BRC Quarterly Trend Analysis - British Retail Consortium

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BRC Quarterly Trend AnalysisEaster fell in April 2011 but in March in 2010,meaning March last year looks exceptionallyweak.Retail Sales – food and non-foodSource: BRCIn April, retail sales appeared much more testing.UK retail sales values were down 3.3% on a likefor-likebasis, when they were up 5.2% on a yearago. On a total basis, sales were down 1.0%,against a 6.9% increase in April 2011. Food salesfell back below their year-earlier level, when theyhad benefited from Easter buying. Record Aprilrainfall and chilly temperatures hit clothing andfootwear sales. Though it helped some smallerhomewares, big-ticket purchases continued tostruggle and were often promotion-led, amidcontinued consumer caution. Online (includingmail-order and phone) sales of non-food goodsshowed growth of 9.0% in April, against astronger 13.7% increase last year, but down fromMarch’s growth of 13.9%. While growth of onlinesales is showing signs of maturing, it remains thefastest growing channel in retail. Some retailerscommented that click-and-collect performed wellamong their multi-channel offering and the wetweather also helped to boost some online spend.Mobile-commerce also grew strongly but camefrom a very low base. However, underlyingconditions remain tough with sales promotiondriven,often at the expense of margins.Growth forecasts for consumer spending offerlittle hope for an imminent recovery. Consumerspending is expected to edge up only 0.4% thisyear, but this would recoup only a small portion oflast year’s 1.2% decline. However, predictions areeven more uncertain than usual, with Eurozonecountries continuing to cast a dark cloud.InflationThe Consumer Price Index (CPI) rose in March to3.5% driven by rises in food and clothing prices,but remains down on September’s peak of 5.2%.The drop reflected the effects of VAT dropping outof the 12 month comparison and earlier increasein energy prices. Core inflation, which excludesfood and energy, reported a rise, the first time infive months. Worryingly, inflation expectationsrose in April according to the survey by Citi andYouGov, with median expectations of inflationrising to 3.0% from 2.7% in March, the highestfigure since December 2011.The latest Bank of England Inflation Reportshowed an upward revision to inflation forecasts.Both the impact of higher energy prices andindirect taxes, and cost pressures from past risesin commodity prices are likely to have a greaterimpact on inflation in the near term thanpreviously anticipated. Overall, the gradualeasing of external price (commodities, importprices) pressures and weak demand shouldcause inflation to fall back.Although inflation is set to ease over the comingmonths, prices are “sticker” than many hadanticipated and so continue to outpace earnings.Real incomes continue to be squeezedLooking forward, it appears that there is little roomfor optimism for retailers, although it appears lastyear’s “perfect storm” for household finances –weak wage growth, high inflation and taxincreases, which combined to drive one of theworst annual declines in real disposable incomeson record, is slowly dispersing.The latest data showed that consumer spendingrose 0.4% quarter-on-quarter (q/q) in the fourthquarter of 2011, which was the first increase sincethe third quarter of 2010. This followedcontraction of 0.3% q/q in the third quarter of2011, 0.4% q/q in the second, and 0.8% q/q in thefirst. Overall, consumer spending contracted 1.2%in 2011 which reversed the increase of 1.2% in2010.Source: ONSAny rise in real earnings is unlikely to occurbefore the end of the year judging by the Bank ofEngland’s central forecast for CPI and the fragilityof the labour market. The recent rise in food
BRC Quarterly Trend Analysisinflation will not help spending in the short-termalthough much more modest levels of inflation areexpected towards the end of the year.However, falling inflation should ease thesqueeze on household budgets, helped by thebulk of austerity-driven tax rises behind us.The Shop Price Index (SPI) continued to showrestrained levels of inflation, particularly in nonfood,reflecting weakness in demand, thecompetitive nature of the sector and deepdiscounting.In April, the BRC-Nielsen Shop Price Index fell to1.3% from 1.5% in March. Food inflation fellsharply to 4.3%, while the non-food categoryreported deflation of 0.5%.BRC-Nielsen Shop Price IndexSource: BRCNon-food remained deflationary for the thirdconsecutive month in April. Clothing andfootwear, electricals and furniture all showeddeflation and so exerted considerable downwardpressure on the overall non-food index.Promotions remain a key driver of sales in thenon-food sector with the underlying environmentof weak consumer spending unchanged –particularly for discretionary purchases.Consumer spending may be hit even harder inthe coming months given the recent news that theUK economy has returned to recession. Althoughit was the production side of the economy, ratherthan services, that dragged it into recession, theimpact is likely to damage both business andconsumer confidence hard. The reality of retailerspassing on rising costs from business rates,distribution costs and from manufacturers remainsunlikely. This pincer movement of rising costsand promotion-driven demand is biting intomargins.Food inflation fell to 4.3% in March from 5.4% inApril. The sharp fall of 1.1 percentage pointshelped to slow the overall Shop Price Index (SPI).Downward pressure was exerted by both thefresh and ambient food categories, reporting asharp deceleration in their inflation rates. In freshfood, the oils and fats and fish categoriesreported a significant ease in their respectiveinflation rates, however, this was compared withdouble-digit inflation rates last year which affectedannual comparisons. Even so, the greatestdownward pressure came from alcoholicbeverages. Alcohol was impacted by March’sBudget and, like last year, was subject to anincrease in duty equivalent to a two per cent riseabove Retail Price Index (RPI) inflation. The lowerrate of RPI inflation this year softened the impacton the ambient food category.April’s food inflation figures are compared with asharp rise last year and so comparisons areagainst a rising base. Last year food inflationrose sharply, driven by elevated commodity pricesand so this should be taken into considerationwhen interpreting the annual figures.In the medium term, there are a number of risks inthe pipeline which could place upward pressureon food prices. Soyabeans, used in animal feedand as a source of oil in processed foods, hasmoved perilously close to the record high seen atthe end of June 2008, and has risen around 27%since January. Global production has fallen as aresult of hot and dry weather in Latin America,which accounts for over half of the world’s exportof the commodity. Demand from Chinese importshas grown 20% in the first quarter of the year,having a significant impact on supply. Robusteconomic growth in emerging markets continuesto improve living standards, pushing upconsumption and placing pressure on globalsupply chains. Corn supplies have also sufferedas a result. The United States Department forAgriculture (USDA) announced at the end of Aprilthe largest sale of corn on any one day for over20 years, China receiving the bulk of this export.While commodity prices look set to remain atelevated levels in the medium term, shocks incommodity prices take time to filter through thesupply chain to consumers.Consumer ConfidenceUnemployment, falling real incomes, the weakhousing market and uncertainty about theeconomic outlook have all hit consumerconfidence. The GfK NOP consumer confidencesurvey showed confidence remained steady inApril, noting that “much like the economy as awhole, consumer confidence is in the doldrums…with no signs either within the survey or in therecent economic figures to suggest anyimmediate improvement.” A stronger assessmentof the past year was offset by weakerexpectations for the year ahead, both on the
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