Is the UK spending spree finally over?

Spend, spend, spend. That was the motto of consumers in high streets up and down the country last year. But 12 months on the consumer spending boom appears to have fizzled out.

Figures from the British Retail Consortium (BRC) released on August 12 show that retail sales for July were up by 3.8 per cent on a like-for-like basis compared with July 2001. This is 0.2 percentage points below June’s rate and half the peak reached in March. Last month’s figure was significantly below the 6.1 per cent rate of growth for July last year.

BRC director Bill Moyes says: “Consumer confidence remains an issue. People’s uncertainty over their long-term financial security may need to be addressed by Government action. The case for the Bank of England to stimulate demand by a slight reduction in the base rate is appearing stronger.”

Nick Bubb, an analyst at SG Securities, says: “It’s a slowdown not a collapse. Four per cent is broadly fine; if it was two per cent then we would be worried.”

Last month, some retailers tried to explain away poor retail trading figures by citing bad weather, the World Cup and the Golden Jubilee celebrations; such excuses hold less sway for July. Yet some commentators have suggested that the Commonwealth Games reduced retail spending in the capital.

Consumer expenditure in the past few years has been fuelled by a relatively healthy economy, low interest rates and rising property values. But recently consumer confidence has been knocked by a volatile stock market, fears of a potential rise in interest rates in the autumn and international political uncertainty.

Analysts await the release of the latest figures from the Office of National Statistics (ONS) later this week to see how deep-rooted any slowdown maybe. The ONS figures for June showed that year-on-year growth in the value of spending for all retailers fell to 2.8 per cent, from 3.5 per cent in May, making it the lowest annual growth since June 2000, which was 2.7 per cent.

Although some analysts down-graded their forecasts for general retailers when ONS figures were released in June, others claim that a slowdown in consumer spending has been expected for sometime.

Richard Hyman, chairman at retail consultancy Verdict says: “Last year’s retail sales growth of 6.2 per cent was very, very high historically and was clearly unsustainable. We have been saying all along that 2002 would see a gradual slowdown in consumer spending growth.”

Hyman adds that forecasts indicate retail sales growth will be below four per cent for the next year or so and warns that this will increase competition in the sector.

Richard Ratner, an analyst at Seymour Pierce, also claims to have predicted a downturn in retail sales, forecasting a 3.4 per cent growth rate for this year and between 2.8 and three per cent for 2003.

Another indication that consumers are preparing to rein in their spending is a survey of 2,000 people by credit card provider Morgan Stanley. Published earlier this month, it revealed that UK consumers intend to spend an average of £927 on their credit cards in the next three months, a 14 per cent drop from the previous quarter.

Those retailers anticipating sales growth rates of the same levels of 2001 may now have to readjust their business plans. Mintel Retail Intelligence senior analyst Richard Perks says: ” If the going gets tough, consumers trade down and retailers change their merchandising mix.” But he warns against retailers trying to reposition themselves: “You tend to lose your core market before gaining the new one.”

Retailers such as Marks & Spencer have improved management of their supply chain, making it more flexible by reducing lead times, while others have been increasing margins. Analysts are agreed that such moves should stand retailers in good stead.

As for marketing spend, Ratner says: “Most people tone it down if they think that the business is not there as it’s a controllable overhead.”

Another city analyst, Matthew McEachran at Investec Securities says: “Probably the last thing you want to do is cut back on marketing. A number of retailers are saying that their budgets have not changed, they’re just ensuring that they’re getting more exposure for their money.”

Hyman agrees: “My view is that marketing spend is an absolute essential, it’s not a ‘nice to have’.” However he adds there is little point having a large marketing budget without having “a compelling message to communicate”.

That message should address the fact that competition for retailers also comes from outside the sector. Hyman says: “Retailing is much more competitive than before and consumers have got much more to spend their money on than just what retailers provide.”

But, if consumer spending on the high street continues to slow down then there are some retail categories that are better placed to survive than others.

One industry insider says: “Inevitably retail will suffer, but grocery and DIY tend to be pretty recession-resistant. Expenditure becomes tied to the in-home environment rather than out of home.” For instance, consumers are likely to rent a video and buy a bottle of wine instead of going to the cinema, or to decorate their homes rather than moving house.

For many analysts the back-to-school push and the autumn will provide an indicator of the true state of consumer spending.

Bubb says: “I think that the biggest worry for the autumn had been the fear that interest rates were going to rise – now that is not going to happen.”

It remains to be seen whether there will be a major slowdown in consumer spending and whether growth rates will dip to below the worrying level of two per cent as happened in 1999. However, retailers have been here before and marketing departments will be preparing themselves to keep consumers spending.