Higher Inflation and Real Growth Set to Drive a Solid Season for UK Retail

Increased shop-price inflation will buoy retail sales this Christmas season—but we anticipate meaningful real-terms sales growth, too. We expect that:

• Total retail sales will climb by around 5% year over year, adding nearly £4 billion to holiday sales and taking the seasonal total to £78.7 billion.
• Higher inflation this year than last will contribute to this total increase, but sales will grow in real terms, too.
• Total year-over-year growth will be split roughly 50/50 between rising prices and a real increase in the amount of goods purchased.
• The bulk of this real growth will be at Internet-only retailers: store-based sectors will see only modest real sales growth.
• There will be a slight unwinding of grocery inflation, easing some of the pressures on consumers by December.

Below, we show our headline estimates for UK retail sales in November and December this year and comparable figures for 2016. Last year, shop-price inflation was much lower, but the Office for National Statistics (ONS) reported solid grocery sales growth and strong nongrocery sales growth over the festive period.

Inflation vs. Real Growth

The graph below splits out our forecast by inflation versus real growth, and places this in the context of 2017 to date, per data from the ONS. As the graph indicates, British shoppers have continued to grow their retail spending in real terms this year.

We think total shop-price inflation could moderate very slightly by the holiday period as grocery inflation begins to unwind and competitive pressures prompt an easing of price rises in some nonfood categories.

Headwinds and Tailwinds

Below, we note the key headwinds and tailwinds to UK retail growth this holiday season, which we discuss in more detail later in the report.

Category Performance

• We expect the beauty category to see strong demand this holiday season. ONS data reflect ongoing growth in the category, and major beauty companies’ results have suggested a selfie-fueled demand for color cosmetics. In its half-year update, for instance, L’Oréal called out sustained growth in the UK market.
• Top tech products this season will likely include the iPhone X (launching November 3); iPhone accessories such as AirPods; smart speakers, including Apple’s HomePod (launching in December); and new Amazon Echo devices such as the Echo Show (launching in the UK on November 16). For a full rundown of hot tech giftables this holiday season, please see our forthcoming US Holiday Outlook 2017

• Raised inflation looks likely in apparel, appliances and furniture, based on recent price data. As of August 2017, year-over-year inflation stood at 5.1% for clothing, 6.0% for household appliances and 7.0% for furniture and furnishings, according to the ONS.
• In apparel, which is a key Christmas gifting category, higher inflation will flatter reported year-over-year sales growth.
• Sustained pressure on consumers’ spending power and signs of housing market weakness will result in softer demand for big-ticket items such as furniture and other home goods.
• For coverage of the hottest toys this Christmas, please see our forthcoming Hottest Holiday Toys

Three Notable Charts Provide Insights for Holiday 2017

1. Spending Power Is Declining

First, the bad news, which is a story that has been documented at length in the UK media: overall price inflation has been outpacing average earnings growth. Consumer spending power has thus been eroded by the general upward trend in prices overall, which has largely been driven by the depreciation of the British pound.

However, recently, the overall inflation trend has shown a leveling off at slightly over 2.5%, and we may currently be seeing peak inflation.

2. Sustained Real-Terms Retail Growth

Despite the pressures on consumers, real-terms retail growth has proved solid in recent months, according to the ONS (although some other sources have reported softer growth). Shoppers have upped their spending to keep ahead of inflation, and they appear to have done so in part by racking up unsecured debt on loans and credit cards and by reducing the amount they save.

While shoppers may reconsider such spendthrift habits in 2018, we do not expect them to abandon these behaviors during the festive season.

3. Grocery Inflation May Be Past Its Peak

In grocery, a key nondiscretionary category, consumer prices inflation may have already peaked and be headed downward, according to the latest data from the ONS and Kantar Worldpanel. This is further borne out by data on retail input prices—i.e., the Producer Price Index (PPI). We saw a very slight decline in PPI inflation in August (latest) following a recent leveling off.

A gradual dwindling of grocery price inflation would ease some of the pressure on consumers and free up cash for them to spend on nondiscretionary categories this holiday season.

Shopping Patterns: More Spending to Be Pushed into December

We anticipate consumers will push more of their shopping from November into December this year than they did last year, for two reasons:

1. Calendar effects: This year, December includes four Saturdays that precede Christmas Day. There were four last year, too, but “Super Saturday”—the final pre-Christmas Saturday—fell on Christmas Eve last year, and relatively few consumers would risk leaving much of their Christmas shopping to that late date. We expect that more people will shop on Saturday, December 23, this year than did on Saturday, December 24, last year. In total, there are eight weekend shopping days before Christmas in December this year, versus seven last year and six in 2015.
2. Muted Black Friday: Last year, we saw Black Friday refocus on electronics, with Marks & Spencer opting out altogether (yet still enjoying a strong holiday quarter overall) and with some department stores offering highly selective promotions. In our Black Friday 2016 store checks, our team witnessed apparently muted consumer interest in apparel promotions. We would not be surprised to see more non-electronics retailers opt out of offering promotions or at least dial down their promotions this Black Friday.

FGRT’s Forecasting Record

We began publishing our UK holiday forecast in 2015 and our record is one of being directionally accurate:

• Last year, we were the only retail research firm to publicly forecast a strong Christmas period. The ONS subsequently recorded the strongest retail sector performance in decades, and major retailers from Tesco and Morrisons to Marks & Spencer and Debenhams beat expectations as consumers spent liberally.
• In 2015, we forecast a lean Christmas for UK retailers, with lower growth than in prior years. The ONS subsequently reported that it was the weakest Christmas for retail sales in a quarter century.

About Our Estimates

Our estimates are rounded, weighted averages for November and December, which in the ONS Retail Sales Index comprise a total of nine weeks. We benchmark our sales estimates to the ONS’s unadjusted sales data and benchmark our shop-price inflation estimates to the ONS’s retail price deflator and Consumer Prices Index. We note that some other sources, notably the British Retail Consortium, typically report softer retail growth and lower shop-price inflation.