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Key Messages

• Stronger than expected retail sales figures for Jan
• Y-o-y retail sales values +3.7%
• But y-o-y retail sales volumes -5.3%
• Inflation is receding, albeit v slowly
• M-o-m performance apparently strong, but figures highly dubious
• M-o-m values +0.5%, volumes +0.4%
• Falsely imply we spent more in Jan than in Dec
• Ongoing strong growth in footwear, fashion and cosmetics
• Improving trend in DIY, electricals and chemists still v tough
• Online sales decline -2.1% m-o-m, -9.2% y-o-y
• Online grocery down -6.1% m-o-m, -4.9% y-o-y
• KF calculation of online penetration of 21.5% vs ONS鈥� 25%.

More of the same. Christmas sales were far better than anyone expected. And January鈥檚 were better still. The fundamental takeaway from this morning鈥檚 release from the ONS, which has again left many economists scratching their heads. Admittedly, there are as many questions as there are answers in some of the data.

The headlines

Much of the confusion arises from majoring on the month-on-month trends, rather than the much more meaningful year-on-year ones. And the ONS鈥� ham-fisted attempts to smooth over the data through 鈥渟easonal adjustment鈥�.

Leading on the month-on-month trends paints a very (overly?) positive picture. M-o-m retail sales values (exc fuel) were up +0.5% in January. More positively still, m-o-m volumes were also up +0.4%. We bought more, we spent more. And the very small (10bps) difference in values and volumes even suggests a rapid decline in inflation.

Excuse me if I don鈥檛 crack the champagne. The notion that we bought and spent more in January than we did in December as these figures indicate is frankly ridiculous. I doubt there was one retailer in the land that saw that happen. The ONS has effectively made a rod for its own back by doing down December鈥檚 figures through 鈥渟easonal adjustment鈥� to the point that the following month鈥檚 figures look suspiciously good. And the next month鈥檚 bad. Ad infinitum. Rather than a meaningful basis of comparison, it鈥檚 just a perpetual yo-yo.

So much for the largely meaningless, month-on-month figures, what of the year-on-year ones? Equally positive, albeit with a predictable inflation-induced gulf between value and volume performance. Retail sales values (exc fuel) were up +3.7% y-o-y, a slight acceleration in growth from Dec (+3.3%) and against a really tough y-o-y comp (Jan 2022 +13.5%). And comfortably above overall GDP growth, it is fair to assume.

Retail sales volumes (exc fuel) were down -5.3% y-o-y to keep the doom mongers happy, but even this is slightly better than the monthly -6%+ we鈥檝e come to expect since last summer. But a sobering reminder nonetheless that although declining, inflation is still a very real factor and the descent will be a painfully slow one.

Sub-sectors a very mixed bag

As ever, some weird and wonderful figures in the sub-category data, compounded in part by a challenging y-o-y comp base (Jan 2022 saw significant spikes in non-food demand, set against a period of lockdown in Jan 2021).

Grocery sales were up +8.0% in value, but down -4.5% in volume, indicating ongoing higher-than-average (12.5%) inflation in many food products. Non-food sales were ahead +4.3%, but volumes were down -2.6%.

A number of categories continue to outperform, achieving both value and volume growth. These included footwear (+22.8%, +17.6%), clothing (+18.5%, +10.2%), cosmetics (+20.2%, +9.6%) and music & video recordings (+24.5%, +24.5%). Yes really. In complete defiance of any economic logic, non-discretionary categories such as chemists (-24.8%, -31.6%) were the worst performing.

Some interesting movements in the bulky goods categories. Carpets鈥� stellar run (it was the best performing product category in 2022) seemingly came to an abrupt end in January (-3.5%, -14.1%), although against a ridiculously tough comp base the previous year (+436%, +406%). Demand for furniture softened a bit versus previous months, but was still significant (+8.9%, -1.0%). Electricals remained very difficult (-16.3%, -16.5%), but there was an encouraging turnaround in DIY sales (+1.4%, -8.7%).

Online still bottoming out

Another horror show from online, arguably a lot worse than even the figures suggest.

All online sales values declined by -2.1% m-o-m and -9.2% y-o-y. This was against an extremely weak comp of -20.8% in Jan 2022. Y-o-y volume growth was presumably -20%+, high negative growth on high negative growth.

Online grocery sales declined -6.1% m-o-m and -4.9% y-o-y. Online grocery penetration has now reduced to just 8.3%, a far cry than the 25% some were predicting amidst the blind disillusionment of lockdown. Online non-food sales were down -6.4% m-o-m and -9.2% y-o-y, but the picture was slightly more nuanced, with online clothing sales up (+2.0% m-o-m, +3.1%) but online household goods down (-21.3% m-o-m, -3.6% y-o-y).

According to the ONS, overall online penetration still remains at a suspiciously high 25.0%. Last January, this figure stood at 25.3%. In the 12 months in the interim, overall retail sales values have grown at a monthly average of ca. +5%, but online sales have declined at a monthly average rate of ca. -11%. My back-of-an envelope calculations put online penetration of around 21.5% - 22%, rather than the ONS鈥� figure of 25%.

The bleating mantra that 鈥渙nline sales are still higher than pre-pandemic鈥� wears thinner with every passing month. Statistically it is true, but we are hastily reaching a point where we would have been if COVID had not struck 鈥� indeed, if we are not there already.

Interesting comments this week to this effect from IMRG strategy and insight director Andy Mulcahy. From one of online鈥檚 biggest cheerleaders (for obvious reasons): 鈥淔rom an online retail value perspective, we might ask: 鈥楶andemic? What pandemic?鈥� There was a train of thought that suggested existing trends had been accelerated by a decade in the space of a few weeks, but it has become apparent that we are creatures of habit and change simply doesn鈥檛 happen at that scale, at that speed.鈥�

鈥淚t is probably fair to say that the market is a bit better off than might have been expected if there was no pandemic; the rate of growth had been generally coming down over a period of years, so it could have run at lower than 5% per year otherwise.鈥�

鈥淭he cost-of-living crisis has caused a real shift in shopping behaviour, with conversion on retail sites dropping away markedly throughout 2022.鈥�

Online penetration may notionally still be 鈥渁bove pre-pandemic levels鈥�. But it won鈥檛 be this time next year, based on the current direction of travel.

Where do we go from here?

The 鈥榞ood month, bad month鈥� yo-yo dictates that February will appear weak relative to January. At the same time, it is always dangerous to read too much into one month鈥檚 figures and that is certainly the case in both January and February, two of the quietest months in the retail calendar. The next real temperature check for the retail market will probably come at Easter in April.

The bigger picture is 鈥渁s you were鈥� 鈥� pressure on the consumer, but no sign of a consumer meltdown, nor is one likely to materialize. Inflation is receding, but at a very slow rate and probably won鈥檛 be <3% until next year. Retail sales volumes will remain under pressure for the foreseeable, probably not returning to positive growth territory until the back end of this year. And the retail economy will continue to out-perform the macro-economy. Because it invariably does.