Christmas cheer masks tough trading

There’s no escaping the bleak headlines; rising unemployment, squeezed incomes, and an impending Euro crisis; Christmas was definitely tough for many consumers. But this isn’t reflected in the official figures, which seemed full of glad tidings. The Office of National Statistics (ONS) says the value of retail sales in December 2011 increased 6.2 percent on the previous December, with sales volumes up 2.6 percent compared to December 2010. Meanwhile, the British Retail Consortium reports that UK retail sales values were 2.2 percent higher on a like-for-like basis from December 2010 and excluding Easter distortions, sales performance was the best since January.

What these figures mask is that Christmas 2011 was driven by deep discounting and, thanks to last year’s snow and ice, faced pretty weak comparables. Christmas was a challenging time—and it’s not getting any easier.

Counting the cost of Christmas
Aggressive promotional activity was behind much of the apparent success of many retailers this past Christmas. At Findel-owned Kitbag, for example, thanks to “significant” levels of promotional activity, sales for the 15-week period from 1st October to 17th January 2012 were 2 percent ahead of last year. However, this strategy “materially suppressed the gross margin” and Kitbag is reviewing certain contracts with underperforming partners to address the issues holding back its profitability, said a company statement. 

At N Brown Group, the home shopping giant behind Simply Be, Jacamo and Julipa, total group revenue increased by 2.3 percent in the 19 weeks to 7th January, driven by additional promotional activity during the period, which is expected to impact on margin by approximately 1 percentage point. 

Then there were those retailers, which despite widespread discounts, still saw sales decline. Argos, for instance, noted a 50 basis point drop in gross margin due to the anticipated impact of higher shipping rates combined with an increased level of promotional activity. Yet it saw sales decline 7.8 percent to £1.72 billion in the 18 weeks to 31st December, with like-for-likes down 8.8 percent. At Mothercare, total group sales declined 1.2 percent, with UK like-for-likes down 3 percent and UK “direct-in-home” sales also down 2.2 percent in the 13 weeks ended 7th January. 

And, it seems, some retailers just didn’t discount enough. Tesco, which was criticised for not issuing discount vouchers to customers in the run-up to Christmas, saw £4 billion wiped off its value after it delivered a profit warning and a disappointing UK sales growth of 1.7 percent (excluding petrol) in the six weeks to 7th January. While over at Flying Brands, total sales plunged 24.9 percent in the final quarter compared with the same period in 2010. The group, which operates mail order brands Gardening Direct and Flying Flowers, delivered sales of £4.83 million compared to £6.43 million the previous year. The majority of sales were generated by the flower division, but due to a decision to cut back on marketing spend, sales declined 26.4 percent, from £4.47 million to £3.29 million. 

Homewares retailer/cataloguer Next was among the retailers that still managed to grow sales while maintaining operating margins—a rise of 3.1 percent on Next-brand sales in the period from 1st August to 24th December. Overall, however, the business was disappointed with its retail sales and said it was “hard to judge” to what extent the warm winter weather this year and higher levels of discounting by its competitors “masked the deeper, longer lasting, economic effects”.

Online still shines
While the high street struggles to attract shoppers, spend continues to migrate online. Figures from the IMRG Capgemini e-Retail Sales Index reveal that shoppers in the UK spent a total of £7.9 billion online during December, equivalent to £155 per person. Sales were up by 12.2 percent on November and by 16.5 percent on December 2010, with the index value reaching a record high.

It was a merry Christmas at M8 Group, which operates online retailers PetPlanet.co.uk and Greenfingers.com. During the period from 1st to 23rd December, sales at pet-supplies etailer PetPlanet.co.uk were up 52 percent on the same time the previous year, with sales at gardening supplies business Greenfingers growing 73 percent. While the growth was partly aided by the absence of snow this year, managing director Kevin Hague says gross and variable contribution margins also improved and “we have consistently delivered 30 to 40 percent growth levels during 2011”. Total revenue at the group for 2011 was more than £15 million, representing a 34 percent growth on 2010.

There were no signs of squeezed margins at online retailer Asos either, which saw retail gross margins up 300 basis points on the previous year. UK retail sales were up 10 percent to £62.1 million in the three months ended 31st December, while international sales almost doubled, up 93 percent, to £84.5 million.

Online beauty products retailer Feelunique also experienced strong growth with turnover for December 2011 reaching £3.2 million—a 50 percent increase on December 2010. Cofounder and chief executive Aaron Chatterley attributes the success to Feelunique’s broad product range and social-media efforts.
Experience gifts specialist Buyagift recorded a sales growth of 10.2 percent in December 2011, partly thanks to a revamped website, while designer outlet Cocosa had a record-breaking Christmas, up 125 percent on last year.

Winners cautious about future
Another star performer this Christmas was department-store chain John Lewis, which posted a 9.3 percent year-on-year rise in sales over the Christmas trading period. Sales reached £596 million in the five weeks to 31st December. Store sales were up 6.2 percent, while online sales grew 27.9 percent during the period. But even John Lewis acknowledges that “trade in 2012 will undoubtedly be challenging and economic conditions volatile”.

A cracker of a Christmas at Very and Littlewoods owner Shop Direct Group came with strings attached. Sales in the six weeks to 31st December were up 9 percent on the previous year, but group chief executive Mark Newton-Jones noted that Christmas may have been so strong because customers chose to defer autumn/winter purchases until the peak Christmas period. As a result, he says, “this level of sales is not representative of 2011 as a whole or what we expect to see in 2012”. Shop Direct is therefore forecasting lower overall sales for the year ahead.

There’s no denying that consumers are under pressure, but Anne-Isabelle Choueiri of consultancy AT Kearney, had this sobering thought for retailers planning to rely on discounting to lift sales, “Constant promotions eat into retailers’ margins, decrease brand appeal and bore consumers. Unfortunately, even if all retailers suddenly kicked off the promotion habit, not everyone would survive 2012. Retailers should be bracing themselves for a tough year.”