By Neil Saunders
The good news is that retail sales rose again in October, with the overall figure increasing by 2.1%. Given the distractions of the election and a slightly more cautious consumer this is not a bad outcome and one which clearly indicates the sound nature of the underlying economy.
That noted, it has to be said that growth of 2.1% is one of the slower performances of the year-to-date. Indeed, the sluggish pace of growth is particularly disappointing given that real wages are now starting to increase, and that gas prices are not exerting so much of a downward drag on total sales. In our view, the figures reflect a more uncertain and hesitant consumer mood across the period.
The good news is that retail sales rose again in October. Given the distractions of the election and a slightly more cautious consumer this clearly indicates the sound nature of the underlying economy. As such, the outlook for the two remaining months of this year is reasonable and growth is expected to come in above this month’s level.
This subdued mood is most evident in some of the bigger ticket sectors. This includes automotive which remains fairly resilient, but is now a long way past the boom days which the sector enjoyed up until February. Furniture and home retailers also found the going tough with a 1.7% decline in sales over the prior year: this is despite the continued resilience of the housing market. Electricals also suffered, although the 5.6% dip in sales here was exacerbated by the continued lack of excitement in the sector — despite the release of new iPhone models and some activity around devices from Google.
Food also played a role in bringing down growth, with a 2% increase in sales over the prior year reflecting heightened competition and price skirmishes in the sector. As much as this is good news for consumers, the savings they are making on grocery do not appear to be resulting in increased spending elsewhere in retail. While we expect the disinflationary trend in grocery to continue into the holiday period, we are slightly more optimistic that consumers will spend some of these gains now that the uncertainty of the election has dissipated.
The deflationary trend is also partly present in clothing where excess capacity has contributed to higher than average discounting. Sales here were down 0.3% — a result that is not worse only because the comparative from the prior year, when weather was very unfavorable, is extremely soft.
Worryingly for retail, we do not see price competition easing as we go into the holiday period. Indeed, if anything it is likely to strengthen with Amazon pushing deals to drive sales and Walmart renewing its focus on everyday low pricing. Ultimately this will help to drive some reasonable volume increases, but at the same time it will dilute growth rates and will result in some margin pressure for retailers.
As such, the outlook for the two remaining months of this year is reasonable and we expect growth to come in above this month’s level. However, the outcome will fall a long way short of being spectacular.
Neil Saunders is CEO of research firm Conlumino.