CUSTOMERS SIGNAL TOUGH YEAR AHEAD

UK retail sales values were down 0.3% on a like-for-like basis from January 2011, when sales had risen 2.3%, picking up after December 2010’s snow disruption. On a total basis, sales were up 2.1%, against a 4.2% increase in January 2011. On both measures it was the second-worst January, after January 2010, since the survey began in 1995.

Food sales slowed sharply after their Christmas boost. Non-food also weakened and any gains were largely driven by widespread heavy discounting in clearance sales. For clothing, footwear and homewares, January was worse than December, especially for larger purchases, hit by consumer caution. Non-food non-store (internet, mail-order and phone) sales growth slowed again after picking up sharply in December. Sales were 11.3% up on a year ago, less than December’s 18.5% gain but similar to the 12.3% in January 2011.

Stephen Robertson, Director General, British Retail Consortium, said: “As 2012 gets underway, it’s clear people don’t feel any better about the immediate future than they did 12 months ago. Customers parked their worries in December and spent, encouraged by discounts. Now, in the New Year, reality has bitten again as concerns about jobs, wages and household costs reassert themselves. Despite consumer confidence improving in January, actual spending shows households concentrating on paying off debt, saving and battening down for another tough year. Food sales grew faster than non-food but the gap was much narrower than in December as people cut back and searched out grocery offers and value lines. Big-ticket goods are still the weakest part of retailing, undermined further by the comparison with last year when beating the VAT rise and promotions linked to it helped sales.

In 2011 overall like-for-like growth averaged virtually zero and that was with a boost to top line figures from inflation, including the higher VAT rate, which won’t continue in 2012. Against that background, Government must hold down the costs it’s responsible for.”

Helen Dickinson, Head of Retail, KPMG, said: “After a stronger than expected December, these latest figures are rather sobering. The return to negative like-for-like sales reflects the trend seen throughout most of 2011 and is a stark reminder of the challenges facing retailers. Both food and non-food had a slow start to the month. In the first week of January customers were still using up stocks of food bought in for Christmas. Non-food didn’t benefit from the catch-up shopping effect we saw last year in the aftermath of December 2010’s snow disruption. Both categories improved as the month developed. But the underlying health of the sector remains a key concern, with margins and profits squeezed by the relentless need to discount to generate demand. Many retailers are rethinking their entire business models in a desperate attempt to adapt to this low growth environment and pricing remains more strategic than ever before.”

UK: MORE RETAILERS SET TO FALL INTO ADMINISTRATION

The total number of retailers in England and Wales falling into administration increased by 11% during 2011 to 183, with further troubles ahead, according to research from consultancy firm Deloitte. Findings from Deloitte’s recent Consumer Tracker, which monitors consumer confidence and spending habits, found that 36% of consumers are spending less on clothing and footwear in an attempt to reduce costs.

The company said today  that despite the last quarter including the lucrative Christmas period, administrations were up 27% on the previous quarter. A total of 42 retailers fell into administration during the fourth-quarter, compared with 33 in the third-quarter.

“2011 was a tough year for retailers and unfortunately this trend is set to continue well into 2012,” said Lee Manning, Deloitte restructuring services partner. ”Many retailers would have been banking on the busy Christmas period to give them a much needed sales uplift, but retailers were forced into discounting at levels last seen in the aftermath of the collapse of Lehman Brothers, putting severe pressure on margins. We are likely to see a further spike in retail administrations in Q1 2012 as retailers buckle under the pressure of VAT payments falling due, impending rent payments, the increased popularity of shopping online and the traditional decline in footfall as the attractive year end sale offers come to an end.”

Commenting on the study’s findings, British Retail Consortium director general Stephen Robertson said that the next few months are “bound to be quieter” as consumers rein in their spending after Christmas. ”Retailers are doing their bit by controlling their own costs and keeping prices down for customers despite steep increases in transport and utility bills. The UK’s governments need to support the sector’s efforts to survive, thrive and maintain jobs by holding back the costs for which they are responsible, including business rates, retail levies and the burden of regulation,” he said.

Robertson added that while retailers “don’t ask for handouts”, they do deserve help “overcoming some of the barriers to business success,” highlighting that retail is the private sector’s biggest employer and a major source of jobs for under 25s.

LOWEST SHOP PRICE INFLATION FOR A YEAR

Overall shop price inflation fell to 2.0% in November from 2.1% in October. Food inflation fell to 4.0% in November from 4.2% in October. Non-food inflation was unchanged at 0.8% in November.

Stephen Robertson, British Retail Consortium Director General, said: “At a time when petrol prices and utility bills are sky-high, fierce competition in the retail sector is helping hard-pressed families manage their budgets. Shop price inflation is now at its lowest for a year despite retailers having to cope with rising costs from suppliers and surging energy and distribution bills. For a second consecutive month the supermarket price war has helped reduce food inflation. As our recent research showed, a typical basket of goods purchased in the UK is around 5 per cent cheaper than the European average. Technology is making it easier than ever to compare prices. Accessing the internet on smartphones while out shopping is helping to make prices even more transparent. Inflationary pressures are easing. Cheaper commodities will help retailers keep prices down while the Chancellor’s decision to postpone January’s three pence increase in fuel duty will also benefit households. Retailers have protected consumers from the full impact of global commodity and currency shocks during 2011. In 2012 the Government should do more to reduce the costs it controls, chiefly business rates and the burden of regulation.”

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments: “It’s been a slow start to Christmas trading and many retailers have reduced prices further in recent weeks to help boost footfall and spend in store. This is reflected in the headline shop price index. We also have the impact of some commodity price increases of last year now falling out of the comparatives. However, the benefits for shoppers are being offset by a continued fall in spending power as other household bills continue to rise. The outlook for inflation is however much more positive than this time last year and shop price inflation is expected to fall further in the first part of 2012.”

UK HIGH STREET REVIEW:  WHAT THE EXPERTS SAY

Retail expert Mary Portas has set out her vision for revitalisting the UK’s high streets. Here’s how the industry has responded to her recommendations.

Stephen Robertson, Director General, British Retail Consortium: “The report sets out some practical ways to address problems faced by the UK’s high streets many of which go back much further than the economic difficulties of the last few years. Prioritising action on Business Rates and parking is exactly right. These are the key concerns for customers and retailers. We agree, it would be ‘too easy’ to blame out-of-town retailing for the decline of our high streets. This plan should be about supporting a rich mix of retailing, not striking dividing lines between big names and independents or town centre and others. When he acts on this report, David Cameron should not restrict that choice by making life harder for any particular category of retailers. The three key words in the report are ‘make things happen’. Let’s see the best of these recommendations acted on quickly.”

Barry Knight, Head of Retail, Grant Thornton: “I don’t see anything from this review, beyond looking at punitive car parking charges to park in out of town sites, that will encourage consumers to go to the high street. Mary Portas is basically suggesting that high street landlords have got to be more amenable to retail tenants and in effect reduce the cost of operating from these properties. The creation of Town Teams and the creation of Business Improvement Districts is all well and good, but the question is who is going to pay for them? Therefore, this is a bit of a pipe dream - firstly in that landlords will be put under huge pressure from their banks should they reduce rental levels, and as such this is not a commercially viable proposal. Secondly, it is hard to see local councils who are under pressure to cut local parking costs also willing to fund ‘quangos’. The increasing number of large supermarkets and their increased push in to non-food combined with internet shopping are major drivers in the decline of the high street. Mary Portas offers no discussion around how or if anything can be done about the impact of these trends. To ensure that high streets do not fall into terminal decline we need to ensure that no properties are empty, regardless of the financial cost and the need to change usage legislation.”

Richard Perks, Director of Research, Mintel: “Portas has 28 detailed proposals, but look behind that and the thrust of the report is very sensible. Granted there’s the dose of hyperbole that just seems unavoidable these days - the high street is certainly not in terminal decline, it may not even be in crisis. What’s happening at the moment is a contraction which is almost entirely due to the recession. And in tough times that’s what happens. The vacancy rates we hear so much about are mostly in secondary and tertiary sites because when high streets contract there is a general move to primary sites. But people still want to shop - that’s why major shopping centres are so successful. And what is a development like Westfield’s at Stratford but a brand new high street? So that is why Mary Portas is absolutely spot on when she says that high streets that want to survive must invest. Ideas such as more markets are excellent, because they add more excitement to the high street. No-one owes a retailer a living. No-one owes a high street a living. Consumers go to where they are best served - and that is as true of retailers as it is of high streets. A high street that gets no investment has no future.”

Maureen Hinton, Analyst, Verdict Research: “The major element behind the survival of the high street is how the consumer behaves and what consumers want. With retail growth halving every decade since the 1970s there was bound to be a fallout as the sector reached maturity. This, combined with the impact of online shopping has led to an oversupply of space. Though these factors are behind high street decline, the main reason is consumers shop differently now to the way we shopped even 10 years ago. We want the convenience of large out-of-town supermarkets with plentiful, free parking and a full range of products. We also want premium shopping centres with a complete range of stores and leisure activities. These locations would not survive if we did not shop at them and taxing them more heavily will be a further tax on shoppers rather than retailers and landlords. Already we are witnessing a return to local shopping. The expansion of click & collect, (in particular Collect + whereby we can collect parcels from local stores rather than wait in for a delivery or go to the Post Office), plus the high costs of driving, are encouraging shoppers to stay local. Furthermore the ageing population, with falling pensions and less mobility, will want local services and stores.”

Rupert Eastell, Head of Retail, Baker Tilly: “Retailers are being squeezed by increased rates and reduced traffic, and something needs to be done to help our high streets. The Portas report provides a call to action at a critical time. Regardless of whether you love her or hate her, Mary Portas’ report should stimulate debate about the future of the British high street and if it leads to just one high street making changes for the better, it will be a success. Portas makes sensible and deliverable recommendations in her report, but change is not down to her. If anything, it is clear that councils, community partnerships, local chambers of commerce and businesses must work together, take an honest look at their local high street, and make the tough decisions about the changes necessary for positive momentum. High streets have not adapted to out of town shopping centres quickly or efficiently enough and are suffering due to increased competition from large retailers who can beat them on price, if not on ambience and customer experience. A certain level of social entrepreneurship will be necessary to reinvigorate our high streets. For example, many communities have regeneration or community cohesion programmes in place. Surely, if economic regeneration can be incorporated into these programmes, the combined profit motive will create safe and pleasant town centres, where local residents will look forward to spending time and money.”

The Economist Intelligence Unit economist, Jon Copestake: “Most will agree that the traditional high street format has become outdated. A decade of dwindling occupancies as well as the rising tide of internet shopping and consolidation among retail chains point squarely to this trend. It is also difficult to see what can counteract the convenience and value that internet and supermarket shopping offer, especially in these frugal times. Although consumers may focus on initiatives like “National Market Day” and parking schemes, supermarket chains will be more concerned with proposed central regulation of out-of-town developments and suggestions that big retailers mentor and assist small businesses”.

LOWEST SHOP PRICE INFLATION FOR A YEAR Overall shop price inflation fell to 2.0% in November from 2.1% in October. Food inflation fell to 4.0% in November from 4.2% in October. Non-food inflation was unchanged at 0.8% in November.

Stephen Robertson, British Retail Consortium Director General, said: “At a time when petrol prices and utility bills are sky-high, fierce competition in the retail sector is helping hard-pressed families manage their budgets. Shop price inflation is now at its lowest for a year despite retailers having to cope with rising costs from suppliers and surging energy and distribution bills. For a second consecutive month the supermarket price war has helped reduce food inflation. As our recent research showed, a typical basket of goods purchased in the UK is around 5 per cent cheaper than the European average. Technology is making it easier than ever to compare prices. Accessing the internet on smartphones while out shopping is helping to make prices even more transparent. Inflationary pressures are easing. Cheaper commodities will help retailers keep prices down while the Chancellor’s decision to postpone January’s three pence increase in fuel duty will also benefit households. Retailers have protected consumers from the full impact of global commodity and currency shocks during 2011. In 2012 the Government should do more to reduce the costs it controls, chiefly business rates and the burden of regulation.”

Mike Watkins, Senior Manager, Retailer Services, Nielsen comments: “It’s been a slow start to Christmas trading and many retailers have reduced prices further in recent weeks to help boost footfall and spend in store. This is reflected in the headline shop price index. We also have the impact of some commodity price increases of last year now falling out of the comparatives. However, the benefits for shoppers are being offset by a continued fall in spending power as other household bills continue to rise. The outlook for inflation is however much more positive than this time last year and shop price inflation is expected to fall further in the first part of 2012.”

UK: NO GROWTH IN RETAIL SALES UNTIL 2013

SALES WORRYINGLY WEAK AS CHRISTMAS NEARS

UK retail sales values were 0.6% lower on a like-for-like basis from October 2010, when sales had risen 0.8%. On a total basis, sales were up 1.5%, against a 2.4% increase in October 2010. Food sales growth slowed and non-food sales also weakened, with big-ticket items suffering most. Clothing and footwear were hit by the unseasonably mild weather. Homewares remained tough and often deal-driven. Uncertain prospects for personal finances and the economy continued to make shoppers careful, giving priority to essentials and replacements over discretionary items. Non-food non-store (internet, mail-order and phone) sales growth picked up a little in October after falling back in September. Sales were 11.5% up on a year ago, more than the 10.1% in September but less than in August and than the 12.8% in October 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “Which part of the wave we’re riding varies from month to month but the water is consistently chilly. For a fifth month, total sales growth continues its strangely regular flip-flopping between 2.5 and 1.5 per cent. But, the year-to-date figure, which smooths out these minor moves, is unchanged from the previous month. This is evidence of the basic weakness of consumer confidence and demand and worrying this close to Christmas. Underneath the headline figure, the year-to-date results show almost no growth in non-food sales. Allowing for the VAT rise since last year, that suggests a substantial drop in sales volumes while the food figures indicate very little volume growth. It’s clear customers are cutting back whatever they’re buying. A lasting lift in consumers’ mood needs a sense that better times will come for jobs, costs and incomes. The Chancellor should use this month’s Autumn Statement to help customers and businesses by offering hope over next year’s planned fuel duty and business rates increases.”

Helen Dickinson, Head of Retail, KPMG, said: “With so much uncertainty across European and global markets, UK consumers remain reticent as their personal finances become harder to manage. The beginning of the month continued with the trend we saw at the end of September: the warm weather helped to boost food sales to the detriment of clothing and other non-food sectors. By the end of the month the gap narrowed, food growth slowed and non-food retrieved some of the momentum lost over the previous few weeks. The month overall saw ongoing challenges for big-ticket items and continued high levels of volatility across individual weeks and different sectors. But one constant remains: to whatever extent sales are being made, margins and hence profits are being impacted to stimulate demand as retailers strive to cope with the new reality. The success of the Christmas season for retailers hangs in the balance as October’s results do not set a strong foundation.”

INVESTORS MORE OPTIMISTIC

Stock market volatility has been a dominant feature during recent months – research shows that, since mid-July, large (2+%) daily fluctuations have been five times more frequent than usual. October is proving no different. After a short, sharp sell-off at the beginning of the month, global markets have bounced back strongly with many indices up more than 10% from their lows. So what has been the catalyst for the latest move? In some respects it is very simple: investors have become more optimistic that at long last, after weeks of pressure from bond vigilantes and global leaders, eurozone policymakers are about to tackle the debt crisis by putting together a comprehensive and effective package to address the issue. As leading economist and associate editor of the FT, Martin Wolf succinctly put it, “The broad consensus of the world’s policymakers is that the eurozone must now do the following: divide countries into the insolvent and the illiquid; restructure the debts of the former and provide unlimited, but temporary, support for the latter; and recapitalise the banks, after stress tests that allow for losses on sovereign debt, either from national treasuries or from the European Financial Stability Facility (EFSF).”

So how will the package, to be announced on the 23rd of this month at the EU summit, actually work and, crucially, be funded? The eurozone’s current rescue fund stands at €440 billion; large but insufficient to potentially bail out Spain and Italy in a worse-case scenario. To address this key issue, EU officials have focused on an insurance plan which would involve the EFSF guaranteeing 20–40% of losses on (government) bonds for struggling eurozone countries instead of buying them as the ECB currently does. Depending on how large such guarantees are, such a scheme could leverage the EFSF’s resources to between €1,000 billion and €2,900 billion. The plan, in effect, means that the EFSF gives its word to guarantee underwriting potential losses but without actually handing over any cash. Not that the plan is without risk: the guarantee will include guarantees from Italy and Spain which could, potentially, mean them guaranteeing themselves; and the markets could shy away from such an idea. For now though, investors feel more comfortable that EU policymakers will be forced to deliver a workable solution – large enough to ‘shock and awe’ and to enable longer-term structural reform to take place.

The events of the last two months or so – the eurozone debt crisis and worries over a ‘double-dip’ recession in the West – have, unsurprisingly, dominated the markets and investors’ thinking. Whilst no-one is suggesting the EU will deliver a panacea or that US growth will suddenly jump forward, it is clear that policymakers have now grasped the nettle and begun to take action about solving the debt crisis and restoring growth. The sideways movement of global equity markets has reflected investors’ frustration with the political paralysis so evident until very recently. But after spending much of the last couple of months on macro, geopolitical issues, it is worth focussing back on the fundamental drivers of investment returns over the longer term. There is one successful aspect of investing that has been lost in all the bad news – the importance of dividends to long-term investment returns. It would be easy to think that, with all the market gyrations of late, even this component had succumbed too: nothing could be further from the truth and international investors are slowing waking up to the opportunities that exist for capturing high levels of quality income.

Starting with the basics: dividend income is a fundamental part of real investment because it is about real cash. The amount that a company pays out to shareholders is determined by how much cash it has and is less easy to fudge than, say, explain why it may have missed an earnings target. The other reason to focus on dividends is that they are the most important contributor to total returns from shares, having accounted for almost 90% of total return over the longer term, according to research by Société Générale. The stream of dividends will likely reflect the cash-generative power of the business over time. This in turn means that companies with high, robust and growing dividends tend to be higher-quality companies. The final aspect of dividend income is that it has proven to be an effective way to shield against the effects of inflation: in other words, dividends have grown in real, inflation-adjusted, terms over the long term. By way of example, long-run inflation is 3% (based on the last 100 years) whilst long-run dividend growth has been between 4 and 5% over the same period, meaning investors can hedge against the erosion of their spending power. Another way of looking at it is that income investing can be growth investing in disguise.

Events over recent years have seen share prices fluctuate considerably but dividends have been more stable. It is easy to think that with low economic growth in the West this means that dividends must have suffered too. Clearly there are times when companies have no choice but to cut their dividends to protect their balance sheets – the credit crunch in 2008/9 was a good example but it is exceptional. Since then, companies have concentrated on restoring their financial positions and today businesses have higher than usual levels of ‘spare’ cash on their balance sheets, giving management the means to return cash to shareholders, either by increasing dividends or via a one-off special dividend. The other aspect of equity income investing is that high-quality companies have robust business models and investors’ conviction in these businesses means their shares tend to be less volatile than others over a full market cycle. So, whilst they may not have the racy characteristics of a growth stock in a rising market, they are likely to weather difficult or turbulent market conditions much better.

HEAT HELPS FOOD, HARMS CLOTHES

UK retail sales values were 0.3% higher on a like-for-like basis from September 2010, when sales had risen 0.5%. On a total basis, sales were up 2.5%, against a 2.2% increase in September 2010.

Food sales growth was similar to that in July and August. Non-food sales improved a little but remained challenging. Homewares showed a modest uplift, though sales were still often deal-driven. Larger purchases in particular were hit by fragile consumer confidence and the weak housing market. Clothing sales dropped off sharply in the end-of-month heatwave. Non-food non-store (internet, mail-order and phone) sales growth fell back after picking up in August. Sales were 10.1% up on a year ago, down from 12.6% in August and well below the 19.1% in September 2010.

Stephen Robertson, Director General, British Retail Consortium, said: “In these harsh times, we have to be thankful for this minor improvement in growth compared with August but underlying conditions remain weak. Spending growth is below inflation meaning customers are buying less than this time last year. And there’s no guarantee next month’s figure will be better. Total sales growth has been flipping between 1.5 and 2.5 per cent for four months now and year-to-date like-for-like growth is zero. Short-lived factors such as the weather and discounting are influencing sales not any fundamental change in how customers are feeling. Hot weather at the end of September boosted spending on food and drink, but clothing sales slumped as the sun undermined interest in winter ranges.  As we head into the year’s most important trading period, we need a return of optimism. That requires people to feel that next year they will see some payback for the current pain.”

Helen Dickinson, Head of Retail, KPMG, said: “While we were seeing reasonable growth during the first weeks of September, hopes for a major improvement on recent months were dashed as the exceptionally hot weather kicked in during the final week, when hitting the shops was well down our list of priorities.  The food sector proved again to be more resilient than other sectors although, with the new academic year starting, schoolwear and shoes also did well. Sales of home accessories, house textiles as well as toiletries and cosmetics showed signs of improvement. However, with consumers’ incomes being squeezed from all sides, many shoppers continue to steer clear of big-ticket items.  As we are entering the crucial season in the run-up to Christmas the outlook may be described as “hopeful” but that’s as good as it gets I am afraid.”