Poor weather and a continued cost of living crunch across the nation prompted the driving down of retail prices. While, in the short term, this may help win over consumers, industry onlookers question the sustainability of this tactic and long-term deflation.
For a long time, discounting was frowned upon under the idea it cheapens the brand.
Many luxury brands still avoid it at all costs, and in the past, some were even known to destroy excess goods to avoid having to discount at all.
But as retailers look to drive sales among cost-conscious consumers who have shifted the bulk of their spending to essentials and experiences, discounted clothing and footwear appear to be a favoured strategy.
After a fall in sales figures in UK retail during June on the back of cold weather, July and August saw a return to growth, particularly helped by a boost in clothing as consumers prepared for their summer holidays.
ONS retail sales index figures indicated sales were up 2.2% in value terms and 1.4% in volume terms.
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By GlobalData
August numbers in brief
- Shop Price deflation was at 0.3% in August, down from inflation of 0.2% in the previous month. This is below the 3-month average rate of 0.0%. Shop price annual growth remained at its lowest rate since October 2021.
- Non-food remained in deflation at -1.5% in August, further down from -0.9% in the preceding month. This is below the 3-month average rate of -1.1%. Inflation is at its lowest rate since July 2021.
Mike Watkins, head of retailer and business insight at NielsenIQ, noted shop price inflation fell in August but pointed out this was a result of non-food retailers keeping promotional support in place “due to the unpredictable weather”. On the food end, discounting came in a bid to drive incremental sales during the “summer of sport.”
Whether commodity prices will keep coming down and their respective impact on shopkeeper’s ability to hold prices, however, is questionable.
Helen Dickinson, OBE, CEO of the BRC, said: “Retailers will continue to work hard to keep prices down, and households will be happy to see that prices of some goods have fallen into deflation. The outlook for commodity prices remains uncertain due to the impact of climate change on harvests domestically and globally, as well as rising geopolitical tensions. As a result, we could see renewed inflationary pressures over the next year.”
A spokesperson for the BRC, told Just Style retailers remain hopeful their discounting of clothing and footwear will encourage consumer spend.
“These categories have suffered from a few months of poor trading.”
However, the spokesperson warns if energy prices rise – which is anticipated – and commodity prices rise on the back of geopolitical tensions and climate change effects, we could see inflation creep back up again.
That together with headline inflation showing signs of rising further means retailers face the prospect of a large rise in business rates next year and are mulling ways to recover their costs.
Pippa Stephens, apparel analyst at GlobalData believes caution must be exercised when viewing this news as a win for retail.
While heavy discounting will plug the gap of waning consumer demand for apparel in the short term and allow consumers to consider purchasing non-essential items which they put off on the back of economic uncertainty, it doesn’t necessarily bode well for brands and retailers.
“It will have a negative impact on their profits,” she warns. “Prices are likely to continue falling into winter as overall inflation continues to stabilise. Retailers are also expected to have a significant amount of surplus stock after several years of low consumer confidence which will mean deeper discounts to shift it.”
Meanwhile, Clive Black, an analyst at Shore Capital, explored what the impact of price deflation will be on the MPC.
Commenting on the non-food element he noted the deeper deflation: “As may be expected after a rather poor UK summer, weather-wise, August being a bit better than the wash-out June and July, many retailers were seeking to clear stock, especially in the fashion and household goods arenas.
“The Index reports an uncertain outlook for inflation overall, citing geopolitical risk albeit as things stand, freight costs may ease back after the H1 CY24 spike, whilst sterling appreciation against the US dollar will help buyers’ gross margins.
“The UK retail scene has been more of a challenge than not in 2024, especially the discretionary goods arena, where weak demand has been manifested in subdued trading statements and a few earnings misses. Upgrades and beats in non-food have broadly reflected share gains over anything else, so the robustness of the Next performance, for example.
“The MPC will, as ever, be behind the curve in its forecasting and so base rate discussions. A September cut feels unlikely although on balance the data in aggregate would merit a nudge down whilst any consideration of what the new UK government may do on spending and tax would support a nearer-term cut than not.
“As and when any cuts do emerge, we would expect the discretionary end of UK goods demand to benefit, as so the associated stocks.”
