Dixons will reveal its interim results for the six months to the end of November this morning (Wednesday). The figures are ex-pected to show that the electrical retailer increased its profits by as much as 76m, fuelled in part by consumers spending windfalls from building society payouts. However, analysts believe that there will be a rider – Dixons had a tough Christmas period and as such will be looking at 1998 with some trepidation.

The company refused to comment because of stock exchange rules but one analyst says: “This will be a tough year for Dixons. The past two weeks will have made up for some of it but not sufficiently to prevent us downgrading our full-year profit forecast from 240m to 230m and it may have to go lower.” According to economists, and some retail analysts, it is not alone.

The first wave of Christmas trading statements over the past ten days created a positive stir. Burtons revealed a 7.6 per cent hike in sales in the 18 weeks to January 3; sports retailer JJB Sports reported that sales increased ten per cent in the six weeks to December 28. Kingfisher announced a 12.2 per cent sales hike in the nine weeks to January 3, while the British Retail Consortium’s December sales monitor showed a surge in late Christmas shopping.

But this was against a background of early December sales gloom when retailers were forced to discount to get rid of excess stock. Canny shoppers are leaving Christmas shopping later and later to take advantage of last-minute bargains, a trend which has long-term implications for future retail marketing. November sales were also sluggish.

“Retailers got it wrong”, says NatWest Securities UK economist Geoffrey Dicks. “They had exaggerated expectations and then practically had to give stock away to shift it.

“Christmas and new year sales make figures appear robust but this should not be mistaken for Eighties-style rampant consumerism. Retailers had exaggerated expectations .”

In short, despite an upturn in the last few days before Christmas, boosted by price cuts and buoyant January sales, there are signs that the retail sector – from electricals to fashion and furnishings – is heading for a difficult year.

With interest rates having risen five times since May and headline inflation standing at 3.7 per cent, there is little confidence in the retail sector. Added to this, a combination of more interest rate rises as early as February, a reduction in tax breaks on mortgage relief, more indirect taxation and fear of a tough March budget is expected to depress consumer spending further.

Iain McDonald, retail analyst at stock broker Charterhouse Tilney, says: “It (Christmas) has not been a disaster, but neither has it been as good as retailers had expected. Clothing retailers bought heavily expecting a bumper period. Some were forced to mark down prices before Christmas. Others held out, but their January sales have been hit because everybody else has been on sale.”

Verdict Research analyst Clive Vaughan is upbeat but predicts that the retail sector will quieten in the next 12 months because of interest rate rises. He believes retailers will have to accept a slower growth in sales although growth of stronger brands will continue at an above-average rate.

“Consumer spending is up on last year, but is still not up to retailers’ expectations,” says Vaughan. “They were anticipating a record year, but are down on their budgets.” He predicts household goods will be hardest hit after an unusually good year.

The level of pre-Christmas retailer expectation is blamed partly on the distorting effects of between 30bn and 39bn of windfall payments from building society demutualisations. Windfall recipients spent heavily on electricals and home furnishings in the summer and retailers made the assumption that this would pick up again at Christmas. But more of this free cash was saved or used to pay off debts than was expected.

The electricals sector stands little chance of matching year-on-year sales volumes without the benefit of new windfall payments in 1998. Retail analysts predict the advent of digital television will also take its toll as consumers delay buying electrical goods until the end of the year, when it will be more apparent what will happen with this technology.

By then the Government’s policy will also be clearer. It has pledged not to raise income tax during its first term in parliament but economists expect more indirect taxation. Council tax is likely to increase above inflation and new taxes on saving schemes will dampen the “feelgood factor”.

“If there is a draconian budget and more interest rate rises, people will tighten their belts,” explains a retail analyst.

The Bank of England monetary policy committee held off from a base rate rise last week, but will consider the effects of consumer spending and wage inflation before reaching a decision next month. City analysts expect another quarter or half-point rate rise.

Strong branding will become even more important, especially in the clothing sector. Clothing retailers have blamed mild weather for a drop in sales over winter but analysts are concerned about the year ahead.

Burton, owner of Top Shop and Dorothy Perkins, claims like-for-like sales for the past four months are eight per cent higher than for the same period in 1996. Debenhams, which is soon to be floated, denies rumours that it was forced to start its sale early.

“It (Debenhams) may not have gone on full sale but there were a lot of red stickers indicating that things aren’t going according to plan. Multiples like Burtons are coming from a low base so it is easier for them to deliver a better-looking percentage increase,” says one retail analyst.

If people have less money to spend they will tend to buy fewer quality purchases or go for rock-bottom prices. Analysts predict a polarisation between strong and weak brands. Next, Marks & Spencer and Alexon should weather the storm while smaller independents lose out.

Retailers will also be forced to improve customer service. Analysts predict that retailers will have to develop more loyalty mechanisms or make better use of loyalty card schemes to gain a competitive edge.

While some stores may have over-ordered stocks for Christmas, food retailers have been commended for buying in the right amount of goods. One food retail analyst says: “Food retailers handled the situation better than last year in stock control, and the margins seem to have been strong.”

Major supermarket multiples will continue to build market share at the cost of the independents. But grocery shopping as a whole should not suffer too badly.

“When the economy is buoyant people spend more on convenience foods and luxury goods. With a downturn they go back to basics but it should not affect supermarkets too much,” says Taylor Nelson AGB client services director Allan Breese.

The British Retail Consortium predicts, or “hopes”, for “steady and sustainable growth” for the sector in the next 12 months. But it accepts that interest rate, taxation and mortgage relief changes will hit retailers.

The theory is that shoppers are having a final fling in the pre- and post-Christmas sales. If that is true, retailers will have to fight even harder to retain market share.


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