UK Christmas 2015 FORECAST: Retailers Prepare for a Leaner ... Christmas 2015 Ret… · Retailers...

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October 22, 2015

DEBORAH WEINSWIG, EXECUTIVE DIRECTOR–HEAD OF GLOBAL RETAIL & TECHNOLOGY [email protected] US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 Copyright © 2015 The Fung Group. All rights reserved.

HOLIDAY 2015

UK Christmas 2015 FORECAST:

Retailers Prepare for a Leaner Holiday

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d o f G l o b a l R e t a i l & T e c h n o l o g y F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9 C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

• UK Christmas shoppers will spend £2 billion more than they did last year, we estimate, taking total retail sales across November and December 2015 to £72.6 billion.

• This equates to a year-‐over-‐year rise of 2.9% in total UK retail sales across November and December.

• This is a lower increase than last year, reflecting strong grocery price competition and an expected softening of Black Friday growth rates.

• Food retailers’ sales will fall for a second Christmas in a row, we estimate, leaving nonfood and nonstore retailers to make all the gains.

• Online, 2015 will be the UK’s first £10 billion-‐plus Christmas, with Internet sales seeing a Black Friday boost.

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October 22, 2015


HOLIDAY 2015

UK CHRISTMAS 2015 FORECAST: Retailers Prepare for a Leaner Holiday UK shoppers will spend £72.6 billion on retail purchases this Christmas, we estimate, some £2.0 billion more than they spent last year. Our estimates are for November and December retail sales in total and include food and nonfood retailing.

This increase equates to 2.9% year-‐over-‐year growth, meaning it will be a relatively lean Christmas for stores. Last year, sales grew 3.4% year over year across November and December.

• Grocery price wars will hit total retail growth. We expect all of the gains to go to the nonfood and nonstore retail sectors, as food retailers suffer a second Christmas of falling sales.

• Demanding comparatives and signs of some retailers easing back on discounting will result in softer Black Friday growth than last year, we expect.

• The context is weaker: nonfood retail growth has been slowing across 2015, from a high of 5.3% in February to just 1.6% in August (latest).

NOVEMBER AND DECEMBER: SLOWER GROWTH, DRIVEN BY NONFOOD RETAIL

Christmas 2015 will be marked by two characteristics: fierce price competition among food stores will dent retail growth, and the still-‐new Black Friday event will pull more nonfood sales into November.

The intense price competition in grocery will result in food retailers’ total sales falling by around 0.4% year over year across November and December, we estimate. This means UK shoppers will spend around £115 million less at food retailers this Christmas than they did last year. Food retailers account for around 45% of total UK retail sales, so the decline will be a substantial drag on total retail growth.

Black Friday remains a new phenomenon in the UK, so we expect to see another wave of growth this year. A surge in sales on Black Friday in November will distort trading patterns for nonfood retailers this holiday season. Last year, we saw nonfood retailers’ growth spike to 9% in November, resulting in more modest December growth.

Our forecasts assume that Black Friday will grow robustly, but at a more subdued rate than in 2014. Total nonfood growth has slowed across 2015 so far, and is now considerably softer than last year. Strong comparatives from November 2014 and indications from retailers such as John Lewis that they will attempt to pull back from Black Friday discounting also inform this expectation.

Figure 1. Estimated UK November and December Retail Sales Growth YoY % Change

Total Retail (ex Fuel) 2.9 Food Retailers (0.4) Nonfood Stores 4.6 Nonstore Retailers 12.5 Online Retail Sales* 13.6

*Includes online sales by food retailers, nonfood retailers and nonstore retailers

Source: Office for National Statistics (ONS)/FBIC Global Retail & Technology

Source: debenhams.com

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October 22, 2015


HOLIDAY 2015 THE FIRST £10 BILLION-‐PLUS E-‐COMMERCE CHRISTMAS

2015 will be the first Christmas in which Internet retail sales exceed £10 billion, we estimate. E-‐commerce sales will climb by an estimated 13.6% to £10.6 billion across November and December. This is equivalent to some 14.6% of total retail sales, and compares to £9.3 billion of online retail sales last Christmas.

More groceries than ever will be bought online this Christmas, with the Internet contributing around £1.2 billion to food retailers’ sales. But the majority of Internet sales—some £9.4 billion—will be taken by nonfood retailers, we estimate from ONS data.

Black Friday will boost online retail sales growth, just as it did last year, as shoppers turn to the Internet to buy deals on what is a regular working day in the UK.

2015’S FORECAST IN CONTEXT

Black Friday provided an unusually large boost to sales in November last year, and we expect a more modest uptick this November.

Figure 2. UK Christmas Retail Sales YoY Growth Rates, 2015 vs. 2014

Our estimates represent a solid performance in the context of a general weakening of retail growth over 2015.

Figure 3. UK Total YoY Retail Sales Growth

August data are the latest at time of writing. Source: ONS/FBIC Global Retail & Technology

3.4 2.9

(0.2) (0.4)

5.6 4.6

12.0 12.5

(5)

0

5

10

15

2014 2015E

%

All Retail Food Retail Nonfood Retail Nonstore Retail

Source: ONS/FBIC Global Retail & Technology

3.2 2.8

4.1

0.2

2.4 1.8 1.8

0.9

0

1

2

3

4

5

Jan-‐15 Feb-‐15 Mar-‐15 Apr-‐15 May-‐15 Jun-‐15 Jul-‐15 Aug-‐15

%

Timing of Easter

Source: marksandspencer.com

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October 22, 2015


HOLIDAY 2015 A slowdown in nonfood retailers growth has depressed total retail growth so far this year—and it pulls down our expectations for Black Friday growth this year.

Between January and August 2014, average nonfood growth stood at 6.2%, so the November jump of 9.0% represented a 2.8 percentage point uplift on this average.

This year, average nonfood growth for January to August (latest data available) was 3.3%, so our estimate of 6.5% nonfood growth in November, although lower than last year, factors in a relative uplift that is greater than in 2014.

Figure 4. UK Nonfood Retailers’ YoY Sales Growth

Dashed lines represent estimates. Source: ONS/FBIC Global Retail & Technology

Food retail sales are expected to be mildly negative, continuing a trend seen through much of the year—and also seen last Christmas.

Figure 5. UK Food Retailers’ YoY Sales Growth

Dashed lines represent estimates. Source: ONS/FBIC Global Retail & Technology

0

2

4

6

8

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

%

2014 2015

(6)

(4)

(2)

0

2

4

6

8

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

%

2014 2015 Timing of Easter

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October 22, 2015


HOLIDAY 2015 TECH, BOOKS AND APPAREL TO DRIVE SALES THIS CHRISTMAS

Figure 6. Rising and Falling Sectors at Christmas 2015

Clothing and footwear specialists: these sectors have enjoyed a strong run across 2015.

Internet pure plays: these retailers are likely to enjoy another boost from Black Friday.

Booksellers: ONS data and expansion from Waterstones and Foyles suggest a return to buying books on the high street.

Tech retailers: New Apple products—the Apple Watch, the iPhone 6s and the iPhone 6s Plus—will drive demand this Christmas. Black Friday promotions could cultivate impulse purchases for tech and consumer electronics more broadly.

Grocery retailers: sector performance has been worsening, at the time of writing. Black Friday may provide a small boost to big grocery stores in November.

Source: ONS/FBIC Global Retail & Technology

The First Apple Watch Christmas Will Help Tech Shine

We expect it to be an unusually strong holiday for tech. Growing demand for wearables will underpin category growth: it will be Apple Watch’s first Christmas and we expect this product to be top of many consumers’ wish lists. Rival products such as Samsung’s Gear S2 have been launched in time for the holiday season.

Meantime, the recently launched iPhone 6s and iPhone 6s Plus will bolster demand for smartphones this Christmas.

The performance of consumer electronics more broadly, including larger items such as televisions, will be shaped by further growth in Black Friday shopping. Black Friday promotions could mean fewer sales at full price, if shoppers switch from planned, full-‐price purchases. Equally, these promotions are likely to generate more impulse purchases of goods that are not on shoppers’ Christmas presents lists.

One caveat is that electrical goods specialists, such as Dixons Retail, face demanding comparatives from 2014: sector sales jumped 20% last November as Black Friday demand surged.

Old Media Blossoms As Book Sales Grow As a complement to the tech boom, we expect to see strong interest in book-‐giving this Christmas. UK sales of physical books rose by 5% year over year in the first nine months of this year, according to research firm Nielsen Bookscan. This marks a reversal from annual declines in 2013 and 2014.

ONS data backs this up, with consumer spending on books up 4.6% in the second quarter (latest).

Source: debenhams.com

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October 22, 2015


HOLIDAY 2015 Demand for e-‐books appears to be slowing, according to a number of sources—but this is largely an academic issue for Christmas spending given it is more difficult, and arguably much less desirable, to gift an e-‐book.

We think the increase in spending on physical books will not simply be channelled to pure plays such as Amazon, as we expect high-‐street booksellers to see a robust Christmas. Renewed demand for buying from physical shops is suggested by the opening of new stores by major names Waterstones and Foyles.

Suggestive of strong seasonal demand, Waterstones grew sales by 5% in December 2014 while Foyles experienced comp growth of 8.1% in the same month. Both retailers will likely be hoping for similar growth this holiday.

Apparel Demand Set to Remain Strong

We expect apparel to be another bright spot this Christmas. Clothing retailers tended to shy away from promoting under the Black Friday banner in previous years, in part because of the event’s association with electronic goods and in part because they were reluctant to condition shoppers to expect annual discounting. And, indeed, Marks & Spencer and Debenhams are among the big-‐name clothing stores trying to ease back on promotions this year.

Moreover, clothing and footwear specialists have enjoyed a strong run during 2015. With grocery prices falling and fuel costs down, British shoppers have spent a little extra on clothing and footwear this year. Across the first seven months of 2015, clothing specialists enjoyed average year-‐over-‐year sales growth of 5.0%, according to the ONS. Footwear stores performed even better, making average gains of 5.5% during this period.

One caveat is that, according to the ONS, small retailers have been driving these gains, possibly because more small apparel stores are using online marketplaces as a secondary, high-‐growth channel. Big clothing retailers saw average gains of 3% across the first seven months of this year.

In what may be a more muted holiday season for retailers, we see demand for apparel continuing through Christmas 2015.

ABOUT OUR ESTIMATES Our estimates are weighted averages for the nine-‐week period covering November and December in the ONS retail sales index. We base our estimates on nonseasonally adjusted value sales data.

Source: marksandspencer.com

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October 22, 2015


HOLIDAY 2015 Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: 852 .6119.1779 [email protected] Filippo Battaini [email protected]

Marie Driscoll, CFA [email protected]

John Harmon, CFA [email protected]

Aragorn Ho [email protected]

John Mercer [email protected]

Shoshana Pollack [email protected]

Kiril Popov [email protected]

Jing Wang [email protected]

Steven Winnick [email protected]

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