- Retail sector showing signs of weakness even before companies react to Budget-related cost pressures and consumers suffer the consequences
- Value retailers have been losers, not winners, as consumers watch their spending.
- Eleven out of 20 companies with UK retail operations have seen their share price fall on Christmas trading updates.
“It is too early to truly quantify the full impact of the Budget-related cost pressures on the retail sector,” says Dan Coatsworth, investment analyst at AJ Bell. “Putting a number on the extra costs is one thing; the ways in which retailers offset the extra costs and how that affects consumer spending patterns is another.
“Some retailers have adopted a cautious tone, others implied it was business as usual, yet there was a sense of uncertainty across the sector which clouded many of the Christmas trading updates issued so far this month.
“There is a real risk that retailers hike prices just as consumer confidence crumbles, creating a toxic cocktail that ends in tears for the sector.
“The outlook is soured by the prospect of inflation moving higher, the labour market weakening as companies reduce hiring, and the economy spluttering. If consumers are already feeling less confident about their personal finances and job security, they certainly aren’t going to respond well to increased prices.
“Most retailers have now put a figure on the extra costs they’ll incur from Rachel Reeves’ Budget decision. The increase in employer National Insurance, a higher National Living Wage and changes to employment rights will cost shopkeepers tens of millions of pounds.
“Only a few companies have explicitly said they are passing on some of the extra costs through higher prices, including Next. Signposting price hikes is a dangerous strategy for any retailer as it could put customers off visiting the shop or website if they know products are going to be more expensive.
“Retailers are more likely to go down the stealth route and quietly raise prices with no warning, hoping that consumers either don’t notice or they pay the higher cost because they’ve already gone to the effort of choosing a product.
“Card Factory says it will offset £14 million annual cost inflation through ‘efficiencies, range development and pricing’. It is fortunate in already having low prices, so raising the cost of a card by 10% from £1.49 to £1.65, for example, shouldn’t cause too much strife for customers and dampen demand.
“What’s interesting is Card Factory’s reference to ‘range development’ as that could imply a host of different things, such as stocking more cards that use cheaper materials. The risk is that customers feel the quality isn’t up to scratch.
“This harks back to previous periods with economic headwinds when companies sought to buy in cheaper goods, such as Restaurant Group re-engineering its menu to have cheaper cuts of meat, instead of putting up prices.”
Value retailers are struggling
“Even though the Bank of England has started to cut interest rates in the UK, it’s clear that the consumer is still under pressure and they’re watching their spending closely.
“One might assume that means value retailers are thriving as people flock to their cheap goods, with these companies attracting lower income households as well as more affluent people trading down to cheaper alternatives.
“That theory no longer seems to stack up, as evidenced by B&M’s growth slowing, Poundland experiencing a slump in sales and Dunelm’s latest quarterly update being mediocre at best.
“It feels like lower income households are at stretching point where they are only buying the absolute essentials and little else. The prospect of retailers passing on extra Budget-related costs from April in the form of higher prices suggests their outlook is even gloomier.
“Middle income earners are still finding the means by which to have the odd treat but even they aren’t spending freely. Aldi, Tesco and Sainsbury’s made a big point of saying their premium ranges have been doing well recently. As a major supplier to supermarkets, Premier Foods also says its premium ranges have been selling like hot cakes, including Ambrosia Deluxe desserts and Mr Kipling Signature Brownie Bites. The big unknown is whether that was simply a desire for a bit of luxury at Christmas or the new normal.
“Next says its customers are buying fewer, but slightly more expensive, clothing products. That implies customers are looking for items that provide good value for money – they might cost a bit more but they should last longer, meaning replacements won’t be required for some time.
“Associated British Food’s Primark chain is having a much harder time in the UK, illustrated by its latest trading update. While it attributed some weakness to unfavourable weather, the business also blamed ‘cautious consumer sentiment’. Primark is seen as the king of the high street, the one retailer which has stayed on top in good and bad economic times thanks to its affordable price points. Therefore, when Primark says life is much harder, the whole retail sector will be sitting up and worrying about the future.
“When times are hard, retailers typically discount their goods to encourage more sales. Value retailers are reluctant to go down this path as their margins are often skinny to begin with. They’re simply going to have to grit their teeth and plough ahead, accepting that the environment is unfavourable and that the business needs to be run as efficiently as possible.”
Stock market reaction to the latest Christmas trading updates
“Eleven out of 20 companies with UK retail operations have seen their share price fall on their Christmas trading updates. Greggs, Marks & Spencer, B&M and Poundland-owner Pepco suffered the biggest declines.”
“There were two common themes among the retailers disappointing the market: they either suffered a slowdown in sales growth or they issued a cautious outlook.
“Greggs has been the hardest hit, with its share price now down by 26% since the start of the year. Having enjoyed strong growth across the UK, there are fears that momentum has stalled.
“Consumers have been complaining about Greggs’ sausage rolls having increased by 30% in price since 2022 and now costing £1.30. People often don’t buy a Greggs sausage roll in isolation; they often pair it with a drink. When you add on the £2.60 cost of a cappuccino, shelling out £3.90 on a regular basis is too much for many people to justify. There’s now a real risk that Greggs’ fans visit its shops less frequently.
“Dragging Marks & Spencer’s shares down was the gloomy tone in its outlook statement, highlighting ‘uncertainty’. While understandable given the impact of the Budget changes, sticky inflation and the potential for interest rates staying higher for longer, its comments chime with the current bleak mood around the UK’s economic prospects.
“It wasn’t simply a nightmare at Christmas for B&M – it has been suffering from slower growth for some time.
“There are now plenty of places to buy discounted goods and B&M is under pressure to ensure its stores offer something different. A price-conscious shopper could easily go to a shopping centre and see B&M, Poundland and Home Bargains all within a short radius of each other, all offering the same things. In this context, it’s no wonder Poundland owner Pepco has paused the discount store’s UK expansion.”
