Christmas is one of the most cut-throat times of the year for suppliers and retailers and, given the state of the economy, this year’s festive period is likely to prove more competitive than ever. Ben Cooper studies why some retailers are likely to have a more merry Christmas than others.
As in most markets worldwide, Christmas is a key retail period in the UK. The increasing commercialisation of the festive period has ensured that it has become a longer and more extensive shopping binge every year. A good time therefore to assess just how bad the economic downturn is? Perhaps not.
In the food market at any rate, the picture is rather complicated. Certainly 2008 is not likely to be a bumper Christmas but one hardly needs to be a retail guru to work that one out. But extrapolating any trends for how the retail market is standing up to the downturn from the performance over Christmas is not at all simple.
First and foremost, there is more than a little truth in the widely held view that during tough times consumers tend to need to retain the occasional indulgence, to keep body and soul together. Christmas arguably is the perfect opportunity for such a splurge, and food and drink represents the most obvious and relatively affordable indulgences on offer.
“Christmas is a time when shoppers do look to indulge themselves,” says Gavin Rothwell, senior business analyst at IGD. “Food is a relatively affordable luxury on the scale of things when you compare it with high-end ticket, non-food items.”
Nick Bubb, retail analyst at stockbrokers Pali International, also sees consumers taking a relatively consistent view of Christmas with regard to their food and drink shopping, in spite of adverse economic conditions. “This year it is going to be fashionable to be frugal with presents but people will still buy turkeys and booze, and there will still be the normal festive family routine.”
That said, with purse strings being tightened, families will be looking to make sure their stretched resources go as far as possible while trying to enjoy a relatively normal Christmas. As Rothwell points out, “products that deliver the right combination of value, quality and indulgence are actually well placed to prosper”.
This arguably means that certain key trends being seen in the UK food retail market over the past year are likely to be continued – and possibly accentuated – during the festive period.
“Over the past 12 months, we’ve seen value-for-money rising much higher on the shopper agenda,” Rothwell continues. “It’s become imperative across the broad for retailers to demonstrate effectively their value-for-money credentials. As well as the major multiples doing a lot more in that area, which is pretty well documented, we’ve also seen the likes of M&S and Waitrose doing a lot more.”
Nevertheless, Bubb forecasts that neither M&S nor Waitrose can look forward to a particularly merry Christmas. Both have been losing customers to mainstream rivals, particularly Sainsbury’s, according to Bubb, who expects the likes of Tesco, Asda, Morrisons and Sainsbury’s to fare better over Christmas than the more premium-orientated food retailers.
Of course the picture is further muddled by the fact that the mainstream supermarket retailers are so much more exposed to the frailties of the non-food sectors than they once were. If non-food sales are to suffer more than food, the supermarkets will take a hit. Bubb sees Asda faring better in this area than Tesco, but also points out that, through aggressive pricing, supermarkets have generally been gaining market share in non-food sectors from specialist retailers, as the recent collapse of Woolworths Group bears out.
Both Tesco and Morrisons recently posted quarterly trading statements but were fairly non-committal about their prospects for Christmas. When asked about Christmas trading on a conference call today (4 December), Morrisons CEO Marc Bolland was coy about the retailer’s performance. However, he noted that the company was continuing to provide value for consumers over the festive period. “We have got a very strong promotion running and it has been very well embraced by consumers,” Bolland said. “People really like it, they like the gesture, especially around Christmas. We know that Christmas is tight for people.”
A reticence to forecast does not suggest a bullish outlook but it also reflects again the unpredictability of the market at this time of year and the complicated picture analysts are looking at.
Bubb does not believe Morrisons or Tesco would be able to sustain their recent quarterly sales gains over Christmas. Morrisons posted an 8.1% rise in third-quarter like-for like sales, while Tesco reported third-quarter like-for-like sales growth of 2% (excluding fuel). Bubb said he would anticipate growth from the mainstream supermarkets of 2% to 3% in the current quarter, but points out that the instability of food prices, and particularly the recent high food inflation, is further muddying the waters.
One key trend set to continue over Christmas is the upward curve in discount retailing. Moreover, Rothwell believes the strides discounters have made in quality – and the improving quality perceptions of discounters among consumers – will have a bearing on how they perform in the holiday season. “It’s important to take into account the positioning of the discounters,” Rothwell says. “They’re not all about the cheapest products around. Aldi is the best example of this. They’ve done quite a lot of development in premium private label.”
Bubb anticipates discounters will continue to gain share over Christmas, while Nick Gladding, analyst at Verdict Research, believes the discount retailers have been particularly savvy in their approach to the Christmas period. “Discounters have proved pretty successful so far in promoting seasonal products, and they trade on their German heritage with Christmas markets and that is helping to sustain interest in Aldi at this time of year,” Gladding says. “Shoppers that have already moved across will continue to look at Aldi at Christmas and cherry-pick some of the best bargains on offer.”
It should also be noted that however Christmas eventually turns out for the major food retailers, there is one facet of the modern-day Christmas period that has been unaffected by the crunch.
The escalating commercialisation of Christmas has ensured for years that each successive year it appears to begin earlier. Those who have lamented this trend may have hoped for the harsh economic environment to have offered some respite but it appears the opposite is the case. Rothwell believes that the extremely challenging environment and intense competition has advanced the Christmas frenzy even further. “It’s a very tough market place,” he says. “From the competitive perspective, it is intense at the moment, even more intense than previously. We’ve seen a lot of promotional activity coming through at a fairly early stage compared with what was maybe traditionally the case.”
So at least in these troubled and uncertain times, some things remain reassuringly the same. Christmas is still a time when we are constantly encouraged to buy and consume, whether we can afford it or not.