The latest BRC Retail Index shows UK retail sales increased 4.7% last month on a like-for-like basis compared to August 2019 (like-for-like includes online sales but excludes temporarily closed stores). This compares with a 0.8% dip in the same months of last year. On a total basis, sales rose 3.9% last month, compared to a decline of 0.4% in August 2019.
This is the best growth posted by the retail sector (excluding Easter distortions) since May 2018 and is welcome evidence of recovery. Still, there are challenges to come in the months ahead. The ongoing economic uncertainties of coronavirus, including the end of the Government’s Job Retention Scheme in October, will naturally prompt consumers to think carefully about how they spend their money.
Moreover, the picture remains very mixed, with some sectors still well down on where they might have expected to be at this stage of the year. Fashion sales did start to rebound in August, at least online, though this was largely driven by back-to-school spending. Food remained steady, posting 5.9% growth, while the focus on domestic products such as furniture and computer equipment has continued. Clearly, many consumers remain mostly at home.
Online channels also remain prominent, accounting for 39.3% of all non-food purchases in August. Most online categories saw significant growth over the month. Overall, including food, online sales accounted for 28% of UK retail sales last month, up from around 18% in February.
Elsewhere, pent-up demand for products from non-essential stores, which re-opened in mid-June, prompting the transfer of spending from other parts of the economy, have mostly benefitted home-related products. DIY and gardening (up by 11.2%), furniture and flooring (9.5%) and homewares (8.4%) all rose significantly year-on-year.
Managing the foreign exchange challenge
While it’s good news that sales are returning in some parts of the sector, retailers and wholesalers continue to face significant operational challenges. Foreign exchange volatility is a particular concern for wholesalers right now, many of which are preparing for the big-ticket events of Black Friday and the Christmas season.
Assessing the impact of the pandemic on the currency markets at any given moment is challenging, given how rapidly sentiment in different regions and countries can change in the context of coronavirus. However, throughout the pandemic, sterling has traded in a wider than usual range against world currencies including the dollar, the euro and the yen. The pound fell sharply against each of those currencies in the spring but has since staged something of a recovery.
Brexit negotiations provides added complexity. It’s notable that sterling’s recovery against the euro since the summer has been much more modest. Making predictions about the outcome of Brexit remains as difficult as ever, with the UK and the European Union still at loggerheads over the detail of our future trading relationship.
For wholesalers with exposure to imports and exports, picking a path through these uncertainties is challenging. International trade continues to offer UK wholesalers exciting opportunities, both as a source of products for domestic sales and as a generator of overseas sales revenues. However, the profitability of such trade can be undermined by an unanticipated move in foreign exchange rates.
The cost of imported goods, in sterling terms, may be higher than expected if the pound loses value. An appreciating currency, meanwhile, may represent an opportunity to lean more heavily on imports. On sales, a falling pound will boost the value of overseas sales, but a rise in sterling is potentially damaging to margins.
These concerns represent a potential impediment to growth. Businesses will be keen to end the year strongly, capitalising on what will hopefully be a continued improvement in consumer confidence in order to bounce back from the difficulties of earlier in the year. But their ambitions may be tempered by nervousness about the impact of currency market volatility on profitability.
How Santander can help
Our ‘Views from the Industry’ webinar focused on the currency questions many wholesalers now face. In Wholesale – Managing margins during a period of volatility, contributors from Retail Economics and from our own Risk Solutions group discussed strategies for managing currency risk over the months ahead.
At this critical moment for the sector, it’s vital that wholesalers are prepared. There’s no one-size-fits-all-situation, but we have a range of options for mitigating foreign exchange risk and can provide specialist advice. Listen to the webinar here.
To discuss how Santander can help your business please contact Sukh Nat on email@example.com