Supply Crunch Looms Over British Retailers

A survey of the UK's retail and wholesale sector confirms a strong rebound in activity is underway, however supply constraints are becoming increasingly acute and hint at higher inflationary levels over coming weeks and months.

The CBI's latest Distributive Trades Survey showed in the year to June retail sales and orders grew at the fastest pace since August 2018 and September 2015, respectively.

Within the retail sector, grocers reported that sales remained above seasonal norms, as did sub-sectors related to home improvements (furniture & carpets, hardware & DIY).

Above: Retail sales year-on-year growth.

Wholesalers reported the most positive sales performance in relation to seasonal norms since November 2018 says the report, while motor traders reported sales as good for the time of year to a greater extent than last month.

"After a generally gloomy 2021 so far, the sun finally shone for retailers in June, with seasonal sales volumes the strongest since November 2016. This was the latest sign that the success of the vaccination programme is feeding through to stronger consumer confidence which, along with the re-opening of hospitality, is encouraging shoppers back onto the streets," said Ben Jones, Principal Economist at the CBI.

But the CBI says constraints in the global supply chain continue to be felt as across the distribution sector stock levels in relation to expected sales reached a record low in June.

This was a question first asked in the survey of August 1983.

Firms in the retail, wholesale and motor trades sectors all reported relative stocks as too low and no improvement is expected next month.

Above: Retail sector volume of stocks in relation to expected sales.

Such restricted supply poses upward pressures to inflation on simple supply and demand dynamics, and marries with the latest ONS inflation report that showed the rate of inflation in the UK has already topped 2.0%.

Indeed, the Bank of England said at their June policy meeting on Thursday they expect inflation to reach 3.0% over coming months but expect the spike above 2.0% to ultimately be temporary.

Department stores reported sales are now average for the time of year and although clothing stores reported that sales remained poor for the time of year, this was to a much lesser extent than last month.

Growth in internet sales slowed sharply in the year to June, to the weakest pace since April 2020 and well below the long-run average.

"The sector remains a long way from a full recovery. The return of demand is patchy, with inner-city footfall still well down. The outlook is also clouded somewhat by supply pressures, with stocks seen as too low compared with expected sales, as logistical and capacity challenges continue to hamper global activity," says Jones.

Jones says the legacy of lockdowns on retailers’ balance sheets remains. Many will welcome the rent moratorium extension, but more support is needed, starting with holding off on tapering existing business rate reliefs.

The monthly survey - of 117 firms, including 56 retailers - was conducted between 26 May and 16 June.