This is the time of year when the gloom merchants begin to feel overwhelmed by a wave of perennial pessimism
This time around, there are even more reasons than usual for them to depress us with their “worst Christmas on record” forecasts.
Following wave after wave of interest-rate increases and a US-inspired credit squeeze, which led to the chaos around Northern Rock, the consumer could be forgiven for thinking that this year it might be a good idea to cancel Christmas. Nevertheless, will they?
However sophisticated a model one might construct, the most reliable guide to what is going to happen in the future is always the past. It might sound rather basic, but history remains by far the best indicator, both long and short term. After 25 years of studying the numbers, I can tell you that retail spending at Christmas is almost always closely in line with the patterns established in the preceding 11 months. Similarly, the statistics over the past 25 years show a remarkable level of consistency. December’s share of the year’s retail-spending cake over this period varies little.
The extremes in statistical variation that have emerged over time have tended, not surprisingly, to coincide with periods of economic recession. We are certainly not in such a period now. Nevertheless, there is no doubt that the consumer economy has been influenced by all the negative things mentioned. Caution prevails and purse strings have been tightened.
This has been the proverbial year of two halves. The first six months of the calendar year were relatively buoyant, but as the impact of successive interest-rate rises has percolated through to consumers, demand has softened. I believe the full impact has yet to be felt, particularly among those householders with fixed-rate mortgages.
Further fallout is emerging in the shape of City job losses. While this may involve a relatively small percentage of the workforce, their spending power does have an influence on the spending pot, because of the large sums involved.
However, even if we set this significant negative sentiment against the overall consumer economic fundamentals, such as wage rates and employment levels, there is no chance that Christmas will be cancelled. Trading will be tough and spending growth year on year will be low, but we will spend more this Christmas than we did last.
The winners will be outweighed by the losers, but it must be remembered that all the players are not the same size. I believe that the winners this year will include retailers like Tesco, Marks & Spencer, John Lewis, Asda, Sainsbury’s and Waitrose. A short list, but these companies combined account for some 30% of total retail sales.
Another group of players who should post decent trading numbers will be the luxury sector. While the City fallout might be bad news for the yacht, private jet and top-of-the-range car manufacturers, there will still be plenty of appetite – and the money to satisfy it – for luxury.
It is not too early to look beyond Christmas, and to begin considering 2008. Most retailers have already committed to ranges and price positions. It will be a tougher year than this one. With the pressure of interest rate rises still to affect important numbers of consumers, demand will be under further pressure, though still in positive territory. It will need to be.
I calculate that retailers’ costs will be going up by some £11bn next year, around 4%. Sales growth will lag some way behind, so the sector’s profit margins will be trending down, across pretty much every sector.
A very challenging period for retailers then, but a great time to be a customer. You will never have felt so wanted and powerful. But only those retailers able to understand the customer’s viewpoint and reflect it in their propositions, will flourish.
The industry needs a shake out. There are too many mouths to feed. I have heard many in the corporate finance world say that deals in retail are drying up and it is now a sector to avoid. I disagree. While they will be more challenging to execute successfully, retail would benefit from some consolidation and lots of retail companies need either to embrace change or have change thrust upon them. Waiting until a business is on its knees is bad for everyone.
This is a trading climate full of opportunities for retailers, consumers and the corporate finance world. Merry Christmas!
Richard Hyman is managing director of Verdict Consulting