There are many reasons for London's retailers to be more worried than merry this Christmas season. The cost-of-living crisis is hitting consumers' pockets hard, while this month’s cold weather and transport strikes have kept customers away from the shops.
Last week's retail sales figures from the UK's Office for National Statistics (ONS) indicated falling sales volumes. Unexpectedly, retail sales on a monthly basis fell 0.4 per cent last month, having risen 0.9 per cent in October, after Black Friday discounting and early Christmas shopping failed to prise cash from wallets.
Danni Hewson, financial analyst at AJ Bell, said: “Retail’s fairy godmother has failed to wave her magic wand and despite Black Friday promotions and a rush by households to spread the cost of a Christmas feast, sales are down.
“Worried about the rising cost of food, people have been popping a few extras into their trollies as they’ve carried out the weekly shop. All those little tasty treats add up when food inflation is rising at the fastest rate in 45 years.
“People are having to make tough choices about what exactly it is they want from this Christmas. What can they do without, and what are the traditions and expectations that can’t be ditched if Christmas is to feel like Christmas, rather than a poor substitute?"
However, on the face of it, it's a very mixed picture. If one stood at the junction of Oxford Street and Regent Street, the heart of London's shopping district, you'd be forgiven for thinking that things were back to normal. Thousands of people busily going about their Christmas shopping were on Tuesday clasping bags emblazoned with brand names.
“We’ve seen strong footfall across the West End so far this festive season, with the recent Black Friday week the busiest across the district since before the pandemic," Dee Corsi, chief executive of the New West End Company, told The National.
But there are many caveats to this. In the week of the rail strikes, beginning on December 12, for example, the retail data company Springboard said there had been a 30 per cent drop in footfall in shops close to offices in central London as workers opted — or many were forced — to stay at home.
Springboard found that across the UK, high street stores registered a 10 per cent drop in footfall on the first day of the rail strikes, compared with the same day last year when mandatory mask-wearing rules in shops and on public transport were in place, and the government had advised people to stay at home because of an outbreak of the Omicron variant of Covid-19.
One young Christmas shopper on Oxford Street told The National that she had spent less on presents this year than previously.
"I've been more mindful about what I've been spending," she said.
"I've got more of a budget. Usually I'd buy more for one person but now I'm buying them one or two things, instead of a few."
Another shopper said it felt "a lot quieter" on Oxford Street than it had in previous years.
"I would say the volume of people walking up and down the high street is much less and certainly it's not as busy in the shops itself," he said.
Several British retailers, including Marks and Spencer and Primark, have issued a warning on the outlook for this Christmas period.
M&S highlighted a "gathering storm" of steeper costs for retailers, when it announced a drop in its half-year profit early last month.
But retailers tend to be an optimistic and resilient bunch. They have been frustrated by the cold weather and the rail strikes, but are more concerned about any increasing reluctance on the part of consumers to part with their money.
Discretion and caution
"Cautiousness will remain the watchword, both for retailers and for consumers — our recent study of 1,000 UK shoppers shows that 71 per cent plan to be more cautious with discretionary spending over Christmas this year," said Andy Sumpter, retail consultant at Sensormatic Solutions.
"On the one hand, shoppers want to get back to celebrating what feels like the first ‘normal’ Christmas since the pandemic, but on the other hand, purchases and discretionary spending are becoming more considered as household budgets feel the squeeze of the cost of living."
Seeing crowds of people back on Oxford Street enjoying the first proper post-pandemic December is one thing — encouraging consumers to spend in the same way they did in pre-Covid festive seasons is another. This shift in consumer behaviour towards the frugal is evident in research by consultancy Ernst & Young. The firm found nearly half (46 per cent) have planned to spend less money this month, with 29 per cent forking out less on food and slightly more than one in ten inviting fewer people to their homes for Christmas celebrations.
"They are also slashing gift budgets, with 43 per cent cutting back on gifts for friends and 34 per cent on family gifts," said Silvia Rindone, retail lead at Ernst & Young. "Purchases will also be more considered, with 44 per cent of consumers more mindful of the usefulness of what they buy."
The British Retail Consortium said: "Customers have been spending less, cutting back on non-essentials, and trading down on items where possible, for example buying cheaper cuts of meat, value ranges of tinned goods and cheaper electrical brands."
Consumer confidence in the UK is knocking 50-year lows, despite seeing an increase this month. The closely watched monthly consumer confidence index by market research firm GfK rose to minus 42 from November's minus 44. It touched a record low of minus 49 in September. For the past eight months, the index has been below 40. The average since the index began in 1974 is around minus 10.
"With scant seasonal joy at present and no immediate prospect of fiscal good news, it is unlikely we will see a rebound in confidence any time soon," said Joe Staton, client strategy director at GfK.
The UK's top retailers are pulling out all the stops to tempt shoppers to part with their jealously guarded cash. Customers have become used to a certain amount of discounting and early starts to winter sales in the run-up to Christmas.
What is unusual this year is the extension of credit, allowing customers to spread the cost of their Christmas purchases over several months.
For example, the department store, John Lewis has halved the threshold for its interest-free purchase deals from £1,000 to £500, for the first time in 10 years.
John Lewis' rival M&S, as well as the electronics retailer Currys, are also offering favourable terms on financing.
“Credit has come into its own in the cost-of-living crisis,” said Alex Baldock, chief executive of Currys.
However, the buy now, pay later schemes of the retailers are not without their critics. About 30 per cent of British consumers are already depending on loans and such programmes to fund Christmas this year, according to a survey by e-commerce agency RVS Media.
Matthew Upton, director of policy at charity Citizens Advice, said: “There’s a risk of people piling borrowing on top of borrowing. As living costs spiral, the number of people who will see credit as the answer will grow, showing just how much people are struggling to get by.”
The flip side of this is that interest-free deals are not free for retailers, especially in an environment of rising interest rates. Under such deals, the shops pay a slice of what they charge their customers to credit operators such as Novuna and Barclays Partner Finance, in exchange for providing the consumer credit.
The Bank of England has forecast a prolonged, if shallow, recession for next year, as inflation remains stubbornly high. Last week the BoE increased interest rates by 0.5 per cent to 3.5 per cent and economist expect more rises to come.
The K-shaped consumer
Of particular note this Christmas is what analysts call the "K-shaped consumer". This is a term borrowed from traditional economics and has grown out of the recovery patterns of the US economy since the Covid-19 outbreak. Under a K-shaped recovery, various sectors of the economy recover from a recession at differing rates. The graphs used to plot this uneven and divergent type of recovery are shaped like the letter K.
Thus the K-shaped consumer picture indicates a large discrepancy in confidence and spending power — obvious as it may seem, the richer a consumer is, the more likely their spending patterns will be resilient and consistent in the face of a recession.
Silvia Rindone of Ernst & Young said: "Such consumers are more than three times less likely to see themselves financially worse off this time next year [14 per cent] than low-income consumers [51 per cent]. They are also less aware of the increasing cost of goods. Just under three-quarters [74 per cent] of high-income consumers have noticed price rises in key categories such as fuel and household energy, compared with around 90 per cent of mid and low-income consumers."
But does that mean luxury goods sellers in London's West End are faring better than the average retailer? Perhaps, Ms Corsi of the New West End Company told The National, but no one is immune, she said.
“The cost-of-living crisis is naturally impacting all retailers, no matter their products or target customers. For example, although luxury retailers may attract shoppers with a high purchasing power, they may still be finding that some customers are pausing their usual spending in response to the crisis," she said.
But London's luxury retailers, such as Harrods, seem to be having a more fortunate festive season, given that many of their customers are better insulated to the UK's cost-of-living crisis.
"Harrods’ customers are unique and you can’t paint them against the same economic backdrop as everyone else," Michael Ward, managing director at Harrods, told The National.
"This year, the returning strength of the luxury market since the pandemic has been clear. In terms of footfall, we are still missing cohorts of some customers from overseas such as China but next year, as travel finally eases up all around the world, I expect to see a full return."
Tourists and tax
One Australian tourist The National spoke to outside the luxury department store Selfridges, on Oxford Street, said the relative weakness of the British pound had created some bargains.
"Some things like perfume and aftershave are certainly a lot cheaper than they are back home," she said.
It is hoped that tourist numbers will be much higher this month than they were last year. Throughout the whole of 2019, tourists visiting London spent £15.7 billion, according to the data company, Statista. Last year, the amount tourists spent was £2.7 billion.
The reason for the drop was largely down to Covid-19 lockdowns, but it has also been claimed that tourists were put off by the abolition of the previous duty-free scheme at the end of 2020 as a result of Brexit. Before that, goods bought in places such as Oxford Street were essentially 20 per cent cheaper for tourists, who could claim the value added tax (VAT) back before they left the UK.
The government said scrapping the tax-free shopping scheme would save £2 billion a year. But those involved in the UK's retail and tourism sectors said tourists would simply choose to go elsewhere and spend their money, at a far greater price to the economy than the cost of refunding VAT.
"If the government truly wants to welcome back our valued tourists from overseas to grow the UK economy, the Chancellor should commission the Office for Budget Responsibility to review the economic impact of tax-free shopping, while also extending the hours that shops can open on a Sunday in London’s two international centres of the West End and Knightsbridge. Both of these measures would further drive London’s appeal amongst overseas visitors in 2023," said Ms Corsi.
But the full tale of this Christmas for all retailers, luxury and otherwise, will not be unwrapped until well into the New Year, when all data is collected and presented. Only then will the hard numbers show what sort of Christmas was had by retailers and consumers alike. It will also offer some indication of the year to come for the retail sector — a year in which the UK economy is expected to be in a shallow recession, with rising interest rates and stubbornly high inflation.