The golden quarter for retailers has now begun, but consumer confidence has rarely been so difficult to gauge.

Charlotte Dennis-Jones reports on a nail-biting countdown to Christmas as our exclusive poll reveals consumer attitudes

Retailers could be forgiven for displaying a distinct lack of Christmas cheer. A never-ending stream of glaring headlines about house prices teetering on the brink of collapse, interest rate rises and the near-demise of Northern Rock are hardly an incentive for consumers to flash their festive cash.

The British Retail Consortium says that retail sales during last December’s five-week month were£6.67 billion. Will this year’s exceed that? It’s a guessing game, but everyone is understandably on tenterhooks – even more so than last year, when Seymour Pierce’s Richard Ratner predicted that 2006 would be the worst for 25 years.

Most analysts agree that, although Christmas probably won’t be dismal, it won’t be particularly good either. General forecasts suggest that Christmas 2007 could be marginally worse for retailers and this is reflected in this week’s ICM Poll.

Nearly a quarter of consumers polled said they were likely to spend less than last year and 53 per cent thought they would spend the same. But a stronger indicator of Yuletide takings will be determined by consumer spending over the next month – and there are aspects of the ICM Poll from which retailers can take solace.

Consultancy Verdict believes there will be another game of chicken this year between retailers and shoppers: customers will want to hold out as long as possible for pre-Christmas discounting and retailers will want to sell at higher prices for as long as possible. The question is: who will cave in first? The fact that nearly a third of those polled say they plan to do their shopping by the end of November may help ease the situation, although more than half will wait until December.

In terms of consumer confidence, perhaps things are not as bad as media coverage suggests. Nearly 70 per cent of those surveyed felt their family is financially secure. But does this guarantee they will be willing to splurge over Christmas?

PricewaterhouseCoopers retail leader for transaction services Mark Hudson is fairly pessimistic. He believes that Christmas trading will be slightly down because of availability of cash and consumer concern. “It’s not a crisis, but there is more uncertainty about, which will mean that people have less money to play with. At the moment, house prices are okay, inflation is okay, unemployment is okay and interest rates are okay. These four crucial factors are in good shape, but there will still be intrinsic nervousness in people’s minds,” he says.

“You don’t have the papers talking about crises without it getting to people. It’s got to have an impact and that’s why I think spending will be slightly down.”

Carry on regardless?


Others believe that the fact consumers have shown little sign of reining in their spending to date means they may not change their habits much before Christmas. Verdict consulting director Neil Saunders says: “It will be more muted than last year, but it’s not going to be a bloodbath.” The reason, he adds, is that despite the credit crunch and widespread concerns about the state of consumers’ finances, people are continuing to spend at present.

“If you look at consumer spending figures, they are holding up really well,” he says. “A lot of concerns in the economy are focusing on housing prices, but a lot of commentators don’t point out that these are changes in wealth on paper. It doesn’t necessarily mean you have less to spend. Interest rates are having an effect, but a lot of people are on fixed rates. About 100,000 people a month are coming off fixed rates so, overall, there isn’t that massive hit and shock.”

UK economist Vicky Redwood of Capital Economics agrees. “They’re not in a particularly good position to splash out, but, that said, it’s not been looking good for a few months and that’s not stopped them. This has been helped by retailers’ willingness to cut their prices aggressively,” she says.

Spending figures released this month revealed that retail sales volumes rose 1.7 per cent in the third quarter – the highest growth since the second quarter of 2006 and driven by non-food sales. Head of Grant Thornton’s retail services team David Bush says that the strong results have shown just how resilient UK retail has been. And, given that the figures are up against strong comparative sales in the same period, he says the figures are “extraordinary”.

Redwood admits that shoppers’ continual spending has been surprising, but says it reflects the fact that the housing market has remained buoyant and that “consumers are running down their savings to exceptionally low levels”, she says. Nevertheless, she warns, while at the moment everything is on track for a repeat of 2006, “there is a risk that it will be much weaker”.

Credit Suisse analyst Tony Shiret says that, while consumers are not showing many signs of slowing down, that does not mean they won’t. “If we’re talking about retail profitability, the inventory position running in will depend on how much is sold in the next month,” he says. “Generally, Christmas always goes from between plus 2 [per cent growth] and plus 4 – and I think it will be more at the plus 2 level. The general pattern will be one of consumers trading down.”

How each retailer fares will also depend, to a certain extent, on which sector they fall into. All agree that e-commerce figures will climb as they have done year on year. Shiret also expects fashion retailers to do better than last year, because they are unlikely to start the festive season with a disastrous few weeks of initial winter trading behind them. Until December last year, the warm weather affected sales drastically.

However, one sector that nearly everyone agrees will have a particularly tough time is electricals, because of shoppers’ reluctance to buy big-ticket items. John Lewis director of retail operations Patrick Lewis says the fact that the sale of large white goods slowed when they were “bouncing along with strong growth” is a good indication of consumer nervousness.

But Currys UK and Ireland managing director Peter Keenan says he is “cautiously optimistic” about peak trading. “Cautious because of the uncertain consumer outlook right now; optimistic because of the exciting product pipeline,” he explains. The latter, he adds, will compensate for the difficult financial climate. “We’re excited about high-definition TVs and new-generation iPods, MP3 players, laptops, digital SLR cameras, games consoles and satellite navigation equipment,” he says.

He is also confident that a strong multichannel strategy will stand Currys in good stead. “This is going to be a Christmas for multichannel retailers. Online, on the phone, in store and through Reserve and Collect, we’re going to be everywhere customers want us,” he says.

Lewis says that John Lewis is confident it will be busy, but will have to work harder to ensure a bumper Christmas than it had anticipated six months ago. “We are still seeing pretty good increases compared to this time last year, although obviously different merchandise will take off at different times,” he says.

The retailer is focusing on three areas to ensure customers are satisfied and keep flocking through the doors: availability, presentation of merchandise and service. “We need to make sure we have exactly the right number of partners in the right place, because trade changes from week to week,” says Lewis.

Harvey Nichols group chief executive Joseph Wan is even more optimistic. He says his stores have not experienced any let-up in consumer spending so far. “Our trading to date has exceeded our budget and we have not seen any evidence to suggest a slowdown,” he says. “We would therefore expect a good trading period at Christmas, showing growth on last year.”

Although consumer confidence has taken a battering, Saunders still believes this won’t have filtered through to spending habits by Christmas. But, of course, a retailer’s Christmas calendar continues into January. Wan is nonetheless convinced that Harvey Nichols will experience buoyant trading into the new year. “We expect the January Sales to show growth over last year’s. Overall, we expect a better year this year,” he says.

When the lights go out


However, most agree that this is when things will start to get tough, whatever sector you’re in. As Lewis says: “My own bet is that people will still be generous, but it’s likely to be slower after Christmas.”

Saunders says: “Even if cash is strapped, people want to have a good time at Christmas, but in January, they will have costs to account for and this is when things will really start getting tough.”

Redwood backs this up. “It’s possible that shoppers might remain resilient for a couple more months and then, after Christmas, it’s going to stop, because confidence will be dented,” she says.

And again, the situation continues to look bleak for the electricals sector. “That’s where a lot of the problems will be,” warns Shiret.

There is a distinct nervousness in the air about Christmas this year. Economic stability is balancing precariously on a knife edge and, if consumers are not anxious, they probably should be.

Some retailers remain resolutely positive about impending festive trading, but one has to question the grounds for such optimism. Fewer people appear happy to blow their cash this year; whether that manifests itself in December’s or January’s trading figures, it will have an impact.

If Christmas ends up being better than expected, brace yourselves for a tricky start to 2008.