are moving ever more into partnerships with new distributors such as Deliveroo to compete better on convenience.

Changing consumption habits

While older consumers may be the best off, they are being replaced by a new generation whose expectations and shopping habits are very different. As Lim points out, they are digitally native.

The pressure on retailers is always to deliver this week’s or this quarter’s sales targets, but at the same time all need to be changing their propositions – whether radically or incrementally – to ensure continued relevance in a few years’ time.

The fact that Karen Millen and Coast will only trade online under new owner Boohoo is indicative of the shape of things to come.

Retailers such as B&Q-owner Kingfisher and the Co-op have in the past established ‘youth boards’. Perhaps more retailers should do so again, to stay alert to what today’s and tomorrow’s consumers want.

Reputational and sustainability concerns might be just two factors which drive or dissuade spending with particular retailers in future. Retailers ranging from Ikea in furniture to Gap-owned Banana Republic in fashion are reflecting changes such as home rental and sustainability through goods rental schemes.

Mulcahy says: “When you’re seeing in the media ‘stop buying things, borrow from your neighbour’, it shows it [sustainability] is really coming into the mainstream, although it’s too early to be really widespread. I think it’s in people’s minds and will start to bite.”