Christmas spending up, but higher costs spell waker margins for retailers
A new forecast published this week by Verdict Research predicts that retailers can look forward to better Christmas uplifts than a year ago.
A combination of improved consumer confidence and weak comparatives are set to deliver higher sales growth despite a likely hike in interest rates in November. But the Christmas cheer comes with a sting in its tail: sharp rises in costs and a continuing need to compete aggressively on price mean that retailers margins will be further squeezed.
Overall Verdict expects retail sales for the final quarter of the year to amount to £74.4bn, a 3.3% increase on 2005. This growth rate is significantly stronger than the 1.9% uplift experienced a year ago, with stronger consumer confidence, recent falls in petrol prices and a strong round of City bonuses all contributing.
But a need to cover cost inflation rather than shoppers loosening their purse strings will be the main factor producing the higher growth. Last year prices fell by 1.3% but this year a range of domestic cost increases including higher wages, energy and logistics costs together with higher factory gate prices in China have forced retailers to pass on some their cost increases to customers and overall prices will be neutral on last year. This means that for the first time in six years, shop prices will not fall this Christmas. While retailers will continue to use targeted promotions to stimulate spend from price sensitive consumers on popular lines in the run up to Christmas, these will be balanced by price increases on less high profile lines.
According to Nick Gladding, author of the forecast, Retailers are fearful of a weak Christmas and want to avoid another round of excessive sales post Christmas. For many retailers margin protection has become more important than driving sales through unprofitable promotions in the festive season.
Breaking the forecast down by month, Verdict estimates growth of 3.6% in October, a slight drop compared with increases recorded in August and September as a result of the unseasonably mild weather delaying sales of winter clothing and suppressing consumer enthusiasm for gift purchases. Sales growth should then pick up pace to 3.8% in November as colder weather stimulates spending on winter clothing and puts shoppers in a gift buying mindset. In December Verdict expects growth to be weaker because of a demanding comparative last year December recorded the strongest monthly growth rate of 2005. The forecast assumes that the Bank of England will raise the base rate by a quarter point in November but that this will have little impact on consumer spending, since higher mortgage payments will not come into force until December and also because shoppers normally ring fence Christmas expenditure and delay any cutbacks in expenditure until the new year.
source: www.theretailbulletin.co.uk
