What’s the Story?

Our The 12 Weeks of Holidays 2021 series counts down to this year’s holiday peak with new thematic research each week. In this report, we consider developments so far in UK holiday retail, discuss what we expect to see in the remainder of the peak season, and consider what that means as we head into 2022.

Why It Matters

The shape and scale of consumer demand during the final-quarter peak is crucial for retailers. Coresight Research’s global coverage provides directional guidance to retailers, suppliers and vendors.

UK Retail Update: Coresight Research Analysis

Retail Growth Has Strengthened Heading Toward Christmas Rising inflation has supported total UK retail sales expansion, yet even on a volume basis (i.e., in real terms), two-year retail growth has been respectably positive recently, at 6.4% in October 2021. The underlying trend is for retail demand to be solid, although unexceptional, when not impacted by external forces such as lockdowns or the easing of major Covid-19 restrictions. This underlying pattern is reflected in the two-year growth seen in the April–June and August–October 2021 periods, when regulations were stable (see Figure 1). We do not yet have confirmed November retail sales from the Office for National Statistics (ONS). However, Barclaycard tracked a 16% jump in consumer spending (including on services) via its cards versus two years earlier, the strongest pace of growth recorded by the card company so far in 2021. Barclaycard pointed to strong growth in purchases of clothing. The British Retail Consortium (BRC) also reported an acceleration in its retail sales metric, to 5% year over year, in November. Given recent trends, we expect the last two months of 2021 to prove solid on a two-year basis; we expect reported December year-over-year growth to jump versus weak comparatives from December 2020. Final-quarter retail growth will be driven by nonfood retail. The ONS and third-party data firms such as Kantar have been tracking negative year-over-year growth in grocery sector sales in recent months as the sector annualizes a strong 2020.

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Figure 1. UK Retail Sales: % Change [caption id="attachment_137761" align="aligncenter" width="699"] YoY=year over year; Yo2Y=on a two-year basis
Source: ONS/Coresight Research [/caption]   Supply Chain Struggles and Inflation As elsewhere in the world, supply chain difficulties have been driven by global shipping bottlenecks and a tight domestic labor market. The latter has been compounded in logistics by Covid-19 severely hindering the number of truck drivers tested and approved in 2020. The UK has an estimated 90,000–100,000 shortfall in truck drivers, and the government has upped capacity in driver testing to help meet the shortfall. Those local logistics issues in particular have led to limited availability of products on the shelf in some instances. [caption id="attachment_137762" align="aligncenter" width="700"] Availability issues in London grocery stores
Source: Coresight Research [/caption]   Management at major retailers have been somewhat confident of availability, however. In Tesco’s October 2021 earnings call, CFO Imran Nawaz stated:

We maintained very good levels of availability even as industry supply chains came under strong pressure… We work hard to mitigate the impact of significant supply chain challenges, including a high number of colleagues required to isolate due to Covid-19 as well as the shortage of HGV [heavy goods vehicle] drivers.

On the outlook, Tesco CEO Ken Murphy added:

We see the majority of the supply chain issues as temporary. How long is temporary? That is something we don't know. I think what's really important, though, is that we are maintaining a fantastic level of availability despite all the challenges we've seen over the summer—and we have very strong plans in place to continue doing so right the way through Christmas and beyond.

On a November earnings call, Marks & Spencer CFO Eoin Tonge pointed to “labor challenges globally but probably slightly more acutely in the UK.” In M&S clothing, Tonge said he did not think that there would be “material availability issues” for M&S in the Christmas peak.

On the Food side of things, I would say the supply chains are also creeping. The labor availability in the UK, in particular, is tough, as I said, and that is impacting our suppliers. To a certain extent, it's impacting our warehouses as well. And again, we're working through it… We wouldn't have been able to maintain the high level of sales that we have if we weren't, but it's tough going—and I don’t think it’s without risk going into the Christmas period.

At grocer Sainsbury’s, which also owns general-merchandise chain Argos, CEO Simon Roberts told analysts in November that consumer electronics would be a “good example” of where there are supply chain challenges, with a “global shortage of products,” and that Argos was taking a less promotional stance as a consequence. The company delayed a toy promotion because the available stock was delayed getting to the UK. On grocery, Roberts added:

It's been tricky on a combination of supply, clearly labor, HGV drivers, the challenges upwards in the supply chain, too… It's tough at the end of the summer, particularly in areas like milk and bread some of the grocery lines, but we've seen that improve.

When we look over the second half of the year… we're doing a lot of work on recruitment to make sure we can move product through the supply chain. Interestingly, in the last few weeks, we've actually begun to pick up product from suppliers to make sure we can guarantee availability back in the business—and that's been one of the enabling factors to improve in the situation. So, it's clearly really challenging out there.

Roberts concluded that he expected it to be “a really big Christmas” and that consumers will “really want to celebrate this year given the events of last year.” Reflecting supply chain challenges and commodity price rises, shop-price inflation has been on a steady upward trend, reaching close to 3% at the start of the holiday quarter. Circa-3% retail inflation will support reported value growth for the sector this Christmas, yet retail volumes are rising, too (as discussed earlier).

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Figure 2. UK Retail Shop Prices, by Type of Retailer: YoY % Change [caption id="attachment_137763" align="aligncenter" width="700"] Source: ONS/Coresight Research[/caption]   Online and the Omicron Risk Shoppers have returned to stores with enthusiasm. As a result, versus a lockdown-heavy 2020, which stretched into the holiday season, UK online retail sales have gone into reverse—e-commerce sales have been down year over year in each month from June 2021 onward. In October (latest), online sales were down 8.4% versus 2020, led by an 11.1% fall in digital sales at nonstore retailers. This echoes the trend we have observed in the US, where online-only (or online-predominant) retailers have tended to underperform versus their multichannel rivals in e-commerce sales this year. E-commerce’s share of total retail sales is set to fall meaningfully this holiday season. Last year, e-commerce accounted for 32.5% of all retail sales and 46.8% of all nonfood retail sales; that was up sharply from 20.8% of all retail and 30.9% of all nonfood in 2019. As of October 2021, the proportions stand at 26.3% of all retail and 37.3% of all nonfood sales—so very roughly halfway between precrisis levels and those of 2020. One potential boost to e-commerce in the final lap of the Christmas shopping season is the emergence of the Omicron variant of Covid-19. There is little evidence yet of a marked change in shoppers’ habits. However, in spite of high vaccination rates and strong take-up in the UK’s booster vaccination effort, government caution has prompted regulations that may have a negative impact on in-store shopping in December:

• On November 30, 2021, the UK government made the wearing of masks mandatory in shops in England.
• On December 8, 2021, the government announced that people should work at home wherever possible, effective from the following week—this is likely to once again negatively impact city-center and town-center traffic and could drive some work-at-home shoppers to e-commerce.

It is too early to see any impact on store traffic. Versus two years earlier, store traffic has been negative into the holiday season, per the BRC—but not massively so, with only mid-teens declines in percentage terms, despite trends such as greater working at home and any lingering consumer caution:

• Traffic was down 16.8% in September.
• Traffic was down 13.7% in October.
• The decline deepened to 15.7% amid poor weather in November.

What We Think

The signs point to a fundamentally solid holiday season for UK retail, albeit one where some metrics are distorted by shifts one year earlier (driving recent negative growth in grocery sales and e-commerce, for example). Shoppers have returned to stores and away from e-commerce, and have proved willing to grow their retail spend in real terms. Availability has been an issue in recent months, but the longer-standing nature of this disruption means that major retailers have planned for this, and many are bullish on availability—as well as consumer demand—in the holiday peak. We head toward 2022 with supply chain constraints—both global and domestic—unresolved, providing a pinch on the supply side. Yet the demand side—when measured versus precrisis 2019—looks robust amid a tight labor market with rising wages. Raised inflation potentially prompting interest rate rises from the Bank of England are one cloud on the horizon for the consumer economy in 2022. Recent government regulations amid the emergence of Omicron may prove to be a drag on momentum in the recovery of in-store demand over winter 2021/22, yet high vaccination and booster rates are the counterpoint to such caution and our perception is that, currently, the government is approaching the threat with slightly greater caution than is the UK shopper.

Appendix: Covid-19 Lockdown and Restrictions Timeline

Lockdown 1 (2020): The UK was put into lockdown on March 23, 2020, initially for three weeks, in an attempt to limit the spread of the coronavirus. Nonessential retail stores were closed. On April 16, the government extended the lockdown by another three weeks. On May 11, Prime Minister Boris Johnson announced that the government would begin easing restrictions in a phased manner, allowing nonessential stores to reopen from the start of June. However, garden centers were allowed to reopen from May 13 and furniture stores from May 23. On May 26, the government announced that all nonessential retailers in England and Northern Ireland—including department stores and small independent shops—would be allowed to reopen from June 15, but stores would need to implement measures to meet the necessary social distancing and hygiene standards. On June 23, Johnson announced that restaurants, pubs, museums, cinemas and hotels could reopen on July 4. On September 14, a new “rule of six” prohibited social gatherings of more than six people, unless they are from the same household. On September 22, Johnson outlined a slew of new restrictions in the wake of a fresh spike in the number of infections. These included the closing of bars, pubs and other hospitality services by 10:00 p.m., effective September 24. On October 7, the Scottish government implemented tighter restrictions, largely on the hospitality industry. Retail was not directly affected, although stores were requested to enforce two-meter distancing. On October 12, the UK government announced a three-tier lockdown system, which classifies regions based on the severity of infection rates. In the week beginning October 19, a number of regions in England, including London and Manchester, moved into higher “tiers” of control, which include restrictions on households mixing and, in some cases, some service industries; however, these did not change the direct rules for retailers. On October 23, a 17-day lockdown began in Wales, with nonessential retailers being forced to close once more. Lockdown 2 (2020): On October 31, Prime Minister Johnson announced a second lockdown for England for the period November 5 to December 2. All nonessential retail was forced to close, “including, but not limited to, clothing and electronics stores, vehicle showrooms, travel agents, betting shops, auction houses, tailors, car washes and tobacco and vape shops.” Food shops, supermarkets, garden centers and certain other retailers providing essential goods and services could remain open. Nonessential retail could remain open for delivery to customers and click- and-collect. Hospitality venues such as restaurants, bars and pubs were forced to close but could still provide takeaway and delivery services. Also forced to close were entertainment venues, indoor and outdoor leisure facilities, and personal care services. Following the lockdown, UK regions were placed into different tiers, each of which had different restrictions. On December 8, the UK’s National Health Service started vaccinations, with the aim of vaccinating the most vulnerable groups of people by February 15, 2021. On December 21, the UK government scrapped a planned easing of rules on the mixing of households over the Christmas period. In England and Scotland, households in many areas were banned from mixing; in some areas, households could mix on Christmas Day only. The devolved Welsh and Northern Irish administrations implemented their own restrictions. Lockdown 3 (2021): On January 4, 2021, Johnson announced a lockdown in England, effective January 5 and with an unspecified end date but with laws formally expiring on March 31. Scotland, Wales and Northern Ireland also implemented lockdowns. On January 19, Scotland’s First Minister Nicola Sturgeon announced that that country’s lockdown would be extended until at least the middle of February. On January 27, the government announced that travelers arriving from “red list” countries must quarantine in hotels specified by the government. On February 22, the government laid out a roadmap to ending lockdowns in England. Restrictions will start to be eased from March 29, nonessential retail stores and services such as hairdressers will be allowed to reopen from April 12, and final restrictions will be ended on June 21. On March 25, the UK lowered the Covid-19 risk level from four to three on a scale of five. On April 12, the government eased a raft of restrictions across England, with gyms, zoos, theme parks, pubs and restaurants allowed to reopen for outdoor service and shops and hairdressers again permitted to serve customers. On April 20, Sturgeon announced that Scotland would move to Covid protection Level 3 from Level 4 on April 26, meaning hospitality venues such as cafés, pubs and restaurants and beauty salons could reopen. On May 17, England eased restrictions further with groups of up to six people from different households allowed to socialize indoors, pubs and restaurants can serve indoors and entertainment venues such as museums, cinemas, and theatres can reopen. On June 14, England delayed the final stage of easing lockdown restrictions by month, until July 19, due to the increase in cases of the more transmissible Delta variant. After more than a year under some form of restriction, England lifted almost all remaining Covid-19 rules on July 19, 2021. This included the opening of nightclubs and lifting capacity restrictions on big events and performances. On November 30, face coverings became mandatory again on public transport and in shops in England following the emergence of the Omicron coronavirus variant. On December 8, the government advised people to work at home wherever possible and required vaccine passports to be presented on attendance at large-scale events.