High street stores are doing better than online-only retailers

Online specialists were hit the hardest at Christmas as the postal strikes and shortages of van drivers led to delivery problems across the market. Asos and Virgin Wines said they lost out on sales after having to bring forward final order deadlines for fear of disappointing people.

The rising cost of deliveries – from increases in petrol, labour and warehousing – has meant the economics of encouraging shoppers to snap up numerous items online at bargain prices have become onerous. Charging for returns, delaying repayment and encouraging shoppers to drop off items in stores have all become more prevalent, dampening demand.

Those retailers who could offer easy pickup of online orders from a network of stores – including Marks & Spencer, Next and Argos – all benefited from that setup and spoke of their intention to join up the digital and physical worlds even more seamlessly for shoppers in future.

In contrast, specialist online players such as Ocado and Boohoo, who are due to report next week, may have had a tougher time and will be looking for ways to link up with physical retail.

Among food retailers, online growth was hard to find, with Sainsbury’s saying grocery orders were down 10%, while Tesco’s online grocery sales fell 0.7% in the quarter as households returned to more traditional ways of shopping for festive fare now that Covid fears have subsided.

It is likely to mean more consolidation among the fast-track delivery groups that sprang up during the pandemic thanks to billions of pounds of venture capital, while the main retailers will look to make serving online shoppers more efficient.

Christmas 2021 was really tough

Better-than-expected fashion and food sales in 2022 showed just how tough things had been a year before. Comparisons were flattered by a lack of availability on clothing and food stuffs in 2021 when retailers were battling severe supply chain challenges, which did not affect them so much in 2022 apart from on specific items such as eggs.

Restrictions on high street stores in 2021 – where about 70% of sales are still made – also put a dampener on spending as there were fewer opportunities to indulge the tendency for people to pick up treats while out shopping for presents, or to spot an additional unplanned gift for someone special.

The pandemic lockdowns in winter 2021 affected young people in particular – cutting off access to temporary or part-time work and so restricting their spending power. The rise of the Omicron variant of Covid also limited opportunities for going out among those who wanted to catch up with vulnerable relatives over the festive season. This year, JD Sports said its younger shoppers had more cash in their pockets and more incentive to spend. Frasers Group, the owner of Sports Direct and Flannels, recently said the same.

After two years of restrictions around Christmas, it was also clear that the UK was ready to party in 2022. M&S sold out of partywear, and even troubled Asos enjoyed a fillip from a 30% rise in sales of miniskirts.

Not all consumers are skint

Frasers and JD Sports have spoken about young people having more money – those living with their parents are less likely to be affected by higher energy bills and mortgage rates, and more work is available to them.

Young people are not the only ones protected from the financial storms sweeping many households. Older people who have paid off a mortgage and have enjoyed protected pension income, and those who saved large sums during the pandemic when holidays and trips out were on hold, also have cash to spare.

With the UK having relatively warm weather for most of the winter so far, and the government’s efforts to help with energy bills, household costs were not as unaffordable as feared. With fewer trips into the office under flexible working, and extra working hours now shops and hospitality businesses are fully open, there is a bit more cash to splash.

Households are also managing their budgets to retain their living standards – switching to supermarket own labels, shopping at discounters, picking up from stores rather than paying for deliveries, delaying or ditching expensive purchases such as replacing car tyres and buying adult bicycles, and reining in spending on gifts.

Halfords was hit by this trend but not all of that spend reduction will mean lower profits for retailers. Supermarkets may make the same profit on a much cheaper box of breakfast cereal than if they had sold a well-known brand. The losers could be those suppliers without the pulling power to persuade people to pay more during tough times. Marmite may be essential to you (or me) but own-label cornflakes may taste as good as Kellogg’s if the price is right.

Inflation is good and bad news

With shop price inflation running at 7.3%, according to the latest figures from the British Retail Consortium, it is no surprise retailers are putting out some stunning-looking numbers.

Behind those figures, the big supermarkets Tesco and Sainsbury’s admitted the volume of items sold had fallen, and it is likely to be a similar story at some other retailers – but not all. JD Sports, for example, said inflation had prompted its shoppers to buy sooner – for fear that goods would go up in price.

Most retailers felt they could not pass the full extent of cost increases on to customers if they wanted to retain market share.

Time will tell how that has played out in terms of profitability: whether suppliers have taken the hit, whether costs have been cut elsewhere to fund the investment, or if the retailers’ bottom lines have been hammered in order to win top-line growth.

Shoppers are nervous and will splurge or save depending on events

Several retailers mentioned the rapid changes in shopping behaviour that made this winter season a rollercoaster. One moment fashion retailers were searching for warehouse space as the warm October led to coats and knitwear piling up, only to find themselves struggling to meet demand once the cold snap, and fear of putting the heating on, kicked in.

The men’s football World Cup, news about the war in Ukraine, energy bills and mortgage interest rate rises all led to sudden ups and downs in spending. As households remain cautious with such uncertainty about their economic futures, news flow is having a disproportionate effect on how they behave.

Christmas showed people were willing to spend if they thought the event was important enough – a trend that has been around for several years now. So expect lots of focus on any event you can think of this year – Valentine’s Day, Mother’s Day or Easter will all be given the hard sell.