UK BRC retail sales: Growth continues but challenges ahead – HSBC

Latest BRC headline retail sales data of UK for September showed a continuation of the positive trend seen in August as total retail sales were up 2.3% in September y-o-y, while LFL sales were up 1.9%, notes the analysis team at HSBC.

Key Quotes

“Food, Clothing and Footwear sales were the key drivers behind this month’s sales growth, while spend in discretionary categories such as Furniture, Household Appliances and Electricals suffered. The BRC states that much of this month’s growth was “being driven by price increases filtering through”. The BRC also states that consumer spending continues to be focussed towards “essential purchases”, and that consumers are “shying away” from spend on big ticket items. This trend is unsurprising given the fact that real wages are in decline, inflation in inelastic areas of demand persists and consumer confidence is near historical lows. The outlook for discretionary spend appears challenged. Tougher comps through to year-end, particularly in non-food, and the prospect of an interest rate rise in November do not bode well non-food retailers.”

“Inflation strong driver in Food; retailers with momentum and growth best placed: Total Food sales growth in the three months to September was 3.5% and is increasingly being driven by inflation. In a deteriorating consumer environment, it is important that food retailers mitigate cost inflation as much as possible. Retailers that can keep prices low in an industry with high cross price elasticity will win sales at a high marginal profit. Growth is the best way to mitigate inflation. Tesco is our top pick given its scale and momentum while Sainsbury’s looks vulnerable. Morrisons’ recent strategic moves are a positive.”

“Structural plays in non-food best placed to deal with threats to discretionary spend: The big picture has not changed and fundamentals still look challenging. In this environment, UK-exposed non-food retailers with high levels of operational gearing may struggle. Retailers with exposure to structural growth channels such as online and discount may prosper, however. This drives our preference for ABF and B&M (both rated Buy). The price gap that both offer relative to other UK retailers may benefit LFL volume sales as consumers trade down. In a worsening consumer environment, consumers tend to have a greater propensity to switch among retailers based on price given high cross price elasticity of demand.”