Why I still believe in Christmas (sales)

If shopping is the British national pastime, then forecasting Christmas and New Year trading is what passes for one in the City of London.

Already this is being billed as the worst festive trading season in living memory – as were 2002, 2003, 2004 and 2005. But in three of those four years the resilient British consumer defied the pundits. In 2002 and 2003 worried over the run-up to, and fall-out from, the Gulf conflict were overshadowed by a fall in interest rates to a 50-year low that encouraged shoppers to flash their plastic with abandon. In 2004 the pundits were right as rising interest rates and utility bills hit consumers’ wallets and optimism. But last December marked the rebound in spending and was the best month in an admittedly poor 2005.

So what of this year? The early omens are again poor. Interest rates and utility bills are still rising, after all. Two retailers – Woolworths and Debenhams – have issued profit warnings. FootFall, one of the outfits that records shopper numbers said retail traffic is at its lowest on record.

But it is too soon to stop believing in Christmas. There are three factors that explain why the high street might appear quiet at the moment. The first is the growing trend towards discounting – cutting prices – before Christmas. UK consumers are wily creatures and have learned to wait for shops to cut their prices. The British Retail Consortium describes it as a battle of nerves between shop and shopper.

The retailers themselves are not stupid. These are often selective price cuts – either on one day or one range. Sometimes it is just a marketing ploy, such as the 40 per cent discount by Thresher that is only a little better than the three-for-two offer they run for 52 weeks a year. So far the official figures show retailers have raised their prices compared with a year ago in the last three months, encouraging shoppers to wait until December. Growth has been weak but has not fallen.

Secondly the Internet has come into its own this year, both as a retail channel and, more importantly, as a price comparison.
On the first aspect, the latest official figures show that non-store sales – the category that includes online retail – posted the strongest, at 3 per cent on the month, reflecting a shift from bricks to clicks. But data on online sales are still relatively rudimentary and that could be an under-estimate.

Nikesh Arora, Google’s European Vice-President, says the Internet poses a threat to established brands that are not as nimble in their marketing as the army of new Internet-only retailers. In other words a profit warning by a blue chip retailers or supplier may tell us more about the company than about overall sales.

Lastly house prices, that inescapable part of the UK consumer economy, are providing a support to wealth, income and the feel-good factor. The Bank of England is quite right to query the direct link between property and retail sales. However both slowed together in late 2004 and early 2005 and rebounded together from September 2006 onwards. Add to that an expected record bonus round and you have a heady mix of income and wealth. A survey by Deloitte showed UK consumers intended to spend some 8 per cent more at Christmas this year than 2005.

Of course it is an unbalanced picture. Those households weighed down by rising utility bills are likely to be found in different parts of the country from those rolling in bonus payments.
There are other little odd factors that argue for a late spending spree. Christmas Day falls on a Monnday so retailers will get six unbroken days starting on 18 December. The warmest autumn for 180 years cut demand for winter clothing that should return.
The Bank of England will be watching sales volumes but its real focus will be on inflation. Even if retail sales do disappoint that will not stop it hiking rates in February. 2007 could be a tougher year for shops and shoppers alike.