Fri 11th Jan 2019
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The retail industry dominated the headlines throughout 2018. We saw retailers like Toys R Us and Maplin disappear from the high street, while high profile anchors like Debenhams and House of Fraser both suffered serious financial shocks. As well as reports of the failings of individual retailers, 2018 saw an intensification of the problems for the high street more broadly, with vacancy rates increasing and footfall falling.
As we entered the golden quarter it was clear that the challenges of 2018 would continue throughout the final months of the year. Participation in Black Friday was up, discounts were deeper and, crucially, for many retailers the sale signs stayed up well after Black Friday, in many cases right up to Christmas.
Discounting did encourage shoppers to spend, with retail sales up on a year-on-year basis in October and November. However the resulting lower margins tested many retailers. Even online pureplay ASOS surprised commentators with profit warning.
While retail sales overall appear to have held up, not all retailers benefited, with online retailers typically winning at the expense of physical stores. In November online retailing accounted for one in five pounds spent for the first time ever according to the ONS. Falling footfall and sales on the high street, compounded with the burden of high rents, rates and other costs led to alarming reports of financial difficulties from a number of high street retailers.
Of course there were some winners. Aldi and Lidl enjoyed strong sales growth, with new stores, new shoppers and trading up boosting their takings. Next defied expectations reporting increasing sales – and crucially an improvement in full price sales. Figures from Tesco showed the retailer had a decent Christmas across both food and non-food, while John Lewis’ figures were better than expected. We also saw impressive trading results from retailers including Ted Baker, Joules, Dunelm, AO.com, Hobby Craft and Selfridges.
There is evidence that small retailers performed well as a whole, benefiting from a trend towards craft and, of course, their ability to harness the power of social media to reach new audiences. We estimate substantial growth in direct to consumer sales this Christmas.
Debenhams and Marks and Spencer were among the retailers to have suffered with poor Christmas trading. Both of these retailers continue to struggle to gain real traction with their online businesses – and certainly not enough traction to offset declining store sales. With Sir Ian Cheshire having stood down at Debenhams, we anticipate substantial difficulties for Debenhams over the coming weeks and months.
A key characteristic of Christmas 2018 was the late surge in sales during the final week following a weak start to December. With Christmas falling on a Tuesday, shoppers had the full weekend and Christmas Eve to pick up last minute gifts. As a result only the most confident retailers held their nerve on price. Indeed, overall, discounting was the major theme of Christmas trading for 2018. For many retailers Black Friday has become an excuse for pre-Christmas price reductions and we also saw a lot of targeted promotional activity, channeled through e-mail and social campaigns.
Going into 2018, even many stronger retailers are licking their wounds. The trading climate feels tougher than it has for many years and with a lot of uncertainty still surrounding Brexit the first quarter of 2019 is set to be especially taxing.
Aldi and Lidl dominate Christmas amongst the grocers
The major grocers have now reported their Christmas trading figures, each with their own spin. However, it’s clear that some have performed better than others. Both reported record Christmas sales, and quick look at Kantar data over the period shows Aldi and Lidl’s grocery sales increased by 10.4% and 9.4% respectively.
Co-op also had an impressive Christmas, with Kantar showing sales up 3.2% year-on-year. New and improved stores, better in-store execution, improving ranges and the shopper trend to convenience all helped the retailer attract more shoppers.
The performance of the big four overall was less impressive. It’s difficult to compare their performance based on published results due to different reporting periods, however the Kantar data provides a useful comparison.
Tesco and Asda were the better performers, sales up 0.6% and 0.7% respectively (Kantar).
In its trading update, Tesco reported positive sales across all major categories and exceeded analysts’ expectations. The UK’s biggest retailer has momentum, with its recovery on track. Crucially, Tesco appears to have upped its innovation game, with shoppers responding well to NPD. Tesco has also benefited from improving price perceptions and a better in-store experience.
We are not surprised to see that Asda had a decent Christmas. Its pricing looks keener and the retailer seems to have regained its confidence after a number of years of weak trading. It is also worth noting that a lot of Aldi and Lidl’s newer stores are now opening in the south-east of England, away from Asda’s northern England heartland.
Sainsbury’s and Morrisons performed less well.
While Morrison’s headline sales figures looked impressive, most of the growth came from the retailer’s fast growing wholesale division. Like-for-like sales growth during the 6 weeks to 6 Jan at its core supermarket business stood at 0.6%. Kantar recorded sales growth of only 0.1% for Morrisons during the golden quarter.
Sainsbury’s Christmas fell short of expectations. Kantar clocked its sales down 0.3%. The retailer’s own results for its third quarter recorded total grocery sales up 0.4% and like-for-likes (including Argos) down 1.1%. We expect Sainsbury’s grocer sales suffered this Christmas for two main reasons. First, the retailer faced growing competition from Aldi and Lidl as they have opened many new stores in London and the south-east. Second, Sainsbury’s did not benefit from the uplift in its premium range to the same extent as some of its competitors – weighing both on sales and gross profit margin.
Overall Christmas was not a disaster for food retailers but, apart for Aldi and Lidl, it was not great either. They will enter 2019 cautious, especially as they wait to see how Brexit unfolds.
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