Silver linings

With the announcement that UK GDP fell by a record 20.4% in Q2 this year, the UK is now officially in recession.

But what does this mean for the retail sector?

The 2009 recession resulted in a significant increase in discount retailers, but the impact of lockdown, on top of an already challenging year, means that most retailers are facing difficult challenges. This is highlighted by the news that retail employment fell 45% in the year to August: the sharpest drop since February 2009.

On a more positive note, the latest update from the ONS reported that retail sales volumes increased by 3.6% in July 2020 when compared with June and are 3% above pre-pandemic levels in February 2020. However, these figures mask the impact on specific sectors. For example, clothing store sales were the worst hit during the pandemic and despite stores reopening, volume sales in July remained 25.7% lower than February.

Online retail sales continue to capture a significant share of spend - although stores re-opening resulted in online sales dropping versus the previous month - they remain over 50% higher than February's pre-pandemic levels.  Reflecting this, John Lewis's online sales are projected to account for 60-70% of total sales this year, up from 40% before Covid.

Along with Next, John Lewis is due to release its half year results on 17th September which will confirm the scale to which both businesses have been impacted. Next's last trading update confirmed that although turnover was down vs 2019, they were trading ahead of their initial expectations.

There have been well publicised administrations and CVAs over the last few months, but many of these retailers had pre-existing challenges that were exacerbated by lockdown. Cath Kidston, for example, made an operating loss £19.6m in the last annual accounts filed before its recent administration, citing upwards pressure on costs and a decline in the value of sterling as contributing factors.  While once renowned for its iconic prints, a lack of evolution in the offer will have reduced relevance to its customer base.

Similarly, although TM Lewin reported a small operating profit in its last annual accounts, its performance was impacted by a decline in formal workwear with more casual dress codes being introduced across all industries. In addition, as with some other brands, TM Lewin's ability to sell full price goods has been hampered by a wide discounting programme which can devalue a brand in the eyes of a consumer. Although TM Lewin will continue to trade as an online retailer, it will need to refocus to understand how clothing requirements will evolve in post-covid workplaces.

Harveys also collapsed into administration in June, after being loss-making and struggling for some time. Having initiated a turnaround plan and cost cutting measures, its former parent company sold the company in 2019. Current owner Alteri Investors said it had been examining both Harveys and sister brand Bensons for Beds since Christmas and concluded that only Bensons had the potential to be a strong business going forward.

There are still some winners in the sector

One of the big winners has been B&M Bargains who were able to continue trading throughout lockdown. In July, B&M posted a strong first quarter, with its UK business trading ahead of expectations. This reflects ongoing strong performance, which has resulted in B&M being promoted to the FTSE 100 index in the latest quarterly reshuffle.

Dunelm has reported a sales rise as post-lockdown sales began to rise thanks to "pent up demand". As highlighted within our review of the homeware market earlier this year, Dunelm has evolved its offer to better meet consumer demands, and has invested heavily in its digital infrastructure. Combined with an ongoing trend for home improvements, this has helped Dunelm's sales for the year to date be ahead of expectations.

Lego also reported a rise in sales in the first half of the year. No longer just for children, their key growth area was larger sets aimed at adults. Since stores reopened, they have frequently had queues outside their stores as they capture pent up demand which could not be satisfied by online purchases, and of course, the store experience.

Many smaller, independent retailers have seen improved performance, mainly due to an increase in local spending with a large proportion of the population still working from home.  Reflecting this the Co-op has been one of the beneficiaries of the `shop local' trend and as a result is planning to launch more than three stores a week until December to serve new neighbourhoods.

As can be seen by the variety of retailer performances, there are no hard and fast differences by retail sector, but this shows that brands need to continue to invest in engaging with and understanding their customers to help them evolve their offer to suit ever changing requirements.

Sam Fox