UK retailers should make hay while the sun shines on shoppers

A robust employment, together with wage increases and a bit of uncharacteristic sunshine, has Brits out spending. (Source: Bloomberg)

UK consumer demand hasn’t collapsed under the weight of the cost-of-living crisis. By contrast, robust employment, together with wage increases and a bit of uncharacteristic sunshine, has Brits out spending.

That’s the message from high-street bellwether Next Plc, which on Monday unexpectedly upgraded its full-year profit forecast.

Next said full-price sales in the first seven weeks of its second quarter were 9.3 percent ahead of the year-earlier period. For comparison, Next had anticipated sales to be down 5 percent, meaning that it beat its own expectations by £93 million ($118.9 million). The shares rose as much as 6 percent.

But there’s another reason for the better-than-expected performance, which has more far-reaching consequences.

While much has been made of the cost-of-living crisis crimping British consumers’ propensity to spend, Next pointed to wage increases actually encouraging them to splurge. Annual salary increases deliver a significant uplift in real household income when they are awarded. For example, during April, inflation in the UK was running at 8.7 percent year over year and 1.2 percent month on month. So if an individual received a pay rise of 5 percent, their real income would have risen by 3.8 percent in that month. Consumer demand rose alongside expanded household budgets.

“We do not think it is a coincidence that sales stepped forward so markedly at a time of year when many organisations make their annual pay awards,” the company said.

Next is the first retailer to point to the positive impact of wage increases on sales. It underlines the fact that some of the predictions of a sharp squeeze on consumer spending this year (mine included) were too pessimistic.

Next doesn’t expect the positive effects to continue, as ongoing inflation will slowly erode the effect of annual pay increases. But prices also may be rising more slowly from here, as Tesco Plc indicated last week, so the benefit to households may be sustained. Meanwhile, the sharp increases in energy costs that marked 2022 are easing.

Of course, there are still some potential hurdles for retailers and consumer-goods groups, primarily the squeeze on household incomes from higher interest rates, spelling pain for the more than 1 million households due to come off of fixed-rate mortgages over the remainder of this year. This situation could be made worse, too, by the fact that pay raises are fueling spending, potentially making it harder for the Bank of England to tame inflation.

The housing market is another worry, as a prolonged downturn would affect consumer confidence and sales of everything from kitchens to carpets.

Still, for now at least, a sharp contraction in spending has been avoided. Investors in British retailers should make hay while the sun shines.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg