(The following article was published by Alliance News on Friday, Jan 10, 2014)
LONDON (Alliance News) – The key Christmas season is shaping up to be just about OK for the UK’s retail sector despite poor performances from some of the biggest names in the industry, but executives stress that the bigger picture remains one of consumer caution and restrained spending.
The British Retail Consortium, the industry’s trade body, Friday confirmed the big picture presented by the retailers that have reported so far: UK retail sales edged up in December thanks to a last-minute Christmas rush and the strongest growth in online sales since march 2010.
Total UK retail sales were up 1.8% compared with a 1.5% increase in December 2012, although they were up only 0.4% on a like-for-like basis, according to December’s BRC-KPMG Retail Sales Monitor.
“This is a respectable result overall, in line with our prediction that Christmas trading in 2013 would reflect that while confidence levels were higher than the previous year, this wasn’t always matched by more money in pockets,” BRC Director General Helen Dickinson said in a statement.
There are always a number of outperformers and underperformers in the UK retail sector each Christmas, and the poor reports from Wm Morrison Supermarkets PLC, Marks & Spencer Group PLC, Mothercare PLC and Debenhams PLC stand in stark contrast to the positive updates from the likes of Waitrose, parent The John Lewis Partnership, Next PLC, and House of Fraser.
The winners tend to have one thing in common: strong products kept at full price and offered via a strong online platform as well as in traditional stores. The other winners, hard discounters in the food sector like Aldi and Lidl, have tempted in more shoppers still cost conscious after years of wages stagnating or rising at levels below inflation.
The underperformers have differing individual problems, although the losers in the clothing sector all got caught in a discounting war that started well before Christmas. In many cases, however, blaming discounting by others masked an issue with their own product ranges that failed to attract shoppers happy to pay full price at stores like Next and House of Fraser.
Marks & Spencer, which is big in both food and clothes, faces the same problem it has failed to overcome for a decade: customers love its premium food ranges but would rather shop elsewhere for their clothes.
It said its overall performance in the last quarter of 2013 was below expectations after tough October and November months and heavy promotions failed to revive general merchandise sales.
“We didn’t start the promotions. We started with a full-price stance, but we saw that it was necessary over the Christmas period to bring some strong promotions to to satisfy customers,” said Chief Executive Marc Bolland of the price war in the clothing sector.
Debenhams was perhaps worst affected. Its Chief Financial Officer Simon Herrick resigned just days after it issued a profit warning that it blamed on heavy discounting. Mother and baby products retailer Mothercare was also badly hit, seeing its shares drop by more than a quarter after it too issued a profit warning as sales tumbled 9.9% in total in the 12 weeks to January 4, and 4% on a like-for-like basis.
However, the failure of Debenhams’ strategy was highlighted last week by big rival House of Fraser, which reported its best ever Christmas trading period, with like-for-like sales up 7.3%, excluding VAT. M&S’s struggles with its clothing range contrasted with its biggest rival Next, which said sales were significantly ahead of expectations, boosted by online sales and strong trading in the run-up to Christmas and in its end-of-season sale. It raised its profit guidance and is now expected to post an annual profit bigger than that of M&S for the first time ever.
JD Sports Fashion PLC joined the winners in the fashion sector Friday after posting a strong festive trading update, and reaffirming that full-year profits will be in line with expectations and ahead of last year.
However, the BRC confirmed the early pre-Christmas discounting referred to by Mothercare and Debenhams, saying this week that British shop prices fell at the steepest rate in at least seven years in December as some retailers offered heavy discounts to attract shoppers. The BRC-Nielsen shop price index fell 0.8% year-on-year in December following a 0.3% drop in November.
This was “a double whammy of good news for cash-conscious customers, and confirms our predictions that retailers worked hard to help budgets go that bit further this Christmas,” BRC Director General Helen Dickinson said.
All of the listed big supermarket groups suffered as Aldi and Lidl took market share at the bottom end of the market and Waitrose and M&S Food performed strongly at the premium end of the market. Even J Sainsbury PLC, recently the best performer in the sector, saw sales growth slow.
However, worst hit was Morrison, which issued a profit warning after a steep decline in sales over the Christmas period. It now expects its profit for the full-year at the bottom end of expectations.
The grocer said that in the 6 weeks to January 5, total sales excluding fuel were down 1.9%, and declined by 3.3% including fuel. On a like-for-like basis sales fell even further, declining by 5.6% excluding fuel, and down by a huge 7.1% including fuel.
“The difficult market conditions were intensified for Morrisons by the accelerating importance of the online and convenience channels, where Morrisons is currently under-represented, and by targeted couponing which was particularly prevalent in the market this Christmas,” the supermarket said.
It has just launched a fledgling online service in an attempt to catch up with its rivals.
Britain’s biggest retailer, Tesco, also continued to struggle in the UK, despite further strong online growth, as shoppers continued to stay away from its huge out-of-town supermarkets. It widened its profit guidance for the full year, suggesting trading conditions have become more unpredictable in the UK grocery market.
Tesco said group sales for the six weeks to January fell year-on-year by 1.2% including petrol, and declined by 0.6% excluding petrol. It said that in the UK, total sales including VAT and petrol declined by 1.5% including petrol, with like-for-like sales down by 2.4%.
“Our decision to significantly reduce our new store opening programme and our ongoing work to transform our general merchandise offer are also holding back top-line performance in the short term, particularly relative to others in the sector,” said Chief Executive Philip Clarke.
Sainsbury, meanwhile, cut its sales guidance for the current financial year, warning that although it had seen customers splurge in the run-up to Christmas, October and November proved to be very slow. It said that it now expects like-for-like sales growth for the year to dip below 1%, down from its previous sales guidance of between 1% and 1.5%.
Sainsbury said it had experienced its best Christmas ever, with 28 million customer transactions in the week before Christmas, up from 26 million last year. It said demand for its own-brand premium range was strong, as was online ordering and sales of general merchandise and clothes. Its growing convenience store business also continued to boom, reporting growth of 18% for the third quarter as a whole.
Sainsbury joined peers in warning that consumers were again likely to tighten their belts following Christmas.
“As with last year, we expect customers to spend cautiously in the few months following Christmas, in an attempt to rebalance the household finances. The general economic backdrop remains uncertain for many families,” it said.
Also firmly on the winners list was Waitrose and parent John Lewis Partnership. The premium supermarket unit said it had recorded its best Christmas on record, boosted by a strong performance from its fledgling online grocery business. Its total branch sales, excluding fuel, for the twelve trading days ending 31 December 2013 were up 6.5% on last year, and 4.1% on a like-for-like basis. The parent company said total sales at its John Lewis department stores reached GBP734 million for the five weeks to December 28, up 7.2% on last year and 6.9% on a like-for-like basis.
“Overall, we sense that Christmas 2013 will be seen to be alright in the big scheme of things but with some doing a lot better than others,” Shore Capital said in a note to clients.
The retail reporting season continues next week, with trading updates from ASOS PLC, Burberry Group PLC, Dixons Retail PLC, Home Retail Group PLC, and low-cost fashion Primark brand owner Associated British Foods PLC.
By Rowena Harris-Doughty; rowenaharrisdoughty@alliancenews.com; @rharrisdoughty
Copyright © 2014 Alliance News Limited. All Rights Reserved.