Despite surging numbers of Covid-19 cases and a perfect storm of external pressures threatening to derail the golden quarter, retail has delivered a merry Christmas. What did Super Thursday’s trading updates tell us about the sector’s seasonal performance – and the year ahead? 

A raft of big-name retailers including Tesco, Marks & Spencer, Asos and Halfords updated the market today, adding to what has been a positive tone for UK retailers following the crucial Christmas period.  

Although growing concerns about the spread of the Omicron variant and the mounting cost-of-living squeeze could have dented consumers’ festive plans, Britons eager to make up for a lost Christmas last year flocked back to retail at the end of 2021. 

Tesco was the latest retailer to upgrade its full-year profit forecast this morning after enjoying a stronger than expected Christmas. Britain’s biggest grocer followed the likes of Sainsbury’s, JD Sports and Dunelm, all of whom increased their guidance earlier this week. 

But, following a seasonal splurge from consumers, will retail’s Christmas party come to a screeching halt as a series of challenges take hold in 2022?  

Inflationary pressures

One of the key factors retailers will have to mitigate heading into 2022 is the already rampant inflation the UK is experiencing.

Tesco chief financial officer Imran Nawaz says Tesco is currently facing inflation of around 5% as suppliers increase their prices.  

In a bid to ensure that doesn’t hit customers too hard at the shelf edge, Nawaz says the grocery giant will seek to cut costs in other parts of the business to offset pain points. It has already established long-term contracts with many of its suppliers and put “hedging mechanisms” in place to keep utility bills down. 

“There’s no doubt that there are inflationary pressures and it’s very hard for us to predict what those are going to look like over the coming months”

Ken Murphy, Tesco

Tesco boss Ken Murphy admits that price increases are inevitable in certain categories this year, but insists the retailer will continue to be competitive on price. 

“There’s no doubt that there are inflationary pressures and it’s very hard for us to predict what those are going to look like over the coming months,” Murphy says.

“But we’re trying to manage and mitigate inflation to the best of our ability.” 

Murphy’s opposite number at Sainsbury’s, Simon Roberts, is adamant that growing inflation won’t hinder sales growth in 2022. 

As part of a renewed focus on its core food business, Sainsbury’s has already rationalised ranges and cut costs across other parts of the group, which has allowed it to “reinvest heavily in our food offering, work with our suppliers and focus on the products that matter most to consumers”. 

Poundland (3)

Poundland has vowed to maintain its low prices despite inflation

Similarly, Poundland owner Pepco has vowed to maintain its low prices despite inflationary pressures. 

Chief executive Andy Bond says the group is “committed” to supporting shoppers who are already facing a cash crunch by “preserving the majority of our existing price points and therefore strengthening our price leadership position”. 

M&S chief executive Steve Rowe says the retailer’s focus on own-label, which accounts for almost the entirety of its range, means it can work closely with suppliers to deliver efficiencies and succeed in an inflationary market. 

“Will there be inflation? Yes, there will,” Rowe says. “[But] we think overall our customers are relatively protected from the headwinds in terms of inflation.”

However, inflationary pressures have already led to some price rises at some of M&S’ fashion competitors.

Online rival Asos admitted that “low to mid-single-digit price increases have been taken to mitigate cost inflation”, stemming largely from additional freight costs, wage inflation and excess stock. 

Asos chief operating officer Mat Dunn would not be drawn on which categories in particular had been subject to price hikes, but admits that a cross-section of brands and categories have been affected. 

Consumer sentiment 

UK households are suffering the steepest drop in available cash since 2014, according to Ipsos Mori.

The disposable income squeeze is likely to get worse before it gets better, with April’s planned rise in National Insurance and rising energy prices also taking their toll. That is bound to cripple consumer confidence and impact spending habits.   

It was in similarly challenging economic times, following the 2008 financial crisis, that discount duo Aldi and Lidl grew at an exponential rate. Will consumers tighten the purse strings and turn to value in a similar way in 2022?   

“The top priority for most families this year will be managing their household budgets in the face of rising living costs”

Giles Hurley, Aldi

Aldi hailed its “best Christmas ever” in 2021 and UK boss Giles Hurley can see further growth opportunities.

“The top priority for most families this year will be managing their household budgets in the face of rising living costs,” he says. “Aldi will always offer the lowest prices for groceries, no matter what.”

Lidl

Will Lidl benefit from consumers tightening the purse strings?

Lidl’s UK chief executive Christian Härtnagel offered a similar message – one that is likely to resonate in households across the country: “I want to reassure each and every one of our customers that we remain resolute in our promise of being the destination for the lowest grocery prices in the market.”

However, Tesco’s Murphy and Sainsbury’s Roberts believe that, even in the tough financial times that lie ahead, shoppers will not be prepared to sacrifice quality. While Aldi and Lidl trumpet their price position, Tesco and Sainsbury’s are focusing on the broader value-for-money agenda.   

Both grocers have invested heavily in their Aldi Price Match initiatives, but those form just part of an equation – alongside product quality, wider ranges and loyalty schemes – that they hope will keep customers out of the discounters’ clutches during the downturn. 

Murphy believes this combination means “customers can rely on Tesco for value” and “removes reasons to shop elsewhere” – even amid a cash crunch.

Roberts says Sainsbury’s is already “400 basis points better value against Aldi compared with a year ago” and has become more competitive on price against Asda, too. 

Even if consumer confidence plummets, grocers will be slightly insulated. It is discretionary categories, such as fashion, that could be hit hardest.

Yet Asos’ Dunn believes that consumers will still want to treat themselves and are likely to dip into any savings they amassed during the pandemic to do so. 

“You’ll see two things, which are counterbalancing factors. On the one hand, clearly consumer disposable income will be under pressure and I don’t think our consumer will be unusual in that respect,” he says.

“However, I think there’s a bank of savings people have built up and they have been through a period where they haven’t invested as much in their wardrobe as they would have done because of the lack of activities.”

As events such as weddings, holidays and festivals return, Dunn predicts there will be a “reallocation of wallet share from other places” into fashion. 

If that trend plays out, consumers are likely to seek out trusted brands and purchase garments they know will last.  

M&S’ Rowe says the retailer’s reputation is at a “record high” among customers, according to recent YouGov research. 

Over the Christmas period, full-price sales at M&S jumped 45%. Rowe suggests that is evidence that shoppers are “desperate for great-quality merchandise” – a mindset that will spark “a flight to great value more than cheap prices”. 

Availability vs range

Although lingering supply chain issues impacted the availability of certain products, such as games consoles, in the run-up to Christmas, a number of retailers actually benefited from lower stock levels – driving full-price sales, minimising markdowns and improving margins.  

Full-price sales at Next jumped 20% in the eight weeks to Christmas Day compared with pre-pandemic levels, for instance, despite what boss Lord Wolfson described as “materially lower than planned” stock levels. 

M&S’ Rowe was another to admit that availability during the crucial Christmas period “wasn’t perfect”. He says there were “lumps and bumps”, which he expects to continue throughout the first quarter of the calendar year.

However, he observes: “Overall, the feedback we’ve had is that customers could get what they wanted when they wanted it.”

Major grocery retailers rationalised ranges dramatically during the height of the coronavirus crisis, focusing on the most popular products to shore up availability during periods of unprecedented demand.

The likes of Tesco and Sainsbury’s have seen first-hand the cost savings that can be made without negatively impacting levels of choice for the consumer.   

Murphy told Retail Week Live 2021 that Tesco was looking at further rationalising its ranges as a result. 

Container ship

Supply chain issues are expected to ease further into 2022

As supply chain snarl-ups unwind, retailers in other sectors will be faced with similar decisions. Do they revert to pre-pandemic stock and range levels or reduce the proposition to drive the availability of the most popular lines?   

Asos’ Dunn believes supply chain issues will begin to dissipate within the next month as demand for freight containers eases following the peak Christmas and Chinese New Year periods.  

“We’re trying to take the learnings in terms of ensuring maximum flexibility and shortest possible lead times, but the biggest factor will be that we’re in a more predictable demand environment”

Mat Dunn, Asos

But he insists that will not leave the business with excess stock this summer – a situation it faced last year, prompting a surge in promotional activity. 

“Last summer, the demand environment was uncertain, balancing lockdowns and the question of whether people would be able to go on holidays or to weddings,” Dunn says.

“In that sense, last year, our product profile was hard to balance. This year I feel relatively optimistic that the demand picture is slightly clearer – it feels like consumers are increasingly learning to live their lives in the face of the virus. We see a more stable demand picture.

“We’re definitely trying to take the learnings in terms of ensuring maximum flexibility and shortest possible lead times, but the biggest factor will be that we’re in a more predictable demand environment.”

The shape of discretionary spend

Lockdown favourites have emerged during the pandemic, from TVs and games consoles to sofas and garden furniture.

But which products proved popular at Christmas and what does that tell us about the likely shape of discretionary spending in the year ahead?

Bicycles, another lockdown winner as people sought more outdoor exercise, drove further demand during the golden quarter at Halfords. Sales of adult bikes jumped 20% on pre-pandemic levels, while sales of e-bikes doubled. 

However, lockdown spending habits didn’t persist across all categories. The Very Group reported a drop in electrical and home sales year on year, following soaring demand during the early stages of the pandemic.

“We’ve seen a real resurgence in fashion over Christmas and our developing categories, principally beauty and gifting, are also in double-digit growth” 

Henry Birch, Very

“We are used to seeing strong electrical sales and strong home sales. That’s been one of the narratives of the pandemic – people staying at home, buying entertainment products and work-from-home products, making their homes look good,” says Very boss Henry Birch.

Shop Direct reports a Very merry Christmas with sales up 4%

Very saw fashion make a comeback over Christmas and Black Friday

But other categories are mounting a comeback heading into 2022. “We’ve seen a real resurgence in fashion over the Christmas and Black Friday period and our developing categories, which are principally beauty and gifting, are also in double-digit growth,” Birch says.

Asos registered an 80% year-on-year spike in sales of occasionwear during the festive period as consumers geared up for Christmas parties. While jogging bottoms and hoodies had driven spending during the height of the coronavirus crisis, evening dresses and shirts were in high demand during the golden quarter. 

Asos also singled out Christmas-themed loungewear – up 20% year on year – and fashion sportswear brands, such as North Face, as festive winners.

Casualwear remained in high demand at M&S, with jersey, denim and knitwear among the categories that performed strongly. As flexible working becomes ingrained within hundreds of businesses post-pandemic, such categories are likely to prove resilient in 2022. 

After two of the most challenging years retailers have ever experienced, the next 12 months will provide further bumps in the road to recovery. However, after a Super Thursday and indeed a super Christmas for retail, businesses should tackle those headwinds with renewed confidence.  

Those who drive value for money, support their customers through the cost-of-living squeeze and strike the right balance between range and availability will be the ones toasting a successful 2022 this time next year. 

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