United Kingdom / Analyst Insights
The Christmas Retail Shake-Out
by Frances Luery
Jan 22 2018

The festive trading period is the most important time of year for retailers, but in the run up to Christmas 2017 they faced a less than merry operating environment thanks to rising inflation, falling real wages, limited consumer credit and lingering uncertainty following the EU referendum. As the post-holiday financial releases from some of Britain’s biggest retailers have jingled in, a picture of mixed performance has been revealed. Whilst some companies were able to weather the storm, others were not so fortunate, indicative of the overall performance of the sector.

Variety pack

According to Visa’s UK consumer spending index, consumers spent 0.3% less in real terms over 2017 than they did during 2016, the first year-on-year decline since 2012. For this reason, budget brands like Aldi, Lidl and B&M, which have low-cost appeal that resonates with frugal consumers, were among the retailers that performed best. Online retailers such as Boohoo and Ao.com also lived up to optimistic expectations, with Boohoo’s group revenue up by over 100% year-on-year for the final quarter of 2017, following what it called its ‘most successful Black Friday ever’. This was a common trend amongst online retailers, with the E-Commerce and Online Auctions industry (IBISWorld report G47.910) expected to grow by 6.4% in 2017-18.

Among traditional bricks-and-mortar retailers however, results have been less predictable. John Lewis, the UK’s second largest department store, and Waitrose, its sister supermarket, both grew over the period, with sales at John Lewis during the six-week Christmas period breaking through the £1 billion mark for the first time. Overall, John Lewis’s department store segment is estimated to grow at a compound annual rate of 4.4% over the five years through January 2018 to just under £3.8 billion. There were some positive results in the high-street Clothing Retailing industry (IBISWorld report G47.710), with Next, Joules, and Fat Face also posting positive results. IBISWorld estimates that the Clothing Retailing industry will grow by 1% in the current year.

In contrast, market leader Marks & Spencer, which can often be relied upon to shore up its consistently underwhelming clothing sales with robust food sales, reported a 0.4% decline in food hall revenue against a 2.8% decline in clothing sales. This decline follows a disappointing run of figures from the group, with its general merchandise segment estimated to decline at a compound annual rate of 1.4% to just above £3.8 billion over the five years through 2017-18. Department store giants House of Fraser and Debenhams also fared poorly, both issuing profit warnings in January. This is in line with the wider industry as revenue in the Department Stores industry (IBISWorld report G47.190) is expected to fall by 0.8% in 2017-18. The performance of some companies in the Clothing Retailing industry has also begun to fray, with Mothercare, Card Factory and men’s outfitter Moss Bros all issuing profit warnings.

Squeezed middle

This spread of results points to a make-or-break situation unfolding in British retail. Cautious consumer sentiment makes for a fragile operating environment, with shoppers considering purchases more carefully. However, this does not necessarily mean that the industry is defined by a dichotomy of discount brands triumphing over high-end retailers. Many of the most successful high-street retailers over the Christmas period are established in the upper end of the market. The trend emerging from retail is of the middle-market stumbling in its response to changing currents. Impulse items and stocking fillers, which brands like Debenhams and Card Factory rely on, have failed to appeal to more hesitant shoppers. Meanwhile, John Lewis’s commitment to product innovation and synergy between online and bricks-and-mortar retail has been a driving force behind its strong performance over the past five years. Differentiation and investment in new products has never been more important.

However, even those firms that have enjoyed a prosperous Christmas period in terms of revenue have admitted that operating margins were sacrificed in the battle for fast sales. John Lewis conceded that the drive for revenue growth necessitated absorbing cost increases arising from higher import prices due to the weak pound.

The Black Friday tradition, imported from the United States, has also been a major headache for retailers. Black Friday deals have led consumers to expect heavy discounts in the run-up to Christmas. While these promotions have been a success for some, with John Lewis recording its busiest ever hour for online trading on the day, others have rejected the event. M&S opted not to take part in Black Friday during 2017, shunning the implication that heavy discounts mean that goods were overpriced to begin with.

Online orders

E-commerce has also been a defining force in the Christmas retail period. Almost every major retailer reported healthy online sales growth, with Next crediting its good performance over Christmas to its investment in online operations.

The growth of online shopping has naturally come at the expense of high-street stores. According to retail analysts Springboard, total footfall fell by 3.5% in December 2017, the biggest fall since March 2013. When consumers do visit stores, it is often to collect items bought online, with much of this traffic diverted away from high streets to out of town retail parks where parking is easier. IBISWorld estimates that click-and-collect purchases now account for one-quarter of sales from multichannel retailers.

What is clear when reflecting on the Christmas trading period is that consumers have been more considered in their spending habits, becoming less susceptible to impulsive spending and more deliberate in their purchases. A squeeze on shoppers’ incomes over the year will have pushed such trends to the forefront, but these more discerning habits stem from the growth of online shopping and heavy discounting, and are already ingrained in the consumer psyche. In the new year, retailers must make a resolution to remain responsive to these trends and develop their operations accordingly, or else they may risk being left behind.

-end-

For a printable PDF of The Christmas Retail Shake-Out, click here.

IBISWorld industry reports used in this article:

G47.190   -   Department Stores in the UK
G47.710   -   Clothing Retailing in the UK
G47.910   -   E-Commerce and Online Auctions in the UK

For more information on these, or any of the UK’s 400+ industries, log on to www.ibisworld.co.uk, or follow IBISWorldUK on Twitter.