Next beat expectations over Christmas but chief executive Lord Wolfson, one of the industry’s most respected leaders, said that working out prospects for the year ahead was “unusually difficult”.

Next chief executive Lord Wolfson

Next chief executive Lord Wolfson set out some key questions for the year ahead when he updated on Christmas trading

He flagged “five areas of uncertainty” that his business is wrestling with. How they play out is likely to shape the performance not just of Next, but other retailers, too. 

Pent-up demand and spending

Lord Wolfson asked: “To what extent has the buoyancy of the last nine months been the result of pent-up demand combined with the spending of savings accumulated over the pandemic? How much of this will reverse out as we move through next year?”

According to McKinsey & Company, the acceleration of ecommerce recorded during the pandemic looks set to stay, particularly newly adopted habits such as online grocery shopping.

However, overall, pent-up demand looks likely to turn to areas such as live entertainment and leisure travel when restrictions allow in 2022. 

At the end of 2020, households had built up savings to the second-highest level on record

Limited opportunity to spend during lockdowns provided households with the chance to dramatically increase savings.

At the end of 2020, households had built up savings to the second-highest level on record, according to the Office for National Statistics (ONS).

Indeed, the highest level of saving was reached during the first lockdown in 2020 and the ONS noted that savings rose during every lockdown.

However, as freedom returned, so too did old habits. Consumer borrowing on credit cards reached its highest level in more than a year in November, according to the Bank of England this week. £1.2bn was borrowed in that month alone.

Saving also became less of a priority. The Bank of England reported that money set aside fell to £4.5bn in November – down from an average of £11.2bn a month recorded over 2021.

A March 2021 Bank of England survey also suggested that 27% of people intended to spend their additional savings – up 17% from six months prior, illustrating the increased likelihood of spending lockdown savings as restrictions eased. 

However, lockdown savings may not be around for much longer, perhaps indicating a slowdown in spending power in 2022.

A recent Barclaycard report revealed that consumer spending in 2021 rose 5.9% in comparison with pre-pandemic levels in 2019, leading to questions around whether such levels can be maintained this year as saving slows. 

Travel and leisure

While staycations have boomed over the past two years, international travel is predicted to rebound in 2022 if no further Covid-19 variants threaten to close borders yet again.

Lord Wolfson therefore asks whether there will be a shift away from spending on discretionary items in favour of “overseas holidays and other social activities”.

After two years of waiting, many consumers will likely be keen to either splurge the savings they made during the pandemic – or save up their pennies if they were less fortunate – to spend on a big trip abroad.

That could spell bad news for retailers who rely on discretionary spending, particularly those who have been bolstered by consumers’ time spent at home – namely home and DIY retailers and fashion players in staycation destinations such as seaside resorts.

On the other hand, many consumers prepare for a trip abroad with new clothing and beauty products, which could lead to a strong summer for fashion retailers.

Embattled travel retail specialists such as WHSmith and luxury players such as Burberry and Harrods, which typically benefit from overseas visitors’ spending, will also be pleased with the return of travellers to their stores.

Airport passenger numbers were down as much as 90% at the height of the pandemic.

It is as yet unclear whether international travel could be dampened by a new Covid variant discovered in France this week.

However, the lifting of pre-departure testing restrictions indicates that more holidays could be on the horizon as travellers take advantage of saving on testing fees and the hassle the pandemic brought to travel. Airlines such as Jet2 have already noticed an uptick in bookings.

Essential goods inflation

Inflationary pressures will hit customers across all sectors and categories in the coming year.

While business costs are playing a role, increases in everything from energy prices to rail fares are all poised to contribute to making 2022 the year of the squeeze for consumers. 

Against this background, Lord Wolfson wonders to what extent inflation in essential goods and services, such as fuel, electricity and food, will reduce discretionary spending on clothing and homeware. It’s a question many businesses are grappling with.

Energy prices are expected to surge 51% in April, with the average household looking at spending £944 a year on gas alone

Retailers such as B&M and Made mitigated some of the operational costs over Christmas by ordering more product earlier, maintaining high stock levels and lowering costs. However, there is much less that retailers can do individually to mitigate the pressures being felt by customers on their own spending.

Energy prices are expected to surge 51% in April, with the average household looking at spending £944 a year on gas alone, according to fuel poverty charity National Energy Action.

Rail fares are also due to jump by 3.8% in March. While that’s below market inflation, it will still impact on customers given that working-from-home orders will likely lift by the spring. 

Another big issue is food inflation, which rose 3% in December – the fastest rise since 2013.

All these issues combined look likely to lead to a worsening of the cost-of-living crunch many Britons started to experience in 2021. 

Greggs chief executive Roger Whiteside said a blizzard of inflationary pressures would inevitably lead to price rises for customers. However, he insisted it would only be “pennies on the pound” and that Greggs would benchmark against its competitors. 

That is going to be the likely scenario for retailers, particularly coming into the second quarter when the impact of rises in energy and rail prices begins to be felt.

Retail prices will inevitably be pushed up, too, by inflationary pressures at a time when customers are feeling at their poorest. 

With essential items costing more, and customers having already done up their homes and upgraded their technology over the last 18 months of Covid-19, discretionary spending in categories ranging from homewares to apparel may be affected. 

Selling price inflation

Next flagged a raft of cost factors driving higher prices – and they will be familiar to many in retail. 

From the “unanticipated persistence of higher freight rates into the back end of the year ahead” through to higher wages, the pressures will ultimately feed through to the prices paid by shoppers.

Wolfson asked: “To what extent will the inflation in our own selling prices, estimated at around 6% in the second half, serve to depress the demand for our products?”

Other retailers will be asking themselves the same question as they assess how their own costs are likely to rise and how much of that burden they can pass on to customers in the form of increased prices without losing trade.

Next has signalled that its prices will rise “broadly in line with the landed cost of goods” so consumers will pay no more than the higher costs it must bear. The retailer’s inflation estimates include home as well as fashion, with the former expected to include the bulk of the rise.

But as consumers’ costs rise as well, there may be some flight to value, perhaps benefiting low-price retailers in home categories as well as others such as Primark in apparel and B&M, which itself posted details of a bumper Christmas earlier today. 

However, the power of the Next brand and its reputation for quality, rather than the lowest prices, may provide protection for it and other businesses with similar positioning, such as Marks & Spencer

In fact, Next anticipates its “total average selling prices to increase by more than the like-for-like price increases”. 

In other words, consumers may buy less but trade up when they do open their purses. Next said that consumers may choose to “buy slightly fewer items, but at moderately higher price points – perhaps exchanging volume for quality”.

Pressures and resulting higher costs in areas such as warehousing and distribution, along with labour shortages, have continued longer than some may have expected last summer. That is likely, in the longer term, to prompt further automation in pursuit of efficiencies. 

Tax and interest rates

Planned and potential increases in tax and interest rates, another key determinant of discretionary spend, could further dampen consumer appetite as 2022 progresses.

Wolfson asked “to what extent” April’s planned 1.25 percentage point increase in National Insurance and possible increases in mortgage rates would impact discretionary purchases”.

If the year plays out in the manner that many analysts and economists predict, the answer may not be one that retailers want to hear.

The additional NI bill of 1.25p in the pound will mean those earning £30,000 a year – just below the average UK salary – will pay an extra £255 per year, or £21.25 a month, in tax.

Increases in mortgage rates would hit budgets harder – and they appear increasingly likely

While not necessarily a bank-breaking sum for workers earning that wage, it is enough to make consumers think twice about refreshing their summer wardrobe with that new T-shirt or dress.

Increases in mortgage rates would hit budgets harder – and they appear increasingly likely.

Just yesterday, Britain’s biggest building society Nationwide unveiled hikes to its fixed-rate and tracker mortgages, impacting first-time buyers, home-movers and those looking to remortgage.

Nationwide’s base and standard mortgage rates have both jumped 15 basis points, to 2.25% and 3.74% respectively, denting the monthly budgets of its customers.

NatWest and Santander are among the other major lenders passing on the Bank of England’s December base-rate hike to homeowners. 

Bank of England governor Andrew Bailey is expected to raise the base rate again in February, so mortgage holders could feel a further squeeze to the tune of hundreds of pounds a year in the spring.

Retailers reliant on discretionary purchases, in sectors such as fashion, beauty and entertainment, could feel a similar pinch.

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