Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

It's become something of a tradition. British retailers spend the month of July in a winter wonderland, putting on lavish events to showcase their Christmas ranges to consumer magazines with long lead times.

Retail folklore also has it that so-called Christmas in July coincides with the hottest days of the year, and 2017 has been no different. But despite the soaring temperatures melting chocolates and wilting Brussels sprouts, there's been a chill in the air.

The British consumer is on a knife-edge. They're still spending, but they're being more careful.

Christmas 2016 was a pretty decent one -- despite it being the first after last June's Brexit vote. That's because although Britain had chosen to leave the European Union, little else had changed.

This year, higher inflation is feeding through into weaker consumer spending power.

Penny Pinching
With inflation running ahead of wage growth, there's less money left over for the things consumers want to buy
Source: U.K. Office for National Statistics

Of course, Brits will still want to spoil themselves at Christmas. But retailers are betting they'll need to make their money go further. That's already showing up in the products they plan to sell in the run-up to the festive season.

Take Asda Group Ltd., the U.K. arm of Wal-Mart Stores Inc. It's introduced Christmas baubles priced at 75 pence ($0.96). Previously, its cheapest tree trims were one pound.

Asda has also expanded the range of gifts it sells for one pound. Ideal for teenagers buying for their friends, these items, from mini nail polish sets to novelty pineapple sponges, could also appeal to cash-strapped parents searching for stocking fillers.

Brace Yourself
The probability of a Bank of England rate hike by year-end is increasing
Source: Bloomberg

With food prices rising, consumers are once again flocking to the U.K. arms of the German discounters, Aldi Stores Ltd. and Lidl Stiftung & Co.

It's little wonder then that both chains are emphasizing their upmarket offerings, from a 24-month matured Christmas pudding at Lidl to a luxury yule log complete with chocolate robin at Aldi.

Aldi expects to increase the number of products in its Specially Selected premium range by about 20 percent this Christmas, ahead of the expansion in 2016.

But it had a big push on its highest tier -- Specially Selected Exquisite -- last year, increasing the number of food lines from three in 2015 to 15 in 2016. This year the number of Exquisite products will expand by a more modest 18 percent.

Restraint at the very top end looks like a smart move. Aldi's Specially Selected sales are accelerating -- up 45 percent year-on-year at the end of June -- as the middle class trades down. But too big a focus on fancy extras could alienate core discount shoppers.

Empty Pockets
Family spending power fell by the most in four years in May
Source: Asda, Centre for Economic and Business Research
Note: The Asda Income Tracker measures how much families have left to spend each week after paying tax and spending on essential items, such as food, fuel, housing and transport costs.

There's another kink in the candy cane, too. Many staples, like artificial trees, are made in Asia, and therefore paid for in dollars.

Store chains are finding ways to get around the weak pound in order to maintain prices.

Asda has combined with Wal-Mart to jointly buy some products. Waitrose Ltd., meanwhile, printed its Christmas wrapping paper in February and March when there was spare capacity in factories, rather than waiting until August, the busiest time.

Sister company John Lewis Partnership is rehabilitating much-maligned tinsel. It's being made in a factory in Cwmbran in Wales. While factors other than currency were the main drivers of that decision, less exposure to the slump in sterling helps.

Retailers will need to keep up these efforts. Many Christmas buyers are already working on the 2018 festive season.

There's little on the horizon between now and then to lift consumers' mood. And the possibility of higher interest rates could make the outlook that much frostier -- even with the heat from all those twinkly Christmas lights.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net