Retail's chance to shine again

After a difficult Christmas in 2008, retailers are more optimistic this year, reports James Thompson

Tinsel and baubles have been on display for weeks, but the festive shopping season in London truly begins today when Jim Carrey, the Hollywood actor, turns on the Christmas lights ahead of the world premiere of A Christmas Carol.

But Carrey is not the only reason why UK retailers may be a feeling a bit more chipper with 50 shopping days to go to Christmas, compared to this time last year.

After the investment bank Lehman Brothers collapsed last September, consumer confidence fell off the edge of a cliff, retail sales dived and a series of retailers from Woolworths to Zavvi collapsed in the run up to Christmas.

The British Retail Consortium said that UK like-for-like sales tumbled by 3.3 per cent in December 2008 – making it the worst Christmas since its records began 14 years ago.

No doubt there are still clouds on the horizon. Retailers fear the rise in VAT back up to 17.5 per cent will hit spending in January and are anxious about a long and slow recovery, held back by tax rises and cuts in public spending after the next general election. More struggling retailers are also expected to follow First Quench – the owner of Threshers which collapsed last week – into administration over the coming months.

But overall, the industry is in better shape than it was this time last year and most economic indicators are heading in the right direction. Yesterday, the price comparison website Kelkoo and the Centre for Retail Research forecast that Christmas sales will hit £44.7bn this year, a 1.9 per cent improvement on last year's £43.9bn. Online spending will also reach a record £8.9bn, representing 20p in every £1.

Nat Wakely, the director of selling operations at John Lewis, the high-street bellwether which has posted six consecutive weeks of growing sales, said: "At John Lewis we are feeling quite optimistic about Christmas." He added: "Looking at year-on-year comparisons, we are expecting to continue to see good growth during November, however December was a strong month last year so the increases are likely to be more modest."

Overall, most consumers feel more confident about their personal finances, buoyed by lower mortgages, petrol and utility bills, as well as rising house prices and a slowdown in the rate of unemployment.

Robert Clark, the senior partner at Retail Knowledge Bank, said: "I think confidence is arguably the most important factor because most people have remained employed and have more disposable income. If they are saving more and paying off their credit cards, they will forget about it for a month and then come back to it after Christmas."

Yesterday, the BRC said its latest Consumer Confidence Index was up by 10 points to 75 from an all-time low of 65 in April.

Angus Thirlwell, the chief executive and co-founder of Hotel Chocolat, the 40-store upmarket chocolatier which opened its first international store in Boston, America, last month, said: "This year, there is not that level of fear and people are just getting on with it. From our point of view, we are feeling quite bullish about Christmas." He added: "There is a sentiment in the wider economy that we are sick and tired of being depressed."

In fact, retail sales have held up remarkably well this year and profits at most large retailers have been heading in the right direction. Next, the fashion retailer which tomorrow posts third-quarter sales, has upgraded its profit forecasts three times since May. Kate Calvert, the analyst at Shore Capital, believes it is "possible" that Next may post underlying sales growth in Q3, although the retailer has guided for second-half like-for-like sales – which strip out the impact of new space – being down by between 3.5 per cent to 6.5 per cent.

Some retailers have also been boosted by the exit of rivals from the market over the past 12 months. In particular, toy retailers have enjoyed a robust year of trading after Woolworths – which accounted for about 14 per cent of the market's sales by value – vanished from the high street in January. Gary Grant, the chairman of the Toy Retailers Association, said: "Toy retailers have had a good year and are therefore optimistic about the next eight weeks."

Retailers could also get a boost on sales of big-ticket items ahead of VAT going back up to 17.5 per cent on 1 January. While the change is unlikely to affect low-level transactions, retailers of furniture, kitchens and big-ticket electricals are certain to benefit. Mr Clark said: "I think furniture is the one that will get a boost from the change in VAT. But I think it will have no impact whatsoever on mainstream spending."

Of course, the risk is that after Christmas and the VAT deadline have passed UK shoppers will run for cover. While January could well be a tough month, Mr Clark says: "Many retailers now have much better control of their stock than they have in the past. There will be the odd loser but generally the January sales, mainly in fashion, are less exciting than they were."

Despite these views, the UK economy remained in recession in the third quarter, with output falling by 0.4 per cent. And insolvency practitioners and restructuring experts expect to be busy this Christmas.

Phil Duffy, a partner at the restructuring specialist MCR, says: "I imagine there will be more retail failures before Christmas. I think it is going to be fairly difficult." He explains that retailers typically face a VAT bill and payment to overseas suppliers between now and early December.

While these and more deep-rooted financial problems, such as debt and falling profitability, will send some retailers to an early grave, most are secretly expecting Christmas to be better than last year and few commentators predict a disaster.

Mr Clark says: "It is never as bad as the doom and gloom merchants say in the decades I have come up against them – and that is what happened last year. Invariably, they are nearly always wrong and Christmas never falls off a cliff. People always find cash and those in work have access to more money this year."

M&S: Penny bazaars make a comeback

Marks & Spencer is to get a pre-Christmas footfall boost by launching in-store penny bazaars on 13 November, following the events held in May to celebrate its 125th birthday.

The high-street bellwether, which posts its first-half results tomorrow, will for one-day only offer a range of products including knickers, stocking fillers and puzzles for just 1p.

Sir Stuart Rose, the M&S chairman, said: "We received unprecedented demand for the products and so much positive feedback that we've decided to do it all again for Christmas. We've got millions of products going for a penny but we're expecting a big turn-out – so make sure you get down to M&S as soon as you can on Friday 13th November."

The penny bazaars will run in more than 350 stores and its flagship Marble Arch store in London. Customers will be able to choose up to five products each. While M&S said every penny goes to local charities chosen by the stores, the retailer will benefit from increased footfall.

The high-street giant is expected to deliver consensus first half-year pre-tax profits of £285m, down from an adjusted profit figure of £297.8 for the same period last year. But better-than-expected quarterly figures means it could pay staff their first bonus for three years in 2010 from a pot of up to £60m. The retailers is expected to say it already has a pot of £30m, but any payment to staff could be hit by dire Christmas trading.