Retail is now halfway through the year, and it has emerged relatively unscathed. While tariffs have grabbed the headlines – and have caused a great deal of uncertainty – they have not hit the retail sector with full force. Most of this is because the deadlines for tariffs to be imposed have been constantly moved, and most stock being sold in the half was not subject to additional levies. As a result, inflation has not been too onerous, and it has not deterred the consumer from buying.
For June, sales continued to grow at a reasonable pace, with total retail spending up by 3.7 per cent. Some of this was driven by inflation, which ticked up slightly during the month. However, even when this is stripped out, underlying volumes rose by 0.7 per cent. Core retail – which excludes gasoline, autos, and foodservice – increased by 3.9 per cent in value terms or by 0.9 per cent in volume terms. The vast majority of retail sectors were in growth, which speaks to the general resilience of consumers. That said, June last year was a weak month for retail, which flatters the growth rate.
The stocking up trend, which has been present for the last few months, was still a driver of spending. However, its impact is fading over time, and this month it only contributed 0.2 percentage points to the value increase. Many people have now bought the things they need for the year, especially in bigger ticket sectors like electronics and furnishings. That said, there is also an attitude among consumers of wanting to enjoy themselves and spend while the going is still good, which remains quite helpful to retail.
The question, of course, is whether the reasonable first half performance continues into the second half. With tariff deadlines now looming, inflation coming in hotter, and a range of economic pressures stacked up, there is every likelihood that performance will moderate – especially in volume terms. However, it is still unlikely that the consumer will fall into a full-blown recession – especially so if interest rates come down. It is also the case that tariff pressure will materialize in a lot of different places, other than the sales line. A lot of retailers are absorbing higher tariff levies, so areas like margins may also feel the squeeze.
For June, sales at apparel stores grew by 2.4 per cent with a 1.9 per cent underlying volume increase. There was a lot of discounting across the month, which helped to stimulate spending. Consumers also splashed out on lighter summer styles and accessories, which helped move the dial. From our discussions, there is a lot of nervousness among apparel retailers around increasing prices. Many feel that their value equations and customer loyalty will be negatively impacted by hiking prices by too much; as such, it looks like a lid is being kept on inflation, at least for now.
The home sector continued a good run of performance with sales at furniture and furnishing stores up by 4.3 per cent, and at home improvement stores by a shallower 0.2 per cent. Pull-forward purchasing is playing a role here, but there is also a little more refreshing of rooms and decor as the purchase cycle picks up. Massive remodeling and complete room refurbishments are, however, still out of favor – especially as financing remains more expensive. Notably, this sector is the one that is most at risk of decline should consumer finances deteriorate substantially over the second half.
At grocery stores, sales increased by 1.3 per cent, with volumes down by 0.8 per cent. From all our survey data, many households are still very uncomfortable with the cost of buying food and household essentials and are retaining conservative spending behaviors such as trading down, migrating to value chains, and buying less. This does not look like it will dissipate anytime soon, and a sharp uptick in food inflation will significantly damage the consumer mood.
The one segment in decline this month was department stores. Here, sales dropped by a sharp 4.5 per cent. Some of this is down to continued store closures, but some underscores the problem many chains have of establishing and maintaining consumer relevance. This is a lesson for all retailers: being close to and generating affinity with the consumer is critical for success.
