There is no doubt that 2005 has been a dreadful year on the high street and as the festive season approaches, most retailers are extremely cautious about their prospects. However, while the economic news has been highly discouraging for those retailers awaiting an upturn in their fortunes, according to retail specialists Verdict there may soon be light at the end of the tunnel ...
While there are now reasons for consumer confidence to improve, a retail recovery will not materialize until well into next year and the outlook for Christmas remains highly challenging. Verdict predicts that the value of retail sales in the final quarter of the 2005 will be 2.1% higher than a year ago. However, while this means the quarter will have the strongest sales growth of the year, it will nonetheless be weaker than any other Christmas quarter since monthly records began 20 years ago.
2005: a terrible year for retail
Several factors explain the sudden slump in consumer demand in 2005. Foremost among them is a squeeze on disposable income with consumers hit by higher petrol costs and home energy and council tax bills. At the same time a sharp deterioration in the housing market has hit consumer confidence. With house prices flat, there is little incentive for home owners to invest in home improvement, a major driver of retail sales. Allied to this has been a steep drop in the number of people moving home. The act of moving home creates huge demand for retailers for home related goods, particularly furniture, household appliances and DIY products, so with fewer people moving home many household goods retailers have been adversely affected.
Consumers can now afford to loosen their purse strings
As we enter the final quarter of the year, there are both signs that consumers can afford to loosen their purse strings and evidence that they are beginning to do so. August's interest rate cut the first for two years has now reduced mortgage and credit card repayments for millions of households and should enable consumers to spend more at Christmas. Even prior to this, mortgage equity withdrawal, a key source of finance for higher ticket items, had increased in the second quarter of this year for the first time in 24 months. The stockmarket has also performed strongly this year the FTSE-100 is up 20% on a year ago increasing the sense of financial security of many middle class shoppers. With shares rising there will be a good round of City bonuses this year the best since the dotcom crash of 2001 and this should translate into stronger demand for luxury items. Finally, while the fall in unemployment has levelled off, the number of people in employment continues to hit record highs.
No upturn this side of Christmas
Consumers should begin to spend a little more freely this Christmas, but their shopping habits are not determined by financial factors alone. Consumers need to feel optimistic to spend more, though with a heightened risk of terrorism some shoppers will prefer to stay at home and spend less time shopping. This is particularly important in London with the fear of terrorism deterring suburban shoppers from visiting the West End and overseas shoppers from visiting the capital altogether.
Even if their financial circumstances are beginning to improve, many shoppers are still cautious about the future. There is little prospect of a pre-Christmas interest rate cut with inflation running at 2.5%, well above the Bank of England's 2.0% target, rates could stay on hold for many months. In addition consumers are wary of possible tax rises. The well publicized hole in the chancellor's finances has been deepened by the drop off in economic growth and this increases the likelihood of tax rises next year.
Retailers' margins are squeezed by operating cost increases
The tried and tested method of combating weak demand is to cut prices, but retailers' scope to do this is greatly limited by high operating cost inflation. This year numerous factors have raised retailers' cost base. In October, the national minimum wage breached the £5 barrier, causing inflation throughout retailers' wage scales. And, like households, retailers have been hit by the higher price of fuel, which has raised store operation and logistics costs. Finally, a rating revaluation in April resulted in major rates rises for many stores which had already experienced increases in rent. Collectively these cost increases have squeezed margins and pushed weaker retailers towards bankruptcy.
Carefully executed Christmas launches are essential
More than ever before, retailers need a perfectly timed launch and rollout of their festive ranges to maximize profits. For some UK retailers Woolworths and Clinton Cards are prime examples Christmas is crucial to annual profitability. Overestimating the strength of Christmas demand can be an expensive mistake, forcing retailers to discount merchandise heavily in the run-up to Christmas. The practice has become so common that consumers now expect it to happen and delay their shopping to take advantage of last minute bargains. To regain the initiative, retailers must become much better at selling and persuading shoppers to buy early, by enhancing staff selling skills and using footfall driving initiatives well ahead of Christmas.
Despite retailer attempts to pull forward Christmas spending, Verdict still expects retail sales growth to be weighted towards December. October will be the slowest month of the quarter with growth of 1.3% and this will rise to 2.4% in November and further to 2.5% in December. Sales for the whole quarter will be £72.6bn.
Clothing & Footwear specialists
Clothing & Footwear retailers should experience strong Christmas sales. This year, women's winter fashions are very feminine yet highly wearable giving them appeal across the age spectrum. Distinctive styles, such as the Russian look, contrast with last Summer's Boho and should prove popular. Tailoring also features strongly in this year's ranges, providing retailers with higher price points and thus potential for improved sales. In footwear, the continuing fashion for boots should support sales growth.
DIY & Gardening specialists
DIY & Gardening retailers will focus heavily on the festive opportunity this Christmas but this will not make up for a dismal year. Verdict expects leading mutliples to use flyer campaigns to encourage shoppers to visit stores to buy Christmas trees and once there, tempt shoppers to buy a broader range of Christmas related merchandise. With the broadest range of homewares among DIY multiples, Homebase stands to benefit most in this regard.
Electricals retailers
Electricals will be among the most popular Christmas presents this year with many tempting new product launches with broad consumer appeal. The iPod Nano and MP3 players are certain to be popular choices now that digital downloads have gained mass market appeal a shift accelerated by HMV and Virgin's re-launch of their download services in September. Among higher ticket items, flat panel TVs should prove popular, with demand boosted by much lower price points than a year ago and the launch of long awaited high definition models.
Grocers
Grocers were the clear winners at Christmas last year and Verdict expects them to outperform again in 2005. Grocers' convenience and reputation for value makes them ideal places for shoppers to shop quickly and cheaply and Verdict expects all the big four grocers to grow sales this year. This year Asda and Tesco's new standalone non-food stores have potential to broaden their share of Christmas sales and strengthen their credentials in gifting categories. Verdict also predicts a better Christmas for Sainsbury which should build on recent progress and win back customers with improved availability and lower prices. After a disappointing year Asda will hope to make up some of the ground it has lost. Expect strong ad campaigns in the fight for footfall.
Health & Beauty specialists
Health & Beauty is set to be the star performing category this Christmas. This year there is a better choice of premium skincare products and of gifting packs. Perfumes will also prove popular with generous discounts available on popular brands. Retailers that specialise in perfume such as the Perfume Shop and the Fragrance Shop are set to perform strongly. The Body Shop is also set for a revival following the repositioning of its brand and the development of more contemporary stores.
Music, Video & Books specialists
Music & video specialists have suffered a difficult year but a strong release schedule should lead to solid Christmas sales. Among them, new releases from Robbie Williams and Madonna are certain to be vying for the best selling Christmas album. On DVD, science fiction titles such as Star Wars Episode 3 and Batman Begins and TV series such as Desperate Housewives should prove popular. Having failed to capitalise fully from the Summer launch of Harry Potter as supermarkets and other non-specialist retailers undercut them, book specialists are counting on a strong Christmas. Though a wide variety of fiction and autobiographies present sales opportunities to specialists, Verdict still expects them to lose ground to grocers on bestselling titles.
Toys & Games retailers
No retail sector is more seasonal than toys and this year Verdict expects a wide selection of toys to satisfy all tastes. Among frontrunners this year are new versions of old favourites such as Thomas the tank engine and Barbie. Last year's best seller Robosapien has been followed up with the Roporaptor, a multifacted dinosaur toy. Other strong sellers of Christmas past to receive a relaunch this year include Furby, Bratz and Baby Annabel. Retailers of games consoles are set for much higher sales this year after a disappointing 2004 when they were let down by supply shortages of Sony's PS2. This year the launches of the X Box 360 and the Playstation PSP provide them with potential for substantial sales increases.
Online retailers
Following adverse publicity last year surrounding late deliveries last year, online retailers know they have to go the extra mile to win back the trust of consumers this year. Verdict believes that significant investments in fulfillment infrastructure will ensure that last year's problems are not repeated. With some shoppers nervous of visiting town centres and a huge rise in the number of households with broadband access, online retailers have everything to play for. In addition, without the overheads of a store network, online retailers can compete hard on price, and this should prove attractive to cost conscious shoppers. Overall Verdict expects the value of goods bought online in the fourth quarter to rise by 23.0% to £2.5bn.