SELLING children’s toys at Christmas should be easy. But according to
65-year-old Val Stedham, owner of Moons Toymaster, an independent toy
retailer in Newmarket, trade this December is as tough as it has been since
the dark days of the early 1990s recession.
Nestled just off the high street, the shop has been a fixture in this Suffolk
market town for 35 years. But the growth of internet shopping and the entry
of supermarket giant Tesco and national chain Toys R Us have combined with
worries about consumer debt to push Stedham’s sales this December down by
about 7% on last year. She said: “It’s been fairly tough – there’s no good
pretending it hasn’t.”
Some 55 miles southwest of Newmarket, on Oxford Street in the centre of
London, the retailing scene could scarcely be more different. The shops are
big. They are, almost without exception, part of national chains. But just
like Moons Toymaster, they are feeling the squeeze – and the signs are
visible.
This weekend, many Oxford Street outlets have already launched promotions to
try to bring shoppers through their doors. Dorothy Perkins has huge red and
white posters across its windows trumpeting price cuts of up to 50%. Evans
is offering 50% off boots and coats. New Look has halved the prices of some
of its gifts and footwear. The list is long: French Connection, H&M,
Clarks, Rus-sell & Bromley, Mothercare, BHS – all have promotions of one
sort or another.
The message is clear: for outlets across the spectrum, from Stedham’s toy shop
in genteel Newmarket to the chain stores in London’s biggest thoroughfares,
times are tough. Consumers everywhere are pulling their horns in.
Certainly, there is some evidence that consumers’ reluctance to spend is
causing pain for retailers. According to the accountancy firm Ernst &
Young, discounting in the run-up to Christmas is deeper and more widespread
than last year – with discount levels so far averaging 36% off full price.
And Gavin George, head of retail at Ernst & Young, forecasts that “the
overall level of preChristmas markdowns is likely to be closer to 37% as
discounting becomes even more intense over the final weekend with retailers
attempting to boost sales and clear poor-selling items.”
One chief executive of a leading high-street retailer who asked not to be
named summed up the mood: “All the indicators are that we are heading for a
really tough time. Everyone is keeping pretty quiet about it but boardrooms
will all be looking at their cost bases after Christmas to see where they
can make cuts.” Michael Ziff, chairman of Stylo, the shoe group added: “It
has not been easy. This Christmas is not for the fainthearted.”
And stock-market investors appear to think not only that things are bad, but
that they are going to get much, much worse.
Since the beginning of the year retail share prices have dropped by more than
20%. And as the chart on the right shows, prospective price-earnings ratios
– a key measure of the stock-market’s perception of company prospects – have
plunged to their lowest level since the early 1990s, according to data from
Thomson Financial.
Companies such as Woolworths and SCS have seen their share prices drop so low
they appear to be offering unprecedented dividend yields of 15% and 20%,
respectively. One analyst said: “The yields are so high because everyone is
worried that earnings will be slashed and the companies won’t be able to
afford dividend payments.”
In the debt markets, the warning signals are flashing too. The debt of
retailers such as Debenhams, House of Fraser and Fat Face, the
specialist-clothing retailer, was last week trading at a discount to its
face value. Traders are clearly betting that a drop in consumer demand will
cause pain.
Put simply, the stock market appears to be doing far more than showing
pessimism; it is pricing shares as if retailing faces complete meltdown.
Are things really that bad? The British Retail Consortium is forecasting that
like-for-like Christmas sales will still be higher than a year ago – albeit
the growth rate will have slowed.
And managers of regional shopping centres around the country surveyed by The
Sunday Times were remarkably upbeat.
Andrew Parkinson, general manager at Bluewater, Britain’s biggest shopping
centre, insisted trade was buoyant, with shopper numbers up by double digits
on last year.
In smaller centres – many of which have been squeezed by their larger regional
counterparts – the experience was mixed.
Peter Drabble, manager of the Hill Street shopping centre in Middlesbrough,
said that sales were improving, but were not as good as expected. “The value
end of the market is doing quite well, but at the mid to higher end things
are not quite as good. Overall, I think we are on a par with last year, but
we are hoping this weekend there will be a big lift,” he said.
Sarah Duffin, centre manager at the Beaumont shopping centre in Leicester,
said: “Until Thursday it was looking a bit quiet, but it seems to have
picked up and I am expecting a busy weekend. It’s definitely not all doom
and gloom.”
Will there be downgrades to investment analysts’ profit forecasts once trading
statements start rolling in during January? Yes. And are nondiscretionary
costs facing households – including the cost of servicing debt, utilities
bills and the cost of food – likely to continue rising in the first half of
2008? Yes.
But Britain’s unemployment rate, which has bobbed around the 5% mark since the
beginning of the decade, is not expected to jump sharply. And the
much-discussed impact of people having to move on to higher-rate mortgages
when fixed-rate deals come to an end is pretty modest: higher mortgage
payments could eat up £2 billion of spending power, but within the context
of UK consumer spending totalling £830 billion, that is small beer.
Add it all up, and despite the well-orches-trated gloom being broadcast by
businesses craving more interest-rate cuts, consumer spending next year is
likely to rise by more than 2%.
In any case, the retail sector is not homogenous; there will be winners and
losers. Keith McGregor from Ernst & Young believes the polarisation will
be more marked this year than ever before. He believes that those most
likely to succeed will be value retailers and big, quality brands with a
strong product range. Tesco, Asda, John Lewis and Marks & Spencer are
widely tipped for the winners’ enclosure.
Online sales are also booming. According to figures from the Internet Media
Retail Group (IMRG), internet sales are on course to finish December at £7.4
billion, up 106% on the same month in 2006.
Certainly, the retail sector has higher financial gearing than during the
recession of the early 1990s. Many shops have fallen into private-equity
ownership and listed retailers have taken advantage of cheap debt and geared
up.
Chris Laverty, partner in restructuring at KPMG, said: “There is significantly
more debt on retailers’ balance sheets than there was in the 1990s.”
And Robert Parkes, equity strategist at HSBC, argues that because British
households have gorged on cheap debt to finance their spending habits, a
tightening in the credit markets means that this time around it won’t
necessarily take a full-blown recession with heavy job losses to make them
rein in their spending.
But Paul Clarke, national director of retail at Barclays, maintains that
retailers are better equipped than ever before to cope with a downturn in
spending. He said: “Retailers are generally in much better shape than they
were in the 1990s. Improvements in IT mean they can tell more quickly what’s
selling and what’s not. They no longer have to wait for months to find out
that pink cardigans aren’t going well.”
Meanwhile, in Newmarket, Stedham remains sanguine. She said: “It doesn’t help
that people keep getting told that they’re poor. Every time you turn the box
on it’s a continual drip feed of bad news, with Northern Rock and household
debt. But I’m not pessimistic. I think people will get to April and
breathe a sigh of relief and realise that they have actually got some money.”
And if she is right, those investors who are now shunning the retail sector
could be wrong-footed.
