Retailers can expect a 'very soft landing' this year, according to analysts at investment bank CSFB.
For the companies looked at by the analysts, like-for-like sales are predicted to increase by 3.2 per cent on average this year. This is only fractionally down on the 3.4 per cent growth rate last year.
'But the market background will become more testing. A price-driven, volume strategy is best, and flexibility on cost base will be needed,' said analyst Tony Shiret.
CSFB economists believe consumer spending will slow during the year, but not dramatically. A housing market crash is considered unlikely and tax rises are seen as the main damper on household incomes.
This weakening UK economic environment could make conditions much tougher for retailers pursuing a trading-up strategy. Chains attempting to build market share with a volume-driven approach would find more success, predicted the team.
Grocers will continue to exert significant pressure on prices, particularly in non-food categories such as clothing and electricals, piling pressure on specialists.
A key underlying problem is expected to be operating costs. Retailers will have to spend more on National Insurance payments, higher pension contributions and rising property costs.
Although the demand outlook is unclear, retailers could control costs. But the cuts achieved during 2002 will prove difficult to repeat this year.
'Retailers pulled rabbits out of hats last year at the expense of employee bonuses. It is not there for this year,' said analyst Nathan Cockrell.