City snapshot: mild recovery for retail sales in May as election looms

Top story

UK retail sales gained 0.7% in May as rising food sales continue to mitigate weakness in the non-food sector.

The BRC-KPMG Retail Sales Monitor for May found that total UK retail sales were 0.7% in May compared with growth of 3.9% a year earlier.

This was above the three-month average growth of 0.3%, but below the 12-month average growth of 2.0%.

Food sales increased 3.6% year on year over the three months to May, against a growth of 9.6% in May 2023.

Meanwhile, non-food sales decreased 2.4% year on year over the three months to May, against a growth of 0.7% in May 2023.

In-store non-food sales over the three months to May decreased 2.7%, while online non-food sales were up 1.5%.

Helen Dickinson, CEO of the British Retail Consortium, said: “Despite a strong bank holiday weekend for retailers, minimal improvement to weather across most of May meant only a modest rebound in retail sales last month. Although non-food sales fell over the course of the month, the long weekend did see increased purchases of DIY and gardening equipment, as well as strong clothing sales.

“Growth in computing sales reached their highest levels since the pandemic, with many consumers continuing to upgrade tech bought during that period. Retailers remain optimistic that major events such as the Euros and the Olympics will bolster consumer confidence this summer.

“With an election only four weeks away, retailers stand ready to collaborate with the next government to unlock economic potential, benefiting customers, colleagues, and communities alike. Cross-government co-ordination and outcome-driven policymaking must no longer be an afterthought in government decision-making. Retail really is the ‘everywhere economy’, and with the right policy environment can use its scale and reach to support public policy goals.”

Linda Ellett, UK head of consumer, retail & leisure, KPMG, added: “Whilst May’s figures show barely positive increases in retail sales, with less than 1% growth year on year, the impact of falling CPI – which means volumes are not declining as quickly, may help to soften the blow for hard-working retailers.

“With the early bank holiday and some better weather, there was a big step up in the number of categories that saw positive high street sales growth, which was close to three in four. health, personal care, beauty and computing continued to sell well, whilst women’s and children’s clothing also saw small increases in sales. After nearly three years, things may have turned a corner for online retailers, with year-on-year sales growth across most categories, including toys and baby equipment and house textiles.

“Whilst sales growth was minimal, it could point to some signs of recovery for the sector, and retailers will be eager for that trend to continue as they carefully maintain their pricing, stock and cost base. Over the coming weeks, retailers will be hoping that warmer weather, purchases related to summer holiday demand and Euro 2024 provide a stimulus to get consumers buying again. The economy may be improving, but the health of the sector remains fragile, with major investment held back by many until there are clear signs that consumer confidence has turned into spending.

“With the general election date fixed, retailers will be keen to hear positive measures to help boost the economy and, in particular, signs that long awaited changes to the business rates regime are finally on their way.”

Commenting on food & drink sector performance, IGD CEO Sarah Bradbury said: “Shopper confidence remained relatively stable this month as shoppers continue to be divided in their spending habits. Glimpses of the warmer weather and confirmation that the UK is no longer in a recession, combined with inflation falling to its lowest level in three years, may have contributed to the three point uptick in shopper confidence compared to April last year. We can see that shopper confidence, overall, is continuing with a marginally positive outlook.

“Grocery sales in May bounced back into growth following April’s decline, although it must be remembered with Easter falling in March this year, comparisons for April were always going to struggle. Although, sales in May were back into year-on-year growth, the rate of growth is beginning to slow down as inflation continues its path back to normality. Further encouraging signs for the grocery sector include an increase in volumes during May; an improvement from last year.”

Morning update

Consumer card spending grew just 1% year on year in May, the smallest rise since February 2021 and significantly lower than the latest CPIH inflation rate of 3.0%.

According to data from Barclays, resilient categories such as airlines and takeaways were knocked by rising household bills, while wet weather continued to cast a cloud over the high street.

April’s price hikes on certain essentials and household bills – including council tax and broadband – have started to impact consumer confidence.

Consumers reined in spending on takeaways and fast food in May, with the category recording its first decline (0.2%) since May 2020. This comes as 44% say they are reducing their discretionary spending, citing ordering takeaways (54%) as their number one cutback.

Over half (53%) of these consumers are also cutting back on eating out at restaurants, with spending in this category seeing an even greater decline in May (15.7%) than in April (13.1%).

As the rain continued to cast a cloud over the high street, overall retail spending fell 0.4% – the biggest drop since September 2022 – with in-store spending (excluding groceries) and clothing sales dropping by 2.6% and 1.0% respectively.

This comes as over half (52%) of the consumers who are reducing their discretionary spending (44%) say they are limiting purchases of new clothes and accessories. Over two fifths (41%) plan to re-wear more of their old summer clothes this year and 29% are cutting back on shopping for their summer wardrobe due to cost of living concerns.

Spending at supermarkets grew just 0.3% – the lowest growth since June 2022 – as April saw food price inflation fall to its lowest annual rate (2.9%) since 2021.

The downturn in supermarket shopping is also partly due to the comparison with May 2023, when spending on groceries surged due to coronation bank holiday street parties and soaring food price inflation.

However, pharmacy, health and beauty stores continued to defy this trend, rising 5.0%, owing to several factors including the ‘lipstick effect’, a growing interest in personal wellness, and the influence of viral makeup and skincare videos.

Karen Johnson, head of retail at Barclays, said: “Retailers faced a challenging May, yet the few sunnier days in the month did bring a welcome uptick in footfall. As consumers gear up to spend more with better weather, and with the Euros, Wimbledon, and Taylor Swift’s ‘Eras Tour’ on the horizon, there’s a brighter outlook for the coming months.”

Jack Meaning, chief UK economist at Barclays, said: ”The economic strength we saw in the first three months of the year was always expected to ease as we moved into the second quarter, with GDP having seen the extra bounce needed to recover the ground lost in last year’s recession. The underlying direction of travel remains though, with falling inflation, real income growth and low unemployment all pointing to a gradual acceleration in consumer spending over the next 12 months, especially as we begin to see the Bank of England reduce interest rates in H2.”

Elsewhere this morning, tobacco giant British American Tobacco says it remains on course to hit its full-year guidance following a first half in line with expectations.

It continues to predict an acceleration in the second half driven by the phasing of innovation in ‘new categories’ as well as the benefits of first half investment in US commercial actions and related wholesaler inventory movements

It added that it is continuing to improve the profitability of its new category business.

Meanwhile, in combustibles, US commercial plans continue to gain traction despite a challenging macro-economic backdrop, while it gained volume and value share in its AME and APMEA regions.

CEO Tadeu Marroco commented: “Our year-to-date performance is in line with our expectations, and we are on track to deliver our guidance of low-single digit revenue and adjusted profit from operations growth on an organic, constant currency basis in 2024.

“As previously highlighted, we expect our performance to be second-half weighted, mainly driven by wholesaler inventory movements related to continued investment in our U.S. commercial actions, as well as the phasing of new launches.

“BAT is a highly cash generative business, and we are committed to continuing to reward shareholders with strong cash returns. I am pleased with our progress in enhancing financial flexibility driven by continued strong operating cash conversion and completion of the partial monetisation of our ITC stake, enabling the initiation of a sustainable share buy-back.

“Looking forward, we expect growing momentum in the second half, enabled by the investments we are making today. As we continue our journey towards building a smokeless world, guided by our refined strategy, we will progressively improve our performance to deliver 3%-5% revenue, and mid-single digit adjusted profit from operations growth on an organic constant currency basis by 2026.”

On the markets this morning, the FTSE 100 has fallen another 0.4% to 8,226.1pts.

Early fallers include Virgin Wines, down 4% to 46.1p, Nichols, down 3.9% to 990p and Ocado, down 3.4% to 369.8p.

Risers include Science in Sport, up 2.6% to 19.5p, Naked Wines, up 2.5% to 61.5p and McBride, up 1.2% to 127.5p.

Yesterday in the City

The FTSE 100 opened the week falling back 0.2% to 8,262.7pts.

Risers yesterday included Pets at Home, up 8.9% to 322.6p after a broker upgrade, Just Eat Takeaway.com, up 3.7% to 1,060p, McBride, up 3.7% to 126p, Bakkavor, up 2.9% to 144p, PayPoint, up 2.6% to 563p, Ocado, up 2.4% to 382.7p and Coca-Cola Europacific Partners, up 2.1% to €68.20.

The day’s fallers included Glanbia, down 4.4% to €17.30, AG Barr, down 1.76% to 613p, Tate & Lyle, down 1.6% to 681p and Compass Group, down 1.1% to 2,168p.