Analysis: Will Christmas cheer beat festive fear as election looms?

Consumer spending is anticipated to increase by 0.8% over Christmas this year – defined as the six weeks until the end of December. The rise will only amount to 0.2% in the event of a no-deal Brexit, according to a study by the Centre for Retail Research. Both figures are lower than last year’s 1.2% advance.

Wages are growing faster than inflation, observes KPMG head of retail Paul Martin, so “technically” that should mean people have more money to spend.

But jitters about the outlook – Brexit in particular and the possibility of a general election– mean that “psychologically people are more cautious” about spending, says Martin. 

“Christmas really does hinge on the next few weeks in Parliament”

Patrick O’Brien, GlobalData

Prime Minister Boris Johnson hopes to hold a general election on December 12, he revealed yesterday, adding to political uncertainty already heightened by the clashes over Brexit.

As Christmas nears, Consumer Cast founder Robert Carruthers says: “It does absolutely hinge on the insanity in Westminster and what they pull out of the hat in terms of some kind of deal.

“If you alleviate that anxiety factor, even in the short run, people will loosen wallets and purses and will feel more inclined to spend.

“The very best we can hope is some sort of growth, but it will be slower than last year with potential for it to fall flat.” 

GlobalData UK retail research director Patrick O’Brien is cautiously optimistic and says: “Christmas really does hinge on the next few weeks in Parliament. If there is any sort of deal they can get over the line at the end of October, it could result in a fairly decent Christmas.

“It would unlock a fair bit of spending across retail, especially in non-food, and that would be a positive for the fourth quarter.”

The likelihood of a no-deal Brexit looked as if it had been “greatly reduced” earlier this week,and O’Brien says retailers if so won’t be faced with tariffs being applied in the golden quarter, “which would have been an absolute disaster for retail”.

But that was before the general election hoved into view and, he warns: “The deal as it currently stands may not get through.” An election or second referendum will cause a lot of problems.

“Christmas shopping weeks [would be] dominated by the uncertainty of what’s going to happen in an election and the direction we’re going in.”

Black Friday

But it’s not just politics weighing on retailers’ minds. Before Christmas is Black Friday, which in recent years has extended over weeks rather than a single day and intensified consumer demand for discounts at retail’s traditionally most profitable time.

Black Friday falls this year on November 29 – a day after many people’s payday – so there is scope for a much-needed boost in spending, though whether that is additional or simply pulled forward will again be the big issue.

Peel Hunt analyst John Stevenson says: “If you just take 20% off everything you sell, it’s Christmas suicide. If you’re discounting for discounts’ sake, you’re giving away your margin.”

So amid all the uncertainty, how are some of retail’s biggest categories likely to fare over Christmas?

Food

Food typically does well during the golden quarter. However, independent retail expert Richard Hyman told Bloomberg he estimates food sales will be flat this year.

Carruthers says food retailers won’t see much volume growth. “A pattern has been set, driven by inflation, so it’s prices going up that’s lifting turnover rather than volume growth,” he maintains.

PwC retail director Kien Tan says Christmas should be strong for the value grocers in particular.  

“Aldi and Lidl have been good at trading up, so it will be more challenging to get people to trade up to special ranges [at the big four],” he says.

However, Tesco looks poised to perform well and has invested heavily in the branding and quality of its Finest range. That will allow customers to trade up on special Christmas favourites within Tesco, rather than switching to more upmarket rivals.

Sainsbury’s will be hoping to make a similar impact with its Taste the Difference premium lines. In recent years, it has lagged some of its competitors in the innovation stakes, but sales performance has been improving, according to Kantar, thanks in part to own-label. The grocer will aim to continue that momentum through the golden quarter.

Fashion

Big online players Asos and Boohoo are poised to go in heavy with Black Friday sales, creating intense competition for the younger pound.

However, in general, fashion may face a challenging Christmas after a challenging year.

“Apparel will have a very, very tough Christmas – no doubt we will see more casualties after Christmas in this space,” Martin says. “If we go back and look at the economics of retail, many [fashion] businesses generate between 30% and in some cases 80% of their profits in the final quarter of the year.

“If this quarter just stays flat in a year that has already been pretty average, then you’re not going to be in a good place,” he warns.

Marks & Spencer has struggled to hit the mark on fashion, leading to chief executive Steve Rowe taking charge of the clothing business until a divisional chief is found.

Next, whose multichannel offer has enabled it to perform consistently well, should be a Christmas winner, and value giant Primark is well placed to draw the crowds to its increasingly experiential stores, such as the new Birmingham branch.

Electricals

In the electricals sector, Black Friday has become one of the most important selling periods.

That can cannibalise sales, Tan points out, but as customers look for deals on the newest tech, Martin maintains: “Retailers have to get onboard or they will lose out on that spend to their competitors.”

Online players such as Amazon will be determined to drive growth in electricals, Carruthers says. While initiatives may be focused around Black Friday, “discounting is likely to be more extensive beyond that”.

Toys

The toy retailers have Christmas on their side, with sales likely to be driven by winter blockbusters such as Frozen 2. O’Brien says toys are “protected from the economy” at Christmas time, though the sector faces growing competition as children lean towards digital entertainment and technology.

Stevenson points out that B&M secured a Lego deal last year and “with even more ranges this year” should do well in the category, while specialist retailer The Entertainer will continue to dominate the sector. 

Beauty

Boots and Superdrug have both invested heavily this year in new stores, refurbishments and exclusive products. 

Boots chief executive Seb James revealed this week that the beauty retailer had sold three of its famous No7 beauty advent calenders every second, selling out online in one day. Rihanna’s Fenty Beauty range should be a big attraction this year, pulling in extra customers for the retailer.

Superdrug commercial director Simon Comins says: “Last year we saw particularly strong sales across beauty electricals and gifting in the run-up to Black Friday and Christmas.

“For 2019, we have some amazing savings to be had across big-name brands and cult Christmas buys, such as Revolution Christmas gifts, Oral B electric toothbrushes and Tresemmé hair tools.”

What will mark out the winners?

Consumers have money in their pockets to spend at Christmas but prying it out of them could prove more difficult.

Leader of industry for consumer markets at PwC Lisa Hooker says: “In this year’s golden quarter, a difficult trading environment means there is even more pressure to deliver sales while remaining mindful of costs.”

As consumers’ disposable income becomes more focused on value offers and leisure experiences, Hooker says retailers can “succeed at this delicate balancing act by thinking first and foremost about who their customers are, what’s on their mind and what they really want”.

With the right product, offers and positioning there is still scope to have a merry Christmas this year.

It’s not all bah humbug just yet.