Little Christmas cheer for retailers as they face the January Blues

Jacqui Baker, partner and head of retail at RSM UK and chair of ICAEW’s Retail Advisory Group, comments on the December ONS retail sales data, which shows a decrease in retail sales volumes of 1.0%:

‘December failed to deliver any Christmas cheer for retailers. In a blow to the sector, nearly every category saw a drop excluding clothing and household goods. Clothing sales were helped along by the party season, whilst consumers stocked up on energy saving goods like air fryers in response to the rising cost-of-living.

‘Heavy industrial action, firstly in the form of postal strikes meant consumers had to take a different approach to Christmas shopping in 2022. Many were forced to abandon online orders and make a trip to the high streets, as a result online sales fell 0.5% last month. However, train strikes inevitably impacted in-store sales too, particularly department stores which dropped 3.1%.

‘With a mixed bag of results, some retailers will be entering 2023 feeling buoyant, but others will fall victim to the January blues with no hope of making up their losses in the first month of the year – a period where the sector traditionally enters heavy discounting to shift excess stock.

‘As the cost-of-living squeeze continues and consumers reign in their spending, we may see more people ditching buying products in favour of enjoying experiences in the form of travel or eating out. But all is not lost, if recent falls in energy prices are maintained, this will significantly ease the cost-of-living crisis for the second half of the year, and in turn, provide a much-needed boost to consumer confidence.’

Thomas Pugh, economist at RSM UK, added: ‘The record-breaking drop in households’ real incomes in 2022 and 2023 means that consumer spending is heading for a sharp fall this year after dropping by 1% q/q in Q3 2022.

‘As you might expect, spending on most discretionary areas, such as retail goods, has fallen sharply recently as the cost-of-living crisis has caused consumers to cut back. Indeed, the fact that retail sales volumes were 1.7% below their pre-pandemic level in December is further proof of this. However, more surprisingly, spending on hospitality services has continued to grow over the last three quarters, despite the huge headwinds as consumers have favoured experiences over goods.

‘However, we doubt the resilience of hospitality spending will continue in the face of a near 2% drop in real incomes this year. With consumer confidence falling again in December back to a near a record low, meaning that consumers are still adding to their pile of excess savings rather than spending them, we think total consumer spending will fall by about 2% in 2023.

‘The good news is that inflation should fall rapidly this year reaching 4% by the end of the year, or even lower if the recent falls in energy prices are maintained. Inflation in retail goods dropped to 9.4% in December from 10.5% in November. That means households real incomes should be rising again by the end of this year, setting the stage for a decent recovery in 2024.’