Retail sales rose by a stellar 3.2% year-on-year (non-seasonally adjusted) in September according to the Retail Economics Sales Index. The three month rolling average, which smooths seasonal distortions, rose to 1.8% from 1.3% in the previous period. It suggests that pent-up demand from improvements in households’ financial positions is filtering through to the retail sector.
However, we must not get too carried away with the strength in the latest data as the timing of the August Bank Holiday, which fell in September’s trading period this year and August last year, flattered growth. Nevertheless, these are still very strong figures and, barring Easter distortions, the strongest this year.
Sales growth was solid across most non-food categories with those benefiting from “back-to-school” trade and seasonal home promotions performing the strongest. Clothing (+5.8%), Footwear (+15.0%), Homewares (+9.3%) and Furniture and Flooring (+5.8%) all achieving impressive levels of growth. Footwear sales were the strongest since November 2010.
Food sales were up 0.9% which was the strongest since June 2014, excluding Easter distortions, helped by the Rugby World Cup. However, the sector continues to face considerable challenges as it undergoes significant structural change. In addition, volumes are still in decline with the latest inflation data from the ONS suggesting food deflation of 2.3% in September. The combination of intense competition from the discounters, online and the drive towards convenience are eroding margins.
We believe that the industry will become increasingly polarised in the coming months with the Food sector continuing to struggle and Non-Food gaining strength. Competition within grocery will intensify and targeted promotions on prices will hold back growth.
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