It’s that time of year again - when the UK’s largest shop owners attempt to tap into our love of all things Christmas by releasing their festive season adverts.
Argos, Asda and Lidl are among the first big retailers to launch their 2017 Christmas adverts, as the countdown to the big day begins. Marks & Spencer (M&S) has called in the help of Paddington Bear, hoping to unlock some much needed festive joy, when it releases its advert today. The most eagerly-anticipated Christmas advert of them all, John Lewis’s, is expected to premier in the next week or two.
But whether these creative campaigns will be enough to encourage hard-pressed UK consumers to loosen the purse strings this festive season remains to be seen. Judging by today’s retail sales figures, the picture isn’t very promising with UK retail sales falling by 1.0% on a like-for-like basis in October, compared to a year ago, according to the British Retail Consortium (BRC).
Worryingly, non-food retail sales shrank by 0.4% over the last quarter - the worst reading since the BRC started counting in January 2011. Meanwhile, food sales climbed 2.4%, indicating that cash-strapped consumers are reducing their spending on non-essential items as rising prices makes the weekly grocery shop more expensive.
Considering that many households now face higher borrowing costs given the recent rise in interest rates, stagnant wages and inflation at a five-year high, it’s hardly surprising that shoppers are more cautious when considering what purchases they can afford.
Given this backdrop, investors are keeping a close eye on the raft of British retailers reporting results or issuing trade updates this week. Today’s weak retail sales have seen shares in several major British retailers fall, pulling down the FTSE 100 with Kingfisher, which operates the B&Q DIY chain, and Marks & Spencer among the biggest fallers on the blue chip index. Meanwhile, John Lewis has reported falling sales while UK fashion retailer New Look also reported a drop in sales over the last six months.
Other retailers reporting this week include the likes of M&S, Sainsbury’s and Burberry. More on these companies' challenges in the weekly market update.
It’s not all bad news, however. A clear winner is Associated British Foods, the owner of Primark which has reported a 10% rise in sales across its British stores in the last year reporting that the discount fashion retailer’s share of the UK clothing market has “increased significantly”. Primark is grabbing sales as it cashes in on UK shoppers increasingly turning to discount retailers for both essential and non-essential goods.
And while we may be cutting back on ‘essential items’, it seems Brits don’t consider tonic water to fall into this category, with stock market darling, Fever-Tree reporting that its results this year will be ‘materially’ ahead of market expectations. As my colleague, Jonathan Wright pointed out last week in his piece Morrisons & the end of the weekly shop, it’s how we buy which is becoming more crucial to retailers.
Weekly supermarket trips where, armed with our shopping lists, we planned ahead and filled up our trolleys with a week’s supply of groceries, belongs to the past as many of us no longer plan meals in advance instead turning into modern ‘hunter-gatherers’, shopping for food only when required.
Moreover, our enthusiasm for buying all things online continues to develop. All things considered, the next month is likely to be crucial for UK retailers with November’s Black Friday sales, not least as Amazon gears up for 10 days of sales and piles on more pressure by cutting prices of products from third-party sellers on its website, moving beyond its more typical method of discounts on items it sells directly.
Some argue retailers should be looking to start Black Friday sales sooner rather than later to boost the slump in non-food sales, perhaps by creating their own ‘peak days’ to stave off the competition from the likes of Amazon. There’s also the chance that the Chancellor could offer a glimmer of hope by alleviating business rates in the Budget, reducing an increase in the tax due in April next year. Meaning struggling retailers won’t also have to contend with a stark leap in their rate bills next year.
Either way, as the retail sector is forced to adapt to a fast changing landscape and an increasingly squeezed consumer, it seems not even the festive cheer of the annual Christmas adverts will be enough to boost sales figures. Disruption and change has its winners and losers and discerning investors need to make sure they tap into the latter. Fund managers with a track record of doing just this include James Thomson of the Rathbone Global Opportunities Fund which has Amazon as its largest holding. Another is Dan Nickols of the Old Mutual Smaller Companies Fund which counts Fever-Tree among its holdings. Both funds feature on our Select 50 list of recommended funds.
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