Little Christmas cheer predicted for UK retailers as shoppers cut back

'Consumers are already reducing discretionary spend with fewer presents purchased and a shift to cheaper retailers to make budgets stretch further.'

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 Ffse-350 Retailers Index down 32% 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 research note. 

“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,” they said. 

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 analysts said.  

Ratings downgrade 

 The dismal retail outlook has prompted a slew of ratings downgrades from other banks in recent months. HSBC, for instance, cut ratings on apparel retailers including Marks & Spencer  Primark-owner Associated British Foods at the end of October. 

Jefferies Group downgraded Kingfisher, Sainsbury's, 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 socializing 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 Retailare the likely winners in this environment, analysts led by Georgina Johanan wrote in a note. They also predict a material shift out of premium food ranges. “Trading down is real,” the analysts said. 

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

Bloomberg