Gloomy months ahead for British retail industry

UK retailers are braced for more downbeat news as summer earnings are expected to show continued weak consumer demand, especially for hard-hit electrical retailers, with the sector still nursing the wounds of the August riots and economic and market turmoil.

Analysts expect no respite until December. Meanwhile, consumer confidence continues to fall and the threat of a return to recession looms large. Polling firm GfK NOP Wednesday said its main measure of consumer confidence fell to minus 31 in August, equalling the low it hit in April. In July, the index stood at minus 30.

The BDO High Street Tracker, a measure of medium-sized retail chains, reported same-store sales fell 2.2%, the weakest performance since July 2009, as the riots took a heavy toll on retail sales. "The sight of hooded youths ransacking high street stalwarts like Currys and JD Sports Fashion PLC along with local independents further deterred consumers from parting with their hard-earned cash," BDO head of retail Don Williams said.

The British Retail Consortium August figures, which presage official government statistics by a week, underscore the difficulties faced by shops in the current economic climate. Like-for-like sales fell 0.6% in August, dragged down by non-food which continued to fall below year-earlier levels. "For non-food, the picture is disheartening with one of the worst monthly results of the year thus far," said Helen Dickinson, Head of Retail at KPMG.

Evidence of the consumer squeeze will be liberally reported in the forthcoming weeks as high street stalwarts reveal sales figures for the last three months, with stark focus on the electronics retailers. Appliances and consumer electronics retailers have been hardest hit across Europe as consumers cut back on discretionary spending in the face of government austerity cuts and rising inflation.

The UK's largest electricals retailer Dixons Wednesday reports sales for the three months to July 23 and its UK same-store sales are expected to fall 13% according to market consensus. The lack of a Football World Cup boost to television sales this year has exacerbated an already dire situation.

General merchandise and DIY retailer Home Retail group is also expected to have suffered the vagaries of the consumer penny-pinch, as its Argos store chain is heavily exposed to electricals sales. Citi expects same-store sales down 11% in the 13 weeks to Aug. 27 and another bout of margin erosion as the group promotes heavily to drive sales.

The Confederation of British Industry's distributive trades index last month reported the fastest pace of retail sales decline in over a year in August and expects sales to fall again in September.

The CBI reported a balance of -14 in August compared with -5 in July—the worst figure reported since May 2010. The balance is the difference between the percentage of retailers reporting higher sales than a year ago and those reporting lower sales than a year ago.

"Comparatives for the latter half of 2011 also remain challenging for the sector, until late November/December, given the snow-affected trading period last year", Nomura said in a note to clients in August.

Both the government and the Bank of England hope a strong export performance and high levels of business investment can compensate for a weakening in consumer spending.

But so far, consumer spending has weakened more rapidly than expected, and exports and investment have yet to take up the slack.

"With an increasing number of indicators suggesting the economy is either stagnating or returning to recession, the continuing loss of consumer confidence is a major worry for the government," Nick Moon, managing director of consumer confidence polling firm GfK NOP Social Research said last week.

Source : Kathy Gordon – Wall Street Journal
Gloomy months ahead for British retail industry
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