Retailers warn of storm ahead as sales growth in UK stutters

Bloomberg

Retail sales growth slowed last month as shoppers tightened their purse strings in the face of Britain’s escalating cost-of-living crisis.
Sales were just 1% higher than in August 2021, the British Retail Consortium and consultancy KPMG said in a report. Clothing sales were “sluggish” for the first time in recent months and parents curbed their back-to-school spending.
With inflation running into double-figures, the modest annual rise in sales “masked a much larger drop in volumes,” the report said.
White goods such as washing machines and cookers as well as homeware were hardest hit. Sales of air fryers and knitwear increased as thrifty consumers prepare for the impact of soaring energy bills.
British consumers are up against the highest inflation in four decades already and this could lead to a recession lasting more than a year, threatening to push many into poverty. After a summer of political paralysis, the focus is on new Prime Minister Liz Truss to tackle the cost-of-living crisis, which she has pledged to do partly using tax cuts.
“Retailers are preparing for a particularly tough time ahead,” said Helen Dickinson, chief executive officer of the BRC, calling for Truss to freeze business rates, a form of property tax, next year.
Prices in British shops reached the highest rate since at least 2005 in August, pushing consumers to visit discount supermarkets and choose own-brand products to save money. People are also increasingly turning to food banks and
buy-now-pay-later loans.
Budget grocery chain Iceland Foods has received over 60,000 applications in two weeks for micro loans allowing shoppers to pay by installments. That’s more than the total number of loans the credit provider behind the initiative expected to offer in 18 months.
Non-food retail sales fell 2% in the three months to August. The drop in clothing sales is “significant” and could signal the start of consumers pulling back from any spending that isn’t essential, according to Don Williams, retail partner at KPMG.
“As consumers return from summer holidays to an 80% increase in the energy price cap, double digit inflation and Christmas just three pay checks away, the brakes could be firmly applied on non-essential spending for most UK households,” said Williams. “The storm clouds are closing in as retailers brace themselves for a fall in demand.”
Berenberg analysts see discretionary spending in UK dropping by 25% for lower-income households in 2023, noting that this prediction “could be too optimistic if energy prices and interest rates continue to rise.” Those on higher incomes aren’t immune, with the analysts estimating a 4% decline in discretionary spending for that demographic.
Jefferies analysts downgraded their recommendations on Associated British Foods Plc, Kingfisher, Sainsbury, Tesco and B&M European Value Retail SA, while Berenberg analysts lowered their ratings on Adidas AG and Hennes & Mauritz AB.