The year kicks off with a respectable set of retail sales numbers that show continued momentum in the consumer economy. The overall growth rate of 4.9% is a little way above the average monthly growth rate of 3.3% recorded in 2016, something that will give retailers some cheer as they head into 2017.
That said, we believe that there are few red flags hidden in the detail of the figures, many of which suggest that underlying performance, while reasonable, is not quite as robust as it first seems. Retailers would be advised to take heed of this as it indicates the sector is in for another choppy year.
The first point to note is that part of the elevated growth is down to the fact that last year’s comparatives are soft. January 2016 was a weak month for retail, partly thanks to Winter Storm Jonas which disrupted consumers’ regular shopping behavior. The weather was more cooperative this year and most of January went smoothly as far as consumer spending is concerned.
The overall growth rate was also boosted by a sharp rise in sales at gas stations, which were up by 13.9% over the prior year. This is the fastest pace of growth in just under five years, and signals that the era of continuously falling gas prices – which characterized the past two years – is now firmly over. Although the uplift is heavy, it comes off the back of a low base and, as such, gas prices are not at levels which are causing consumers too much pain. Even so, further rises will be generally unhelpful to retail as they will inevitably bite into consumer incomes.
Pure retail, which excludes foodservice, auto, and gas sales, is the other area of interest. As much as the overall growth trend looks good, there are some telling movements in the numbers that make up this total. Many of the bigger ticket sectors – including furniture and electricals – recorded a deterioration in sales over the prior year.
Given that our own data shows consumer confidence started to wane partway through January, this could be an indication of nervousness among shoppers. While we do not expect the declines to persist across the entire year, we do believe that continued uncertainty among shoppers will lead to a very changeable retail environment in which large purchases are carefully considered.
Within retail, some sectors performed better. Clothing was one, and although sales only rose by 0.4%, it marks a change from the declines that were a hallmark of the sector across a large part of 2016. This is mostly down to lower discounting rates across January 2017, which is the result of better inventory control, and fewer overstocks of items such as coats thanks to a much colder end to 2016.
We believe that the year ahead will be a reasonable one for retail, and nothing in this month’s numbers changes that assessment. However, growth will undoubtedly be variable across 2017, and it remains insufficient to benefit all players. The environment will continue to be one of winners and losers.