Santa likely to bring only brief joy to retailers

James Thompson gauges the mood on the high street as Britain's shopkeepers look ahead to their crucial 'golden quarter'

Retailers returning to work yesterday after the bank holiday were buoyed by the news that the GfK NoP consumer confidence index rose for the first time last month since February. But after putting away their buckets and spades, life now gets serious for shopkeepers ahead of the so-called crucial golden quarter, when most retailers make the bulk of their profits.

Retailers have reasons to be both cheerful and fearful about the four months ahead. While consumers are feeling the pinch from rising petrol prices and food inflation, as well as parsimonious wage increases or freezes, trading on the high street has held up better than expected this year. This has been driven by lower mortgage bills, boosted by interest rates at an all-time low, and relatively constrained levels of unemployment.

John Lewis, the high street bellwether, has enjoyed a barnstorming year so far with sales up by 14.5 per cent for the 26 weeks to the end of July. Trading since then has grown in double-digit territory. Andy Street, the managing director of John Lewis, said: "Our current trading is extremely strong."

This year's British Retail Consortium-KPMG, Office of National Statistics and CBI surveys have also largely painted the picture of a recovery in consumer spend, giving retailers grounds for cautious optimism that while it might not be a bumper Christmas, they are unlikely to be crying into their stockings.

That said, John Lewis, which continues to outperform the market, is forecasting more subdued growth of 5 per cent in the second half of the year to the end of January. Mr Street said: "Our expectation for Christmas is pretty solid. We are expecting to continue growing sales but not at this pace [seen so far this year]."

However, across the high street, there is plenty for retailers to be nervous about for trading in the final quarter and year ahead. Whether it is the painful public-sector job cuts, the rise in VAT to 20 per cent on 4 January or stubbornly high inflation, consumers are feeling their wallets lighten. Richard Hyman, the strategic adviser to Deloitte's consumer business practice, said: "There are very few things that are certain in the world but one thing is that consumers will have less money to spend next year than this year."

Before the real squeeze takes hold, however, retailers are cautiously optimistic about the remainder of 2010. Jim McCarthy, the chief executive of the single-price retailer Poundland, said: "People will do what they can up to, and will have a good, Christmas. I think we will see a real battle for customers up to Christmas and intense January sales. We will then get two to three years of really challenging economic times."

Christine Cross, the chief retail adviser to PricewaterhouseCoopers, the accountancy firm, agrees. "Most people are thinking that trade will hold up reasonably well up to Christmas in non-food."

But she cautions: "There is not going to be a phenomenal uplift on last year. One to two per cent sales growth is the best that most can expect."

On a like-for-like basis, she says that most non-food players are planning for a fall of around 1 per cent in sales.

As a result, retailers are keeping a vice-like grip on their stock. Ms Cross says: "Everyone is keeping a really tight control of stock to make sure they don't have an overhang problem." Furthermore, the rise in VAT is likely to provide a short-term jolt to sales of big ticket products, such as electricals and furniture.

Maureen Hinton, the lead analyst at Verdict, said: "The VAT increase after Christmas will help with big-ticket items in the lead-up to Christmas, especially just after in terms of any sales promotions that can be pushed through."

But John Stevenson, the analyst at KBC Peel Hunt, says that any growth in like-for-like sales over the next four months will be "quite weak".

This is partly because retailers are now coming up against strong comparable sales in the same quarter of last year, which benefited from the dire trading two years ago. Mr Stevenson said: "My sense is that things will be relatively subdued and flat for the bulk of the next year."

Mr Hyman also casts doubt on the relative buoyancy of the BRC and ONS data so far this year. He argues that as they only use a sample of retailers, they are inflated by the extra sales gained from the collapse of chains such as Woolworths. "My own view is that retail sales are overstated by about 3 per cent," says Mr Hyman.

While no one is suggesting that the sector is set for a return to the near-Armageddon of late 2008, a cocktail of factors is likely to usher in a tougher trading environment in 2011.

Of the gathering storm clouds, the biggest impact is likely to come from public-sector unemployment and the effect that wage constraint and tax rises will have on disposable income.

In October, the Government is set to unveil swingeing cuts of between 25 per and 40 per cent in departmental budgets, which could not only deal a hammer blow to consumer confidence but significantly lengthen dole queues north of the Watford Gap, where public-sector employment is the greatest. The Office for Budget Responsibility has forecast that about 600,000 jobs are set to be lost in the public sector over the next six years. Ms Hinton says: "Much will really depend on what comes out of the spending review."

Public-sector job losses could widen the gap between the two tiers of retail economies that effectively exist in London and the rest of the UK. Boosted by tourists, retail sales grew by 9.6 per cent in London in July, compared to just 0.5 per cent outside the capital, according to the New West End Company.

Mr Hyman says: "It is going to be tough. The regions and big metropolitan areas [outside London] are going to be hit harder. It is going to be very difficult for the private sector to manufacture new jobs to compensate for the loss of public-sector jobs." Aside from headline-grabbing job cuts, above-target inflation on food and clothing will have a more subtle impact on spending.

Simon Wolfson, the chief executive of Next, has warned that clothing prices may rise by up to 8 per cent next year, driven by higher input costs in the supply chain. Meanwhile, Ms Cross also says that with food inflation set to hit 5 per cent in the autumn, this will leave less money to spend on discretionary purchases.

Despite these pressures, you write off the UK consumer at your peril. While many will have less to spend – Asda's Income Tracker said discretionary income fell by 2.5 per cent in July – they will no doubt pull out the stops to have a good Christmas. The trading environment next year is likely to be tougher, however.

Mr Street said: "We are not in double dip territory. We still see growth next year but softer than this year."

Furthermore, he says the Government can help by clearly signalling the road ahead. "It was uncertainty that froze consumer spending last time [in 2008]. If the Government is clear, decisive and gets on with it, consumer spending will hold up."