Shoppers will spend more than ever in the run-up to Christmas. However, with incomes squeezed by high mortgage costs and wages only rising slightly, consumers will rely on credit to fund their festive spending.
According to Verdict Research, the downside to this upbeat performance is that consumers will be forced to tighten their belts in the New Year, making trading far tougher, particularly for retailers of home-related items.
Despite concerns that waning consumer confidence will result in a weak Christmas for retailers, Verdict expects seasonal trading performance in 2007 to exceed that of last year.
Overall, Verdict expects retail sales in the final quarter of the year to reach £77.9bn or £1,300 per head - a 3.8% increase on 2006.
While the growth rate will be slightly lower than the 4.1% uplift achieved last year, the year will finish on a robust note, with consumers spending almost £3bn more than a year ago.
Retail analyst with Verdict , Nick Gladding, said, “The build up to the Christmas trading period has been surprisingly strong, in spite of factors that should by rights cause trading to slow.
“Real take home pay - the overriding determinant of purchasing power, has been broadly flat over recent months and the impact of pay rises has been eroded by higher energy bills and mortgage costs.”
In addition many shoppers who took out fixed rate mortgages two or three years ago are experiencing sharp increases in their loan costs as their discounted loan period comes to an end.
City bonuses, another key driver of retail are also likely to be substantially lower than a year ago, owing to the decline in profitability of many financial institutions.
Moreover, a higher number of shoppers than last year are likely to fly to the US to do their shopping to take advantage of the pound s strength against the dollar.
However, rather than rein in their festive spending in the light of these concerns Verdict believes consumers will defer difficult decisions until the New Year.
Gladding added, “Shoppers never want to be seen as mean at Christmas and will postpone any cutbacks until the New Year. However, having already run down their savings this year, consumers will need to rely heavily on credit to fund their seasonal generosity.”
The stretched state of consumer finances will make shoppers particularly responsive to retailers offering value, particularly on easily priced comparable goods like books and electricals.
Gross margin gains and a focus on reducing overheads in the wake of earlier energy and logistics price increases give retailers scope to reduce prices while preserving their profitability.
In an intensely competitive market, advertising will be particularly important for retailers to attract shoppers. Larger retailers that can justify the expense of TV campaigns are likely to gain share from smaller operators.
John Lewis for instance has tripled its festive campaign budget, while Tesco has enlisted support from the Spice Girls. Smaller retailers will have to adopt lower cost initiatives like viral marketing and email campaigns to ensure they do not lose out.
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