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A happy holiday season for retailers?

We break down this year’s shopping trends and take a look at who could benefit from them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The all-important shopping period between November and January is where lots of retailers aim to capitalise on a Christmas shopping boom.

After last year’s celebrations were dampened by lockdowns, this year the urge to splurge over the festive period has been stronger than ever. Worries about stock availability meant consumers were keen to make their purchases early, leading to an estimated £9bn spent during Black Friday sales – surpassing both 2020 and 2019.

All signs point to a merry end of the year for UK’s retailers, but the benefits of this strong spending could be uneven.

The retail sector is rife with challenges as the landscape continues to shift, leaving former mainstays struggling to play catch-up. Below, we look at some key trends that could shape this year’s festive shopping period.

This article isn't personal advice. If you're not sure whether an investment is right for you, seek advice. Investments and any income they produce will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

The power of plastic

The pandemic accelerated the shift away from cash. This year, that trend is continuing to grow. Brits spent 121% of the February 2020 average on credit and debit cards during the Black Friday sales. Much of this spending came from so-called delayable purchases like clothes, toys and homeware.

It’s a positive sign for credit card companies like Visa and MasterCard, who make money on each pound that passes through their payment processing systems. It’s also a sign the e-commerce boom seen throughout the pandemic is continuing with force.

Making the most of sales mix

One key difference in consumer behaviour so far this festive period has been a willingness to get out and shop in-person. The vaccine rollout, coupled with an eagerness to break away from last year’s restrictions, meant November online sales were lower in most categories. This doesn’t mean e-commerce has gone out the window, but it does open a door of opportunity for retailers that have fine-tuned a multi-channel approach to selling.

Proportion of spend by channel

Source: PwC October 2021 pre-Christmas survey.

Zara owner Inditex (Industria De Diseno Textil SA) should benefit from the evolution of online and in-store shopping. The group spent the last year streamlining its inventory administration to create a single stock management system that digitally tracks both instore and online items. Plus, the group’s closed its smaller locations to focus on high-traffic stores, making foot traffic all the more valuable.

Inditex’s hard work should pay off in the new retail landscape, but that doesn’t mean there’s smooth sailing ahead. Fashion is notoriously fickle, and the competition is fierce. Inditex’s brands aren’t the cheapest options out there, so the group could suffer if people start to tighten their purse strings.

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Currys, previously Dixons Carphone, is another retailer who’s done a good job merging online and in-person experiences. Lockdowns pushed the group to double down on its face-to-face service offerings, with online consultations with expert sales reps. This is a key differentiator between Currys and competitors like Amazon, so more foot traffic should be a good thing for the group’s holiday sales.

The group’s also combined some of its businesses to offer more products under one roof. This should help with cross selling and improve margins if in-person shoppers flood the stores. 

It's yet to be seen whether this approach will be successful in fending off competitors like Amazon in the long run. There’s a chance people will stop in for advice, only to ultimately purchase online. Inflation could also take a bite out of Curry’s sales if rising prices put people off buying big-ticket items.

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Who’s buying what?

Last year’s lockdowns meant families didn’t gather over the holidays. This year the tables have turned, with more parties to attend, stockings to fill and dinners, drinks and snacks to share. Spending habits this festive period will likely look more normal. Most people are expected to shell out more on Christmas food and drink and clothing, and cut back on homewares and toys after a strong showing in 2020.

That puts supermarkets directly in the limelight this year – especially those offering more than just food. These days, that’s most of the big grocery chains.

Sainsbury’s has been spending big on revamping its stores to include Argos, a move that’s increased the group’s reliance on general merchandise. This could prove fruitful if shoppers embrace the convenience of picking up everything at once. However, the transformation is a long way from being complete. So a strong turnout might not be enough to do much more than cover current costs.

Sainsbury's revenue breakdown (£billions)

Source: Sainsbury annual report, 6 March 2021.

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Supply chain snarls

Supply chain woes have been a mainstay this year, and they could prove problematic for retailers trying to make the most of this year’s shopping season. The semiconductor chip shortage in particular, could dent sales of popular gift items like game consoles, smartphones and TVs. Not only could this knock sales for companies that make these items, but also the shops that sell them.

Chips aren’t the only thing that’s been hard to get hold of – everything from lorry drivers to bottles of wine are in short supply. That’s bad news for just about everyone, but the bigger names in retail will have the upper hand because their scale gives them better bargaining power with suppliers. This won’t completely insulate them from the supply chain crisis – they’re still constrained by the amount of inventory they can physically get to the shelves.

The limited availability of some items is intensifying inflationary pressure as well. Rising costs will either cut into margins or be passed onto consumers. The latter will require a delicate balance though. The cost to manufacture artificial Christmas trees, for example, has risen by more than 50%. Add to that increased shipping costs, and you have a very expensive Christmas staple. At some point, people will make do with what they’ve got to avoid paying higher prices.

The inflation argument

That brings us to inflation – probably the most talked-about issue of the season. It’s up for debate whether the rise in prices is temporary or not. What we can say for sure is that things are more expensive than they were last year. That means although most people say they’re planning to spend more on Christmas staples this year, they might not be buying more.

Scroll across to see the full chart.

Source: Office of National Statistics. 17/11/2021 

However, the latest consumer price index reading showed a 4.6% increase over last year. If forecasts for the Black Friday shopping bonanza pan out, it would represent a 15% rise in spending. That suggests higher prices are doing very little to derail enthusiasm during this year’s festive shopping season.

The spending was likely uneven though. We see retailers at the top and bottom ends of the spectrum as well-placed if inflation persists. At the top end, luxury retailers cater to high-net-worth customers, who tend to be less price-sensitive. Discount retailers, on the other hand, could see sales rise as people look for ways to stretch their pounds further.

That leaves mid-tier retailers in a tough spot as their customers will feel the pinch. This could be the final nail in the coffin for department stores, which have already been fighting a losing battle against falling foot traffic for years.

Retail’s getting an injection of holiday cheer

While supply chain woes and coronavirus variant worries have cast a shadow over this year’s shopping season, the overall picture looks decidedly rosy. Shoppers appear to be out in force, and this influx of demand will give some of the industry’s players a chance to test out their tuned-up business models. The pandemic forced retailers to focus on efficiency and online offerings, and the fourth quarter will be the first time we have a chance to see whether it was worth the effort.

To keep an eye on how retailers performed over the Christmas period, sign up to our free share research. You’ll get updates on 100+ stocks from our dedicated team of analysts, including some of the UK's biggest names like Tesco, Next and Associated British Foods.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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