Before Christmas the UK retail sector was in relatively high spirits. After a mixed year forecasts of 3.5% growth promised a record-breaking December in which sales could top £40bn. However, in the cold light of New Year many are facing a reality check.

Before Christmas the UK retail sector was in relatively high spirits. After a mixed year forecasts of 3.5% growth promised a record-breaking December in which sales could top £40bn. However, in the cold light of New Year many are facing a reality check as discounting, economic uncertainty and the switch to online continue to take a toll.

Rights and wrongs?

Pre-Christmas optimism may seem ill conceived with hindsight, but it was built on some fairly solid assumptions. Retail sales enjoyed a summer surge, compounded by a good November. A recovering housing market was boosting confidence and generating demand for household goods. The Payment Protection Insurance (PPI) scandal was expected to see payouts which helped spending.

However, some of these factors should also have raised concerns. November sales were driven partially by gift-buying dates like Black Friday which would undermine December sales. Recovering house prices can also mean less discretionary income for house-buyers. Meanwhile rising energy prices and slow wage growth were weighing on any spike that PPI would bring. If spending in December was going to jump then debt would play a part, something consumers might be reluctant to take on.

Finally there is the weather which has wreaked havoc with retail predictions all year. December was no different with poor weather ahead of Christmas dampening footfall and forcing some households to cancel festivities altogether.

Winners and losers

There are two categories of winners and losers from the Christmas retail period. Winners were those with a strong online presence or hard discounters that have thrived under austerity. Losers relied heavily on bricks and mortar channels or represented mid-market retailers struggling to compete with hard discounters on price or with premium retailers on reputation. Christmas is also becoming characterised by discounting. The emergence of online sales such as “Black Friday” and “Cyber-Monday” have pressured bricks and mortar retailers to bring January sales forward. Retailers able to maintain control over their sales policies have thrived, while those forced into deep pre-Christmas discounts out of desperation have struggled.

These sentiments have been so far borne out. Earlier this week accountancy firm BDO reported a 2.2% fall in Christmas sales by “medium sized” retailers but a 31% rise in “off store” (online) sales. Barclaycard also reported sales spikes on specific online shopping dates but stagnant sales figures in the periods outside them, indicating some canny bargain-hunting by shoppers.

High street “winners” over the Christmas period such as Next, John Lewis and House of Fraser have all enjoyed strong ecommerce sales, with House of Fraser seeing online grow by 58%. Debenhams also saw strong online growth but suffered from an overreliance on poor store sales. Meanwhile Mothercare, seen as one of the biggest losers over the Christmas period found itself forced to discount heavily, uncharacteristically compounded by poor international sales figures.

For general retailers price competition from hard discounters was crucial. Aldi and Lidl thrived and their continued rise marks them as big winners. While Sainsbury’s managed to sustain some growth and Asda has quietly indicated solid trading Tesco, M&S and Morrisons have all seen sales slide. For Morrisons, which saw the steepest like-for-like declines, the impact has been twofold given that its online partnership with Ocado does not begin operations until after the crucial Christmas period. Tesco and M&S continue to struggle with the structural challenges that have plagued them, but can point to bright spots. Tesco online sales rose by 15% and M&S saw rising food sales offset clothing declines.

The outlook?

If Christmas was disappointing then it seems unlikely that 2014 will bring much relief. Many retailers bought forward sales ahead of Christmas, while those hoping for a bumper Boxing Day bonanza will have seen footfall suffer from poor weather, which has persisted into January. Consumer confidence accumulated in the heady days of summer is evaporating quickly. 2013 ended with hikes in utility price and 2014 arrived with rail fare rises. A stark New Year message from the Chancellor has also promised a further £25bn in cuts. Against this backdrop tough times will continue for many retailers with growth falling back from the modest gains made last year.

Jon Copestake is chief retail analyst at the Economist Intelligence Unit

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