Retail’s Christmas results don’t match up to the gloom in the market
If you were to judge the health of the retail market solely from the last two weeks of festive trading results, you would think the market is in rude health.
But that would be a significant departure from the actual sentiment in the market, which has taken on a sense of almost unrelenting gloom in the wake of Labour’s first budget.
Stocks have either boomed or plummeted – sometimes getting to double-digits – in the wake of festive results.
M&S reported an 8.7 per cent uptick in festive food sales, and shares responded by dropping seven per cent.
Pub operator Fuller, Smith & Turner said earlier this week that like for like sales grew 10.2 per cent over the five-week Christmas and New Year period, and pointed to a number of major investments in the pipeline.
Tesco’s share price received no boost, and in fact dipped slightly, after reporting a 4.7 rise in sales year on year.
The numbers might not be blow-the-doors-off-good, but they’re by no means as bad as what was predicted. So why aren’t investors convinced, and is their response justified?
The sharp market reaction “highlights the real concern about what’s coming, with higher labour costs following the Budget measures, plus the expectations that interest rates will stay higher for longer,” analyst at Frontier Economics Tim Black said.
“The big question is how consumers will respond to higher prices,” he added. “The worry is that demand will be weak, especially for discretionary spending.”
“The reality of a turgid economy, the impending increase to labour costs, rising bond yields and a shaky pound must all be factored in,” AJ Bell head of financial analysis Danni Hewson said.
Investors ‘looking to the future’
Hikes to national insurance – and crucially, a lower threshold for employers to start paying it – plus a packaging tax and higher business rates, will undeniably increase costs.
James Callander, analyst at Freshminds, said: “The reality is that investors are looking to the future… there are really big headwinds facing the industry.”
“The £40bn is going to come from [staff] not getting pay increases or people paying people,” he said. “It’s going to come out of the economy… arguably it’ll go back and be reinvested in public services, but I think it is definitely quite gloomy.”
In a survey earlier this week, around two thirds of CFOs said their business will be forced to raise prices as a result of higher wage bill.
But as for how much, no one is quite sure yet – Next has said prices will rise by one per cent, Greggs has pushed the price of its sausage roll up by 5p, and pretty much everyone else has said that they’ll aim to keep prices down, but can’t promise anything.
There are some other signs which suggest the picture might not be as bad as it seems: UK hospitality predicted a cut in investment after the budget, although early trading statements from pub operators have not suggested this is happening – at least at the large ones.
Plus, if price rises stick around one per cent, a la Next, the impact of the budget may not be too bad, particularly with an interest rate cut on the horizon in February.
The headline rate of inflation fell to 2.5 per cent in December, down from 2.6 per cent in November and below market expectations, making a cut a “certainty”, analysts said. The subsequent rise in consumer spending could easily offset a one per cent price rise.
It’s possible that investors are simply seizing “on any traces of negativity,” investment director at AJ Bell Russ Mould said, adding that the wider backdrop of surging UK gilt yields and a slump in the pound has done “nothing to help”.
Small retailers will bear the brunt of higher costs
Larger, listed businesses are more able to swallow higher costs than smaller ones, with more scope for increasing efficiency via avenues like automation or taking advantage of economies of scale.
In Begbies Traynor’s latest Red Flag Alert, which – in their words – highlights the “mounting pressures UK retailers are facing”, the number of retailers facing critical financial distress in the last three months of the year was up by more than 25 per cent quarter on quarter, to 2,124.
Retail SMEs, particularly those on the high street, are already struggling with the shift to online shopping, a Covid-19 hangover and high business rates.
In fact, over 200,000 retail jobs are set to disappear next year along with over 17,000 stores, according to the Centre of Retail Research.
If there is something in retail to be concerned about, it is the growth – or lack thereof – of these local businesses, rather than the giants.