The food sector is battling the harshest trading environment in its history while non-food begins to leverage a long-awaited return of consumer confidence.
Since the start of the year much has been made of the increasing polarisation of the performance of the food and non-food retail sectors. The former is battling the harshest trading environment in its history while the latter begins to leverage a long-awaited return of consumer confidence.
The widening gap was demonstrated in the latest set of data from the British Retail Consortium, which showed that while food sales faltered – suffering a decline in total terms in May – overall retail sales were up 2% in the month. Clothing was the best-performing category, delivering its highest growth since December 2011.
A number of key economic indicators continue to point to the return of a more robust demand environment for non-food retailers, from consumer confidence to employment rates. It has convinced many that improvements are becoming entrenched.
The performance of the non-food retail sector is adding fuel to that fire. But ironically, as investment house Oriel Securities pointed out in a note this week, it may have been the healthy nature of the latest retail figures that acted as the final encouragement for Bank of England governor Mark Carney to signal that interest rates may rise sooner than expected.
Carney is not alone in fearing the housing market is close to overheating, and measures to dampen it now seem inevitable. The fear for retailers is that any such action will quickly mute the consumer recovery.
The most obvious threat is to DIY and home retailers, who are most exposed to the health of the housing market. But any rise in interest rates will have a significant impact on consumer spend.
For retail chiefs, concern over the evidence of a recovery has come from the lack of real wage growth. While the economy is growing, many people still remain worse-off than they were before the recession.
A rise in interest rates will not only squeeze consumers’ pockets further, but in quelling rising house prices it will also undermine one of the key psychological boosts that has driven a rise in confidence.
In communicating early, Carney has at least given consumers time to digest any upcoming rebasing of rates.
But the concern his speech has sparked illustrates the complex and uneven nature of the economic landscape in which retailers are battling.