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Retail recovery mooted as sterling strengthens

British retailers have struggled to absorb higher costs and poor consumer confidence this year, but could they be about to bounce back?
September 21, 2017

Results from the likes of JD Sports (JD.) and Next (NXT) have exceeded many investors’ expectations, while August retail sales data from the Office for National Statistics (ONS) also defied the odds. But as the pound starts to gain ground against the US dollar, hopes have been raised of further good news on the horizon.

In August, the quantity bought (volumes) increased by 1 per cent compared with the month prior, or by 2.4 per cent year on year, marking the 52nd consecutive month of year-on-year growth in retail sales. That’s surprising given the commentary around poor consumer confidence lately, particularly as store prices have risen across all formats. Last month non-food stores and non-store retailing recorded their highest year-on-year price growth since March 1992, at 3.2 per cent and 3.3 per cent respectively.

Add to that stagnant British wages – despite good employment rates – and it begs the question: exactly who is buying in these quantities to generate this growth? This is where the weak pound has actually done the retail industry a favour by encouraging an of influx tourist shoppers. Overseas residents made 3.7m visits to the UK in April, a jump of 19 per cent compared with the same month in 2016. Although summer data hasn’t been released yet, it’s a widely accepted fact that July and August are the busiest for tourist traffic, suggesting visitors’ spending power should account for at least part of the ONS figures.

But could the pull of the pound be short lived? Recently, sterling has strengthened against the US dollar, giving rise to the idea that Britain’s 'inflation bubble' could, in fact, be temporary. A report from brokerage N+1 Singer made this exact point, arguing that the effect of higher input costs and squeezed margins for retailers could “annualise out in nine to 12 months”. It could mean that shopkeepers will need to do less to mitigate cost pressures beyond the price rises already put through this year.

But that’s not to diminish the efforts by some of Britain’s retailers this year. JD Sports released a good set of numbers last week, admitting it was too cautious in a preceding trading update, while high street chain Next has put several self-help measures into place to buck up trading.