Will it be a merry Christmas for UK retailers?

Consumer confidence is shown to be at record lows ahead of holiday quarter, and rising inflation and food prices could see consumers give turkeys and gift sets the cold shoulder this festive season.

The holiday season is upon us, but it might not spell festive cheer for the whole of the retail industry due to the ongoing cost of living crisis. “With consumer confidence already at or close to record lows, it’s likely that consumers — if they do have money to spend — are probably holding back ahead of the end of the year and the Christmas period,” commented Michael Hewson, chief market analyst at CMC Markets (click to learn more).

Retailers reported UK sales slowing in October. Data from the British Retail Consortium shows that sales increased 1.2% in October on a like-for-like basis, down from a growth rate of 1.8% in September. High street footfall fell 11.6% versus October 2019, a more comparable period as it was pre-Covid, and shopping centre footfall dropped 21.8% from pre-pandemic levels.

“As we look towards the end of the year, the pressure on the UK consumer is unlikely to diminish, although we could well see a pickup in retail sales spending in the lead-up to Christmas,” Hewson added.

Consumers will likely get quite picky about what they buy, however. Inflation jumped 11.1% in October from 10.1% in September, driven largely by a 16.2% rise in food prices. Data from the Office for National Statistics shows that milk, cheese and egg prices alone spiked 27.3% last month, while bread and cereals increased 15% in price. There will be many consumers forgoing high ticket food items and prioritising basic food items over turkeys, stuffing, Christmas puddings and all of the other trimmings.

Where they buy from will also become a bigger deciding factor. Consumers with higher disposable incomes who would usually shop at premium supermarkets like Marks & Spencer may switch to budget retailers and discounters. This could potentially lift seasonal sales at Tesco and Sainsbury’s, both of which run Aldi price match schemes, although Tesco did lower its profit guidance for fiscal 2022-2023 when reporting half-year results in October.

Confectionery and gifting

According to research by Kantar, UK shoppers are placing 3% fewer items in their baskets compared to 2019. Purchases of larger pack sizes are up 1% as more shoppers are opting to buy in bulk to save money. Consumers deciding to shop cheaper retailers and purchase budget products and own-label value ranges is contributing to a 4% reduction in spending.

Breaking down shopping habits by category, Kantar found that seasonal gifts and confectionery are most exposed to consumers tightening their purse strings, with 21% and 23% of the spend in those categories respectively coming from households that describe themselves as struggling financially.

Fewer consumers willing to open their wallets for luxury items could impact posh purveyors of chocolate, which could sour Hotel Chocolat’s seasonal sales, for instance. Although The Hut Group (THG) reported that its beauty, health and wellness segments were holding up well amid the cost-of-living crisis when it delivered a Q3 trading update in October, the online retailer’s top line could become impacted if consumers decide that gift sets are a discretionary item that they can’t afford this year.

“Beyond Christmas, the retail environment is likely to remain challenging until inflation and prices come down, putting retailers’ bottom lines under pressure,” Hewson has suggested.

While seasonal sales won’t determine the fate of retailers, it’s not out of the question that more unviable businesses could yet collapse like millennial furniture darling Made.com, which went into administration earlier this month due to a number of factors including the cost of living crisis.