Fresh retail sales data from the Office for National Statistics (ONS) hint at a return to normal activity levels for the sector. Total retail sales rose by 13.9 per cent in June when compared with May, while two monthly increases across this period have returned overall retail sales to near pre-coronavirus levels. But behind those numbers sits a more complex story.
Indeed, the composition of retail sales is markedly different from what it was before the onset of the pandemic. Online retail demand was 53.6 per cent higher last month than in February, before the pandemic took hold. Meanwhile, non-food store sales still remain below 'normal' levels – despite the fact that they are now showing signs of recovery, having grown 45.5 per cent last month. Fashion and clothing demand has been hit particularly hard.
It doesn't help that households remain cautious about spending; amid concerns about job security and earnings, demand for unsecured borrowing including credit cards and personal loans is at its lowest levels since IHS Markit's records began in 2009.
And while grocers have, conversely, seen their sales surge during the crisis, they have struggled to translate that trend into profits over the past few months – providing a cautionary tale on the value of headline sales data when assessing the investment quality of companies.
Food and online demand remain high
Supermarkets have reported unprecedented demand during the pandemic and have been forced to adapt their supply chains accordingly. The closure of restaurants and pubs has precipitated a mass shift in calories consumed into our homes. While there was a small 0.1 per cent drop in food store volume sales in June, sales remain 5.3 per cent above February.
Feeding the nation has come at a cost to the big supermarket groups, however, which have invested heavily in protecting staff, beefing up their supply chains and mastering online sales channels. Tesco (TSCO) has cautioned that the pandemic could cost it almost £1bn. At the start of July, J Sainsbury (SBRY) estimated a £500m blow to profits as a result of coronavirus, which it said will be broadly offset by higher grocery sales and business rates relief.
Consumer stockpiling activity has now waned, while people are returning to restaurants and pubs, which have been allowed to remain open for nearly a month. "We do not expect the current strong sales growth to continue,” Sainsbury chief executive Simon Roberts warned in the grocer’s latest announcement.
The only food-retailer to realise any significant share-price gains since the crisis began is Ocado (OCDO). While profits continued to elude the group at the half-year mark, Ocado is adamant that digital demand is here to stay. A survey cited within its results announcement found that a third of surveyed UK consumers claimed they would order more of their groceries online after the pandemic.
While online retail activity remains at an all-time high, it actually only grew by 1.1 per cent during June, according to the ONS. The proportion of online spending, meanwhile, fell to 31.8 per cent compared with a May peak of 33.3 per cent, but this remains well above February’s 20 per cent level.
Retailers must do more to coax customers back into stores
While consumer survey data indicates that people in the UK are adjusting to the idea of shopping in some physical stores, this readiness fluctuates between retail sub-sectors, while changes in government policy may also have a detrimental impact on the recovery. For one thing, it is possible that the introduction of compulsory face masks in stores may dissuade some shoppers from returning to the high street.
Pent-up demand will diminish; only a fraction of the retail sector remained closed in June, with over 80 per cent of the sector having traded for more than the last two weeks of the month. Consumers now feel more at ease entering stores, with those comfortable with going to grocery stores and shopping malls having risen to 48 per cent and 26 per cent of consumers respectively last month, according to EY.
Household spending remains well below pre-pandemic levels, although the proportion of shoppers planning more ‘big-ticket’ purchase, such as furniture and electronics, rose to 18 per cent last month, from 13 per cent in April. However, an online shift towards these goods will dampen profitability. As Dixons Carphone (DC.) highlighted earlier this month, online electrical sales, which jumped 166 per cent in April for the retail, are lower margin.
Fashion retail sits in a particularly vulnerable position, and it is difficult to know how the sector will fare in the months ahead. Only 17 per cent of consumers feel comfortable trying on clothes, according to EY. The value of textile, clothing and footwear sales was 34.9 per cent below February levels last month, according to the ONS, with this gulf widening to 50.8 per cent on store-only sales. “Retailers need customers to quickly realise the benefits of coming into a store if they want to keep their brick and mortar open,” observes BJSS retail consultant Georgina Wickman. With growth of just over a quarter, online sales growth in clothing and footwear was much slower than across the rest of retail.
That said, help may be on the way. According to The Times, Chancellor Rishi Sunak is considering an online sales tax in order to shore up public finances and help high-street retailers compete with the burgeoning online marketplace. Ideas under consideration reportedly include a 2 per cent levy on online sales and an online delivery charge.
