With uncertainty rife as to retail’s prospects, who is right when it comes to the outlook - the doom-mongering bears or the optimistic bulls? Retail Week puts the arguments for and against

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Lisa Berwin speaks up for the bulls

As the countdown to Christmas prepares to kick off, retailers are starting to worry in the light of evidence that trading is cooling off, as highlighted this month in cautious updates from Carpetright and Next.

But the fears may be overdone. Yes, from about the time of the general election consumer confidence has been affected by the uncertainty that accompanied the new Government, but many retailers’ sales - and overall total sales - have still been growing. The hot early summer helped lift food sales and some clothing.

Retailers have experienced far worse conditions. When Lehman Brothers collapsed and Woolworths closed an atmosphere of doom descended over retailers, but most are still here. Good retailers have shown how canny they can be in cost control and increasing market share.

Although the British Retail Consortium (BRC) reported consumer confidence was weak in July, the organisation pointed out sentiment was “better than last year”.

Oriel Securities analyst Jonathan Pritchard said response to the negative noises from Next and Carpetright was “overdone”.

He says: “While we are not rampantly bullish on the consumer’s prospects, shares are now discounting bad news ahead, which we don’t expect to occur.” He adds: “Next has a record of under promising and over-delivering.”

Although Next boss Simon Wolfson said conditions were sluggish he also emphasised that he was “not talking about demand falling off a cliff”. Wolfson and most other retail leaders have not so far signed up to the idea the country is heading for a double-dip recession.

Christine Cross, chief retail adviser to PricewaterhouseCoopers, says that she expects autumn to be good for retailers, particularly in clothing. She explains: “Because spend has been relatively restrained over the last few years people who still have jobs will spend money. Womenswear will be particularly good in the lead-up to Christmas.”

An eye on prices

Price rises are inevitable because of so many cost pressures across a variety of sectors, particularly fashion. Clothing prices could rise as much as 8%, but even if they do, that does not automatically mean customers will be scared off.

Analysts expect most retailers to put up prices at the same time and there will be some products on which the rises will be easier to implement - such as higher fashion or embellished items.

Numis retail analyst Andrew Wade says: “Will people notice 20p on a pair of jeans? Probably not, but rises will have to be implemented carefully.”

And the last few years have shown that retailers are highly accomplished at delivering efficiencies that can mitigate cost rises to shoppers.

Last week Arcadia boss Sir Philip Green was appointed as a Government adviser to help the coalition look at public sector costs and identify savings, a reflection that retailers know how to run their operations well.

Many feared rises have simply not come through yet. Shop Price Inflation is at its lowest level since November 2009 and was just 1.5% in July. Some food price inflation is expected but that will be seen by some as good news, flattering the grocers’ sales.

There was undoubtedly anxiety leading up to the election and then the emergency Budget, but a clearer idea is emerging of what sort of measures the will be taken to help plug the deficit.

The rise in VAT had seemed inevitable before the election and retailers have time to prepare for the change before it is imposed in the new year. While unwelcome, many retailers feel the rise is a necessary evil that will help secure longer-term economic growth.

And the knowledge that VAT is going up in the new year may well prompt consumers to make bigger purchases and take advantage of the current lower rate.

People with mortgages are benefiting from low interest rates, which are not expected to go up imminently. Many of those in work are relatively well off and may be tired of living frugally, as evidenced by sales of upscale goods and increased take-up of better and best priced lines at mass-market retailers such as Marks & Spencer.

Working hard at it

Unemployment figures published last week showed the number of people out of work in the UK fell by 49,000 to 2.5 million in the three months to June - a better than expected figure.

Pritchard is sanguine about employment prospects. He says: “We do not expect public sector cuts to be draconian and the consumer won’t stay underground anywhere near as long as share prices are currently discounting.”

Wade adds that while public sector unemployment will rise, private sector employment is likely to increase, which would go some way to counter the negative impact.

Wade says: “Even though we have had a lot of disruptive factors in the last quarter it has not been too bad. Not many retailers I speak to are saying that it is a nightmare out there.”

Retailers have successfully come through a tough few years, and done so with admirable skill. There is little reason to suggest the sector cannot continue to ride out any further storms.

Nicola Harrison puts the bears’ case

Many retailers would agree with the verdict of Simon Wolfson, chief executive of high street bellwether Next, who caused consternation with his comments that “there has been a noticeable cooling in retail demand in recent months”.

Retail sales in July edged up just 0.5%, the BRC-KPMG Retail Sales Monitor showed. It found that “consumer uncertainty over job cuts and income prospects”, as well as the “jittery housing market”, was a drag on growth. Even the summer Sales could not entice people on to the high street, as “concerns over the future impact of fiscal changes” hit confidence.

Even the usually robust online sales growth took a hit too. The figures showed that non-food, non-store sales displayed their weakest growth in almost a year, increasing 11.3%.

BRC director-general Stephen Robertson called the figures “poor” and warned the Bank of England to “resist pressure to increase interest rates too soon”.

KBC Peel Hunt analyst John Stevenson forecasts like-for-likes will begin “turning negative from September” and the run-up to Christmas is likely to be “more restrained than last year”.

Earlier this month, when Carpetright as well as Next updated the market on so-called “black Wednesday” - so called because of the impact of the announcements on retail share prices - the flooring giant’s founder and chairman Lord Harris, one of the retail sector’s most experienced bosses described the market as “the weakest it’s ever been”, although he thought there would be improvement.

Rising costs

Retailers are not just suffering from shoppers’ reluctance to spend - they are being hit at the other end of the supply chain too as all manner of costs creep up and in some cases soar.

Fashion retailers have forecast rises in the prices of cotton, Chinese labour costs, freight and oil, as well as the VAT increase, could all lead to price hikes of between 4% and 8% next year.

But it is not just fashion retailers suffering. Currency pressure has also piled upon store groups, with sterling’s weakness against the dollar continuing to put margins under pressure.

In July, overall shop price inflation remained unchanged from June at 1.5%, according to the BRC-Nielsen Shop Price Index. Food price inflation increased to 2.5% while non-food rose to 1%.

The BRC said then that prices have remained stable largely because of “aggressive discounting”, driving non-food inflation down to its lowest rate since November 2009.

Such discounting, while good for shoppers and retailers’ top lines, is clearly a danger to profitability. And hikes in the costs of animal feed, poor harvests and problems in the wheat supply are likely to ensure that the cost of food keeps rising. That leaves less money in consumers’ pockets for non-essentials as well as further unsettling consumer confidence.

If there is one thing troubling retailers this year it’s the difficulty in forecasting just how bad conditions will get. But there is no disguising it: on paper, it doesn’t look good.

The VAT rise in January will force retailers to choose between putting prices up, absorbing the increase in difficult times or turning the screws on their suppliers.

While consumers will have to deal with this tax increase they also potentially face other price hikes because of rising costs of food commodity items and cotton - bad news for retailers trying to persuade them to spend.

A downward trend in mortgage approvals is also unwelcome to home and furniture retailers, which benefit when people move and need to furnish their new homes.

Added to this are the massive public sector cuts planned to plug the gaping hole in the country’s finances, which could send unemployment soaring and leave less money in people’s pockets.

Confidence tricks

There is talk of strikes already, and fears of another ‘Winter of Discontent’ are creating further unease. Union militancy would only further batter consumer confidence - the very thing that many retailers believe the recovery hinges upon.

The Gfk NOP Consumer Confidence Index fell for a fifth month in July, by 3 points to -22, giving the lowest reading since August 2009 when the UK economy was still in recession.

When the figures were revealed at the end of last month, Nick Moon, managing director of GfK NOP social research, said “the continuing slide in the index makes a double-dip recession look more of a possibility as each month goes by”.

While not completely bearish, Christine Cross, chief retail adviser to PricewaterhouseCoopers, fears Christmas could be “pretty horrible”. She says: “After Christmas a lot more people will know the fate of their jobs, the bills from what they have spent at Christmas will come in and there will be the psychological effect of the 2.5 percentage point VAT increase.”

While reluctant to be too bearish, Arden analyst Nick Bubb says that “even with interest rates staying low it is certainly hard to be optimistic in the long term”.

So while no one expects Armageddon few are filled with optimism by the prospects for 2011.