Little Christmas cheer for UK retailers as consumers cut back

UK consumers are cutting back on Christmas spending as soaring inflation hurts household budgets, analysts note, a sign that Britain’s beleaguered retail stocks can expect little relief from the traditionally busy end-of-year shopping season.

Retailers have already endured a tough year, navigating higher costs, supply-chain issues, and shoppers who have become more price-conscious. All that has sent the FTSE 350 Retailers Index down 32 per cent this year, putting it on track for its biggest annual decline since 2008. Now, with the UK economy in recession and inflation running at four-decade highs, things may be set to get worse. 

“Evidence suggests that consumers have started their Christmas shopping early,” Deutsche Bank analysts including Adam Cochrane wrote in a note on Wednesday (Nov 23). “Given inflationary pressures, we believe consumers are already reducing discretionary spend, with fewer presents purchased and a shift to cheaper retailers to make budgets stretch further.”

Meanwhile, the FTSE 350 Retailers Index is trading at just 11 times estimated earnings, compared with 24 times for the MSCI World Retailing Index, according to data compiled by Bloomberg. The Deutsche Bank analysts see further earnings downgrades for the UK retail sector, and expects it to drop more in 2024. 

“This makes the “recovery trade” timing even harder,” they said. “Even realistic guidance for 2023 given in January may not help if there is no material consumer recovery expected in 2024.” 

The dismal retail outlook has prompted a slew of ratings downgrades from other banks in recent months. HSBC Holdings, for instance, cut ratings on apparel retailers including Marks & Spencer Group and Primark-owner Associated British Foods at the end of October. Jefferies Group downgraded Kingfisher, J Sainsbury, Tesco and others the previous month, citing “tremendous upcoming pressures” on consumers. 

Recent surveys conducted by JPMorgan Chase have found UK consumers are “overwhelmingly” planning to spend less not just on clothing and presents this holiday season, but also on socialising and food.

There could however be some beneficiaries as consumers turn more frugal, JPMorgan reckons. 

Supermarket chain Tesco and discount retailer B&M European Value Retail are the likely winners in this environment, analysts led by Georgina Johanan wrote in a note Wednesday. They also predict a material shift out of premium food ranges. “Trading down is real,” the analysts wrote. 

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In the meantime, a NielsenIQ survey of more than 1,000 UK consumers held out some hope. It found 63 per cent of households planned to keep their Christmas budget unchanged from last year, and only 27 per cent said they wanted to spend less. The online survey was conducted in September and results were published this week. 

The survey showed the emotional value consumers attach to the holiday, Alwyn Venter, senior commercial business partner at NielsenIQ, said in an emailed statement. 

“The majority do not want to give up the usual traditions,” he added. BLOOMBERG