Retail’s Nightmare Before Christmas

As a second wave of the COVID-19 pandemic now appears inevitable, what does this mean for a retail industry that is crying out for a buoyant Golden Quarter more than ever before?

With new restrictions on public activity announced this week by the UK Government set to collide head on with the peak shopping season, the second wave of the pandemic now appears set to present an even bigger challenge for retailers than it did first time around in the Spring. Against this backdrop, there are three key questions that will dictate the success of the critical Christmas trading season for an already under pressure retail sector:

1. Will consumers spend less this year?

With the furlough scheme set to end in the coming weeks – just as a second wave seems likely to bite – the prospect of widespread unemployment is more real than ever before. KPMG predicts that the national unemployment rate could rise to more than 9% in the fourth quarter of the year. With gloomy forecasts like this, it is natural to assume that consumers will adopt a more cautious approach to their spending this coming Christmas.

However, previous deep recessions have shown us that consumers remain keen to spend money over the holiday season. Christmas appears to have a certain amount of immunity against the impact of recession. The 2008 financial crisis provides us with a useful reference point: consumer spending increased on average by more than 10% in December of that year when compared to the previous three months. Whilst that year’s monthly spending increase was less pronounced than in the years leading up to the great financial crisis, it does illustrate that consumers tend to try and protect Christmas as far as they can. This is supported by recent research by eBay which indicated that 65% of UK adult consumers planned to spend the same or more on Christmas this year compared to 2019.

But even if consumers are still willing to spend at Christmas, there is one critical difference to the recessionary ghosts of Christmas past: namely Government enforced restrictions on social activity. After all, if the Christmas party does not take place, there may be no need to buy a new outfit or Secret Santa present, and if we are not able to get together with old friends, maybe we will just send a few more Christmas cards this year and buy fewer gifts. Last week Next warned that restrictions on social gatherings may depress demand for gifts and clothing associated with traditional Christmas family get together. So, even if consumers are willing to spend, they simply may have fewer reasons to purchase than they typically would at this time of year.

2. Will consumers spend differently this year?

Irrespective of what restrictions are in place on social activity over the coming months, online shopping will be significantly higher than any year previously. Retailers need to be ready for this surge with product availability, a seamless online customer experience and frictionless fulfilment. They must also be ready to meet this heightened online demand profitably, with failure to do so resulting in excessive damage to the bottom line over this testing period.

Stock availability will be key too. Consumers may still be scarred from lockdown panic buying when retailers struggled with both product availability and deliveries. This may mean that consumers start their shopping earlier in 2020 and reverse a trend that has developed during recent years of Christmas spending moving later and later into December. As a result, if retailers are not nimble enough and do not have the right products available at the right times, they may miss out on share of wallet.

3. Will the Government be able to soften the blow?

There is increasing pressure on the Government to provide sector-specific relief to particularly challenged areas of the economy such as the arts, hospitality and retail. It is yet to be seen whether this targeted support will materialise through, for example, extending the furlough scheme, offering short-or-longer-term business rates reform, or introducing something akin to the successful ‘Eat out to Help Out’ scheme to encourage people to shop during the peak season. All eyes will be on what interventions the Government are willing to make over the coming weeks and months.

Whether COVID-19 will steal Christmas is still unknown. But what is already crystal clear is that those retailers with flexible models, robust balance sheets and strong online offerings will be best placed to survive the coronavirus Christmas.