If one were to gauge the state of the retail sector based solely on the festive trading results from the last fortnight, it would appear that the market is thriving. However, this would be a stark contrast to the prevailing market sentiment, which has been overwhelmingly pessimistic following Labour's inaugural budget.
Share prices have either soared or plummeted, sometimes reaching double digits, in response to festive results. M&S reported an 8.7 per cent increase in festive food sales, yet its shares fell by seven per cent, as reported by .
Earlier this week, pub operator Fuller, Smith & Turner announced that like-for-like sales had grown by 10.2 per cent over the five-week Christmas and New Year period, and highlighted several significant investments in the pipeline. Despite reporting a year-on-year sales increase of 4.7 per cent, Tesco's share price received no boost and actually dipped slightly.
While these figures may not be spectacular, they are certainly not as dire as predicted. So why are investors not convinced, and is their reaction warranted?
The sharp market reaction "highlights the real concern about what’s coming, with higher labour costs following the Budget measures, plus the expectations that interest rates will stay higher for longer," said Tim Black, an analyst at Frontier Economics.
"The big question is how consumers will respond to higher prices," he added. "The worry is that demand will be weak, especially for discretionary spending."
Danni Hewson, AJ Bell's head of financial analysis, commented on the challenging economic climate, stating: "The reality of a turgid economy, the impending increase to labour costs, rising bond yields and a shaky pound must all be factored in."
Investors ‘looking to the future’
Investors are being urged to consider the future as they navigate through these turbulent times. The introduction of new taxes and higher business rates is set to raise operational costs significantly.
James Callander, an analyst at Freshminds, echoed this sentiment, saying: "The reality is that investors are looking to the future... there are really big headwinds facing the industry."
He also highlighted the impact of the £40bn fiscal tightening, noting: "The £40bn is going to come from [staff] not getting pay increases or people paying people," and added, "It’s going to come out of the economy... arguably it’ll go back and be reinvested in public services, but I think it is definitely quite gloomy."
A recent survey revealed that around two-thirds of CFOs anticipate having to increase prices due to a higher wage bill. While Next has forecasted a price rise of one per cent, Greggs has already increased the price of its sausage roll by 5p, and many businesses are aiming to keep prices stable, though they cannot guarantee this.
Despite the concerns, some indicators suggest the situation may not be as dire as predicted. º£½ÇÊÓƵ hospitality had foreseen a decrease in investment post-budget, yet early trading statements from large pub operators have not indicated a reduction in investment.
Inflation in the º£½ÇÊÓƵ is anticipated to see a marked decrease for October, with the Bank of England's governor highlighting ongoing efforts to address the heightened cost of living. If price increases remain around one per cent, akin to Next's situation, the impact of the budget may be manageable, especially with a potential interest rate cut looming in February.
December saw the headline rate of inflation drop to 2.5 per cent from November's 2.6 per cent, falling short of market expectations and leading analysts to view a rate cut as a "certainty". This could spur consumer spending enough to counteract a one per cent price rise.
Investment director at AJ Bell, Russ Mould, suggested that investors might be latching "on any traces of negativity," noting that the broader context of soaring º£½ÇÊÓƵ gilt yields and a weakening pound has done "nothing to help".
Small retailers will bear the brunt of higher costs
Smaller retailers are likely to suffer more from increased costs, whereas larger, listed companies have greater capacity to absorb these costs through measures such as automation or leveraging economies of scale.
The latest Red Flag Alert from Begbies Traynor, which they describe as an indicator of the "mounting pressures º£½ÇÊÓƵ retailers are facing", showed a quarter-on-quarter increase of over 25 per cent in the number of retailers experiencing critical financial distress in the final three months of the year, totalling 2,124. Retail SMEs, particularly those on the high street, continue to grapple with challenges such as the shift to online shopping, the aftermath of Covid-19, and high business rates.
Indeed, the Centre of Retail Research predicts that over 200,000 retail jobs and more than 17,000 stores are set to vanish next year. The real concern in retail should be the growth, or lack thereof, of these local businesses, rather than the large corporations.
