From buying sofas to curtains to the latest sportswear and luxury watches, many consumers have shown a surprising willingness to splash out in lockdown.
Investors had feared the latest round of shop closures during the most important trading weeks of the year would lead to a deluge of profit warnings from retailers.
But in the UK, the sector’s traditional January updates have passed with few nasty surprises. If anything, upgrades have been more common than downgrades, not just at online-only operators such as fashion group Boohoo or electronics retailer AO, but also those that had to close stores for extended periods — including Watches of Switzerland, JD Sports and Next.
“We did much better than we expected to,” acknowledged Next’s chief executive Simon Wolfson.
Not all retailers were so fortunate. Superdry’s shares fell after it reported a half-year loss and warned that store traffic would remain subdued until 2022, while Card Factory said it could not provide guidance until it was clear there would be no more lockdowns. Stationer Paperchase looks set for a prepack administration.
Overall, December’s retail sales were below economists’ forecasts.
But Tony Shiret at Panmure Gordon quipped that negative statements had been so rare that “when Card Factory warned that it might breach its banking covenants, I did think to myself how unusual it was to hear something like that”.
Even among younger workers on lower incomes, there are signs that household finances are in better shape than feared. “People are spending less [on other things],” said Henry Birch, chief executive of Very Group, a retailer with a credit operation. “They are not going out, they are not going on holiday and they are paying down credit balances.”
Lord Wolfson reported a similar trend, which he said “bodes well for the post-Covid economy because it suggests that if you keep your job, you will come out of the pandemic in the same or better financial position as you entered it”.
One reason for this is that the economic impact of the pandemic on consumers has been cushioned by government support. “The increase in unemployment has been consistently over-predicted,” said Robert Carruthers at Consumercast.
“There are groups that have suffered hugely but that has been outweighed by higher-income households, which were more significant consumers to start with.”
The household savings ratio, which measures savings as a percentage of disposable income and has barely crept above 10 per cent this millennium, leapt to 27 per cent in the second quarter of 2020 and was still 16.9 per cent in the third.
“Heading into Christmas there was a significant number of households sitting on cash, and in the context of a difficult year and cancelled holidays they decided to splash out,” said Richard Lim, chief executive of Retail Economics.
Much of the money that might once have been spent on commuting, holidays and meals out has instead found its way into electronics and homewares, benefiting the likes of Kingfisher, Dunelm and Dixons Carphone. On Wednesday, Dixons said UK and Ireland sales grew 8 per cent in the 10 weeks to January 9, despite many of its 386 large stores being closed for parts of that period.
Retailers’ costs have also fallen, helped by the furlough scheme and a year-long business rates holiday. Many groups deemed non-essential have paid either reduced rent or no rent at all; landlord Hammerson collected barely half the rent owed by retail tenants during its most recent quarter, rival Landsec even less.
“Lots of retailers deserve credit for their response, but without this support there would have been a bloodbath on the high street,” said Mr Lim.
The partial or total absence of some players from the market during lockdowns has benefited rivals that were able to continue trading or could pivot quickly to selling online.
Primark, which does not sell online, constitutes around 7 per cent of the UK clothing market. The closure of its UK stores benefited rivals such as Asos and Boohoo. Some capacity will disappear entirely as weaker players are forced out of business.
Whether retailers can continue defying the doomsayers depends largely on how quickly the government withdraws financial support and how consumers react to that.
Alex Baldock, chief executive of Dixons Carphone, said he was “not seeing any slowdown of demand”.
“Do I expect to report 120 per cent growth in online sales a year from now? No. But many eyes have been opened to what technology can do, even among groups of people that did not consider themselves tech-savvy,” he said.
Mr Carruthers talks of a “K-shaped recovery”, with the upward leg of the K representing high-income families and the downward one younger workers on lower incomes whose spending power will remain constrained.
As vaccines are rolled out and restrictions eased, some analysts expect fashion chains could prosper relative to early “pandemic winners” such as electronics retailers and DIY stores.
“If you bought a new television ahead of the November 2020 lockdown, are you going to need another in 2021?” said James Anstead at Barclays. By contrast, consumers who can once again go on holiday or attend weddings are likely to want a wardrobe refresh. “[Apparel] could bounce back quite strongly,” he said.