DEEP DIVE: Holiday Shopping Themes 2016: The US And The UK

Holiday-Shopping-Themes-2016

KEY POINTS

We expect retailers in the US and the UK to see a robust holiday season. Across November and December, we expect US retail sales to grow by 3–4% year over year and we expect UK sales to grow by 3.5% year over year. In this report, we turn from the numbers to holiday themes.

Three of our top holiday shopping themes for the US are:

  • Shoppers will flock to online marketplaces that cut out the retailer and allow consumers to buy direct from brands and other sellers.
  • Online grocery will truly take off this holiday season, as a result of Walmart, Kroger and others ramping up their e-grocery services.
  • Almost half of American households will have Amazon Prime memberships by this holiday season, making the site a first stop for gift shopping.

And three of our holiday themes for the UK are:

  • Services are proving increasingly popular gifting options.
  • Despite the depreciation of the British pound, UK shoppers will continue to enjoy deflation in food retail and low inflation in other categories, boosting discretionary spending.
  • A fightback by nondiscount retailers, coupled with rising consumer confidence and deflation in nondiscretionary categories, will lead more British shoppers to trade up to premium products and nondiscount stores this Christmas.

EXECUTIVE SUMMARY

We expect retailers to enjoy a solid holiday season in both the US and the UK. For the US, we expect retail sales to grow by 3–4% year over year across November and December. We have similar expectations for the UK, where we expect sales to grow by around 3.5% year over year in the final two months of 2016. We outline these forecasts in detail in our Holiday Outlook reports, which can be found on FungGlobalRetailTech.com.

In this report, our global analysts discuss ten hand-picked shopping themes that we believe will impact retail this coming holiday season. We offer five themes for the US market and five for the UK market.

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Top-five shopping themes in the US this holiday season

  • The new Christmas market is online, as shoppers turn to online marketplaces that cut out the retailer and allow consumers to buy direct from brands and other sellers.
  • Online grocery will take off this holiday season, with consumers buying more turkeys, cranberry sauce and stuffing online than ever, as a result of Walmart, Kroger and others ramping up their e-grocery services.
  • Almost half of American households will have Amazon Prime memberships by this holiday season, and for these consumers, Amazon will likely be among the first stops for their shopping list.
  • In part because of the popularity of Amazon Prime, major brick-and-mortar chains are struggling to close the gap with pure-play Internet retailers—chief among them being Amazon.
  • Black Friday has stretched to become Black Quarter. “Holiday creep” means promotions and shopping are spread across the final quarter, and almost half of Americans will have finished shopping by Thanksgiving.

 

Top-five shopping themes in the UK this festive season

  • Forget gold, frankincense and myrrh; today, it would likely be a Spotify subscription, a concert ticket and dinner with friends, as services prove increasingly popular gifting options.
  • Despite the depreciation of the British pound, UK shoppers will enjoy a deflationary Christmas dinner, with turkeys, brussels sprouts and stuffing likely to cost around 2% less than last year. Along with low inflation in other categories, this will boost discretionary spending.
  • Nondiscount retailers, epitomized by Tesco, are fighting back successfully against budget rivals. Coupled with rising consumer confidence and deflation in nondiscretionary categories, this trend leads us to expect more British shoppers to trade up to premium products and nondiscount stores this Christmas.
  • For British shoppers, turning to Internet shopping increasingly means turning to Internet-only retailers. Despite pouring money into multi-channel services, brick-and-mortar retailers are losing share online.

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  • Black Friday could fade to gray in categories other than electronics and appliances. This follows apparently limited demand in categories such as apparel last year, and amid efforts to limit discounting at some major chains.

 

The US

Here are our top-five shopping themes in the US this holiday season.

 

1. More Shoppers Will Turn to Marketplaces and Cut out Retailers

The new Christmas market is online, as shoppers turn to online marketplaces that cut out the retailer and allow consumers to buy direct from brands and other sellers.

This year, more consumers will cut out the retailer and buy direct from brands or other types of sellers on online marketplaces. eBay is, of course, very well established, but newer rivals are growing fast. These rivals include big names from the world of conventional retail (where the retailer holds inventory, curates the product offering and adds a markup).

Worldwide, we forecast that Amazon will overtake eBay this year in terms of annual marketplace sales. Additionally, Amazon is likely to become a majority marketplace in the second half of this year, as measured by the share of units sold on the site: third-party sellers are expected to sell more units on its site than Amazon itself does.

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Amazon’s marketplace offering has received a recent boost by improvements to its ePacket small and light delivery program that helps Chinese merchants ship directly to US shoppers. ePacket is an agreement between the US Postal Service and China Post. Amazon Prime members can now get their orders more quickly—in just five days, instead of the previous eight.

Meanwhile, Walmart is ramping up its marketplace by bringing new sellers on board; and it has acquired Jet.com. The acquisition of Jet.com brings the latter’s 14.8 million product listings, 210 million unique visitors and US$1.2 billion GMV run-rate (at August 2016) to Walmart.

Although some of the sellers on these marketplaces will be retailers themselves, including small-scale retailers seizing the opportunity to reach a wider market, direct sales from brands and from consumer-to-consumer traders will sap revenues from the traditional retail sector.

 

 

2. E-Turkeys (or, Americans Will Buy More Groceries Online than Ever)

Online grocery will take off this holiday season, with consumers buying more turkeys, cranberry sauce and stuffing online than ever, as a result of Walmart, Kroger and others ramping up their e-grocery services.

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The fledgling US online grocery market is set to spread its wings, helped by major retailers such as Walmart and Kroger changing how shoppers use the channel.

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In the US, just 1.4% of all sales of fast-moving consumer goods (FMCGs) were made online in June 2016, according to Kantar Worldpanel. Yet that figure represents a near doubling of share in just two years.

Walmart: Offline market leader Walmart rolled out its Pickup at-store collection service during 2014. The company began extending its Pickup service to new markets, and expanding it in existing markets beginning in April 2016. At the end of Walmart’s fiscal second quarter 2017 (latest), the company was offering pickup in 60 markets and at nearly 400 locations, up from 150 locations two quarters earlier.

Kroger: America’s second-biggest grocery retailer, Kroger, did not officially roll out an online service until August 2015. At the end of the company’s fiscal second quarter of 2017, this service was offered in nearly 400 stores.

AmazonFresh: Meanwhile, AmazonFresh is fighting back by lowering the cost of its service from US$299 per year to US$14.99 per month.

So far, American consumers are overwhelmingly using online grocery services to buy specific items, not to undertake regular, big shops: just 15% of online grocery “trips” were for major shops in the fourth quarter of 2015, according to researchers Brick Meets Click.

US online grocery retail looks set to boom, as average basket sizes get pushed. The big-basket needs of holiday shoppers stocking up their pantries are the type of shopping trip that Walmart.com and Kroger.com will cater to.

 

3. Prime Time for Shopping on Amazon

Almost half of American households will have Amazon Prime memberships by this holiday season, and for these consumers Amazon will likely be among the first stops with their shopping list.

Close to half of all US shoppers have an Amazon Prime subscription, or access to one. The core benefit, as most readers will know, is two-day delivery at no additional cost.

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Financial services firm Cowen and Company estimates that as of September 2016, 44% of US households are Prime members. Kantar Retail puts it a touch higher, at 47% of US consumers with Amazon Prime memberships, as at October 2016.

Earlier this year, Cowen estimated that US Prime memberships could climb by 12 million during 2016. Even if this estimate is close to correct, that is a lot of extra holiday shoppers who are likely to take advantage of their Prime benefits.

As we chart below, Prime members spend more and convert to a sale more often, on average, than non-members.

These shoppers will not simply be turning to Amazon to get the most use out of their free delivery, they may also be getting two-hour delivery through Prime Now, buying groceries through AmazonFresh, ordering household replenishments through its Dash buttons and placing shopping orders by voice through its Echo device.

This holiday season, Amazon shoppers can speak their orders (for Prime-eligible products only) to their Echo devices. And Amazon has integrated its list of 1,000 top toys for Christmas into Echo’s Alexa software, to make it easier for customers to simply say what they want to buy. Prime has always been about breaking down the barriers that limit people from shopping online and this year Amazon has moved e-commerce off the screen and into the living room.

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4. The Gap Between Multi-Channel Retailers and Pure Plays Will Widen

In part because of the popularity of Amazon Prime, major brick-and-mortar chains are struggling to close the gap with pure play Internet retailers—chief among them being Amazon.

Many brick-and-mortar retailers are playing catchup online, racing to make up ground on the head start effectively enjoyed by Amazon and the apparently booming popularity of other Internet-only retailers such as Wayfair. The integration of services between stores and e-commerce is one element of this: nonfood retailers are continuing to roll out buy-and-collect and reserve-and-collect services, while nonfood retailers are extending buy-and-collect and home-delivery services to ever-more areas.

Yet, trends suggest that store-based retailers will lag Internet-only retailers—not just Amazon—in growth terms this shopping season. Below, we chart the most recent quarterly growth in online or digital sales at leading brick-and-mortar retailers, and total sales growth at selected pure play retailers. The pattern is evident, and we see little reason for any major reversal of it in the final quarter of this calendar year.

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5. Black Friday Will Lose Out to Holiday Creep

Black Friday has stretched to become Black Quarter. “Holiday creep” means promotions and shopping are spread across the final quarter, and almost half of Americans will have finished shopping by Thanksgiving.

The traditional shopping peaks will evolve, as the long-term trend for holiday shopping to creep over a longer period continues this year. Macy’s is among those opening its stores one hour earlier on Thanksgiving, while Walmart is launching its Layaway gift-buying program two weeks earlier than it used to.

For fully 49% of US shoppers, even Thanksgiving opening will be too late, as they expect to have completed all their shopping by then; that is according to a September 2016 survey by marketing analytics firm Market Track.

Although a number of malls, including the Mall of America, are staying closed on Thanksgiving, the genie appears to be out of the bottle in terms of holiday creep—and promotional creep.

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The effect is most evident on participation in Black Friday: with retailers stretching their promotions over longer periods and with shoppers accustomed to finding deals online whenever they want, there is less need than ever for bargain-hunters to go to the stores on Black Friday. Events such as Amazon’s Prime Day and Alibaba’s 11/11 Singles Day (though still niche in the US) are further pulling sales over a longer period.

As a result, retail analytics firm RetailNext estimates that Black Friday will only be the third-biggest shopping day, losing its top spot for the first time in “many years,” in part due to sales being shifted forward to Thanksgiving. And research agency Conlumino is among those expecting a further drop in Black Friday participation in 2016, with 61.2% of US consumers forecast to shop on Black Friday, down from 61.3% last year and 62.5% in 2014.

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As a result, we expect fewer peaks and troughs this holiday season, as the final quarter becomes a more smoothed shopping season. Unfortunately for retailers, that smoothing applies to promotions too, meaning it is becoming the norm to offer Black Friday-type deals throughout the holiday season.

 

The UK

Below, we discuss our top-five shopping themes in the UK this festive season.

 

1. Services and Experiences are the New Gifts

Forget gold, frankincense and myrrh; today, it would likely be a Spotify subscription, a concert ticket and dinner with friends, as services prove increasingly popular gifting options.

Brits are opting to spend more on leisure services, such as tickets to events and dining out, than at retail. Clothing stores, in particular, are being hit hard by this trend.

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Over the coming holiday season, we expect this trend to be manifested in strong sales of gift cards and subscriptions for nonphysical products and services—for instance, digital subscriptions to audiobook download services, movie streaming sites and music streaming services.

We also expect an increase in spending on services in the “physical” world in lieu of goods—from tickets to events to meals out. These kinds of spending, which are not considered retail categories, will sap some sales from stores a little this Christmas.

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2. Brits’ Spending Power to Enjoy a Low-Inflation Boost

Despite the depreciation of the British pound, UK shoppers will enjoy a deflationary Christmas dinner, with turkeys, brussels sprouts and stuffing likely to cost around 2% less than last year. Along with low inflation in other categories, this will boost discretionary spending.

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We expect Christmas 2016 to be a robust one for UK retail. This is despite the popularity of spending on services, which we noted earlier. As we detailed in our report, UK Christmas 2016 Retail Outlook, sales could rise by around 3.5% in light of the strengthening in UK retail we have seen since the vote to leave the European Union (EU) in June.

The strength of the UK economy, including consumer spending, has defied the pessimistic forecasts of many economists. In the wake of the Brexit vote, the UK is now forecast to be the strongest performing of the G7 economies this year, and UK government forecasts for 2016 growth are now higher than they were on the basis of the UK voting to remain in the EU.

Inflationary headwinds lie ahead for British shoppers. The depreciation of the British pound will raise the cost of imports. Thus far, the impact of rising food and product prices has been offset by many retailers having hedged unfavorable currency exposure. However, the benefits of currency hedging contracts will decrease coming into 2H17, according to S&P, while the British Retail Consortium expects nonfood shop-price rises to be focused in the first half of 2017.

As we chart below, UK shoppers have enjoyed deflation in food for 27 straight months. Clothing and automotive fuel have tended to be deflationary, too, boosting the spending power of consumers.

We expect no significant shift in consumer prices ahead of Christmas 2017; strong competition between retailers in both the food and nonfood sectors will keep a cap on any rises this year and next. As a result, this Christmas, we expect shoppers to enjoy another boost to spending power that will support discretionary categories.

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  • Our UK Christmas forecast report can be found at bit.ly/FungUKChristmas2016

 

3. The “Tesco Effect” Means Trading Up Looks Likely

Nondiscount retailers, epitomized by Tesco, are fighting back successfully against budget rivals. Coupled with rising consumer confidence and deflation in nondiscretionary categories, this trend leads us to expect more British shoppers to trade up to premium products and nondiscount stores this Christmas.

British consumers look likely to be willing to splurge on premium goods and spend more freely at nondiscount stores this holiday season.

After a long period of losing out to no-frills, budget-positioned rivals, nondiscount retailers look poised to enjoy their best Christmas for some time. A refocusing on retail basics such as sharper pricing, improved quality and fewer, better ranges are themes common to retailers such as Tesco and Morrisons in grocery and Marks & Spencer in apparel. While improvements will not be uniform, we anticipate more shoppers will “return” to major, nondiscount stores this season.

The enhanced propositions of hard-hit nondiscount retailers has coincided with slowing underlying growth at discount retailers—it is what we term the “Tesco effect,” because it is epitomized by Tesco’s improving trend, which we chart below.

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We are now seeing slowing trends across various discount retailers:

  • Aldi and Lidl’s sales are slowing. Kantar Worldpanel measures sales of major grocery stores, and it has recorded a steady slowing of growth at the discounters. For example, in the 12 weeks ended September 14, 2014, Aldi grew sales by 29.1%; fast-forward two years to the 12 weeks ended September 13, 2016, and Aldi grew sales by 11.6%.
  • Moreover, this growth is in the context of aggressive store-opening plans. Sanford C. Bernstein analyst Bruno Monteyne suggested this year that Aldi’s comparable sales had reached zero, while Clive Black at Shore Capital recently suggested Lidl’s same-store sales were likely now at around (4)% to (6)%.
  • Mixed-goods discounters, such as B&M and Poundland, are also seeing underlying growth slow. B&M’s latest results, for the 13 weeks ended June 25, 2016, show that UK comps were flat in the period. For the year ended March 27, 2016, Poundland posted comps of (3.9)%, down from 2.4% in the prior year. (Poundland was recently acquired by retail group Steinhoff International, so we do not have subsequent disclosures.)
  • In apparel, Primark recently reported its first negative comps in 16 years, while Sports Direct has slumped, posting comps of (0.8)% in the year ended April 24, 2016 versus 7.4% comp growth in the prior fiscal year.

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The abovementioned deflation in nondiscretionary categories such as food and fuel, coupled with improving consumer confidence—following a postreferendum slump in July—add further promise for trading up to quality this Christmas.

Finally, retail sales data from the ONS adds weight to our expectation: official data show strengthening trends across 2016 in the real-terms amount spent at retail: in other words, once inflation is stripped out, Brits are increasing their spend at retail considerably.

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4. Turning to the Internet Means Turning to Pure Plays

For British shoppers, turning to Internet shopping increasingly means turning to Internet-only retailers. Despite pouring money into multi-channel services, brick-and-mortar retailers are losing share online.

British shoppers naturally turn to e-commerce at Christmas: Each year, the online channel grows share at Christmas, as shoppers turn to e-commerce for “shopping-list shopping.” We chart this pattern below.

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Brick-and-mortar retailers have been pouring investment into smooth multi-channel services, ranging from mobile apps to click-and-collect. Yet, as we noted for the US, we expect online-only retailers to outpace their multi-channel rivals this shopping season.

Here is why:

  • On an individual company level, pure plays are outperforming: recent results show e-commerce retailers such as boohoo.com, ASOS, AO World and Ocado continuing to comfortably outpace online growth at their multi-channel peers.
  • On an aggregate level, the medium-term trend is for Internet-only to gain a greater share of e-commerce sales. Data from the ONS and Euromonitor International show this pattern.
  • Online growth is accelerating: Both total e-commerce and Internet pure plays have posted stronger growth so far in 2016 than they did for the comparable period of 2015, according to ONS data.

We expect pure plays to benefit most from this underlying boost in
e-commerce this Christmas. And we expect Internet-only retailers to buck the trend of a weak apparel market: ASOS and boohoo.com are likely to maintain their very strong growth, while Amazon is set to benefit from its ongoing march into the apparel category and Zalando should receive a boost from its current, major advertising campaign. Store-based rivals are likely to continue to lose out.

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5. Black Friday Set to Plateau?

Black Friday could fade to gray in categories other than electronics and appliances. This follows apparently limited demand in categories such as apparel last year and amid efforts to limit discounting at some major chains.

Black Friday is a still-new arrival on UK shores, yet it is already at risk of having peaked. The event boomed in the UK in 2014: it was worth an incremental £200 million, or 1.5%, to November’s retail sales, Mintel estimated at the time. Last year, however, Black Friday proved to be something of a damp squib, and we expect growth to slow further or even plateau this year. At the time of writing (late October) it is hard to discern any UK consumer anticipation for Black Friday.

Last year, we saw:

  • Asda, which had kicked off British Black Friday in 2013, declined to participate in 2015.
  • Expansion beyond hardline goods proved to generate lackluster demand, with retailers such as Marks & Spencer seeing no perceptible uplift in traffic.

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  • Retailers stretched the day out to a week or even longer, with Argos running a series of Red, White and Blue Fridays from early November up to Christmas.
  • The big gains appear to have been in the electrical and electronics categories; see the data from GfK below.

 

This year, we expect:

  • Clothing retailers to participate in a more limited manner—not least because major players M&S and Debenhams are trying to reduce their reliance on promotions.
  • A refocusing on the core categories of electronics and appliances. Last year, consumer electronics sales jumped significantly year over year, as we chart below. We think Dixons Carphone and Argos will once again seize the opportunity to fight back against Amazon.
  • Retailers may continue offering “stretched” Black Fridays to periods such as a whole week, but we sense there will be little additional extension of the period beyond what was undertaken last year.

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In short, we feel the excitement over Black Friday may well have peaked among British shoppers, and we could well see a retrenchment of participation from this year onward.