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Many retailers rely on a Christmas boost to keep profit margins up and ensure that have a safety net even if the rest of the year is not so profitable. Of course DIY retailers are no exception to this rule, with a large proportion of dad’s receiving presents bought at the local tool or hardware store.
However this year many experts are predicting sales may not be as high as in previous years. Rising interest rates, the increase in petrol costs and the general concern that house prices are likely to slump are all given as possible indicators that customers may not be spending so well this year, both on presents and on regular purchases in the coming months.
Safe as houses
Any company that relies on tool and DIY sales as its main money maker will now that the housing market is the major element that will effect what customers are prepared to buy and how much they are prepared to spend. Several months ago banks reported that the number of new mortgages being taken out had dropped.
In August the number of mortgages being taken out fell to the lowest they had been for four years, according to the bank of England. The number approved dropped to 96,000, the average was 112,000 a month from May to July.
This in itself does not prove that we are about to witness a true property price collapse to the extent we did in the eighties and early nineties, however concern over house values does seem to be hitting customer confidence according to surveys.
Experian, a global economic forecasting group, issued a report at the beginning of November that showed a drop of in consumer confidence compared to three months previously.
What connects this fall to the corresponding decline in property prices is the areas where it is greatest. “ Pessimism is most pronounced in the UK’s southern regions, in particular the South East and South West,” explains Melanie Lansbury, Editor of the Experian report. “Here, following strong house price inflation during the boom, prices have now started to fall in some areas and many homeowners are nervous about how far they might drop.” In the Midlands confidence had, in fact, grown.
Credit
When people decide they are not going to buy a property they often choose to spend more money on other items, often luxury goods for the house or home improvements. Figures in August suggested this was exactly what people where doing and that they were using their credit cards to take the strain.
The Bank of England reported that credit card spending had reached £12.36 billion in July and that consumer’s combined debt was approaching £180 billion. In the short term this may seem like good news for retailers, but now five months later it looks as if the credit spending spree has ground to a halt. A number of reasons have caused this sudden onset of cold feet, not just the arrival of icey weather. The scale of spending earlier on in the year mean that many people have now reached their credit limit, also the fear of a collapse of the property market has made people nervous of borrowing money against the value of their homes. A number of lenders have ended schemes offering secured personal loans, which allowed people to release spare equity from the value of their houses.
Increasing interest rates are also dampening consumer’s enthusiasm. “Rising interest rates and oil prices combined with a cooling housing marker have all taken their toll on consumer sentiment and this is causing weaker spending in retail and other consumer markets,” Melanie Lansbury points out.
The cost of household bills is also a strain on the family budget, according to research by uSwitch.com, with 7 out of 10 people already feeling that more of there cash than ever is going to pay household bills. With the cost of household services set to rise even further over the next year this is just another factor driving average consumers to spend less on the high street.
Kingfisher’s dive
Even the big boys are feeling the pinch. Only four months ago Kingfisher was letting the market know how well it was doing, with plans to move B&Q up-market, and to expand into Russia. Executives were bullish about the threat from economic conditions, saying the market would bear up because consumption was good, unemployment was low and disposable incomes were high.
What a difference a few months can make, having reached a three year high in October Kingfisher’s shares made a sudden drop, partly because of the troubles the group had been having with its Screwfix Direct mail order business. Screwfix Direct has had trouble meeting the level of orders to its website, but other, less soluble factors have also played a part. Business rates are set to rise in April, and this is likely to have a significant effect on profits for out of town retailers, according to US investment bank Merrill Lynch. Merrill reckons the rise in rates could reduce Kingfishers earnings by £17 million per year.
Increased oil prices are also driving up the general level of inflation, which could effect retailers and is already, together with the current level of interest rates, driving up the cost of products at the factory gate.
Confidence building
None of this is absolute proof of a downturn, in fact until the last few weeks things have been exceptionally good, so any drop could easily be temporary. In fact at the end of October the Builders Merchants Federation were reporting a healthy rise for the eighth successive year. “The federation’s latest sales indicators confirm that our particular building industry’s sector results remain significantly ahead of last year,” commented Jeremy Hawksley, BMF Director. “This is especially encouraging for our members bearing in mind that both bank and building society rates rose last June, July and August. It remains to be seen if the reported slowing in mortgage advances will heralds a slowing in demand for building materials.”
The CBI also showed a cautious attitude to the retail trade’s good October figures. 37% of the firms it surveyed reported a sales rise during the month. This exceeded retailer’s expectations, but the CBI warned that this was still below normal for the time of year, attributing this to increased interest rates and advising the Bank of England to hold of any further rise.
“The period of strong spending seen up the summer is over, with underlying sales cooling,” said John Longworth, Chairman of the CBI’s survey’s panel. “Retailers will now be hoping for a boost in the run up to Christmas. But there is a great deal of uncertainty about the economic cycle and it is unclear how consumer spending will fare in the months ahead.”
On the level
Although there seems to be little to feel happy about, if the prevailing message about the ways sales are heading is true, this may only be part of the picture. Experian suggest that any drop in sales may just be a sign of the market leveling out. “On the positive side, the economic fundamentals that drive spending decisions, especially growth in employment and disposable incomes, have recovered over the past year and Experian believes that any weakening in spending reflects a temporary correction in the markets rather than the start of a longer-term downward trend,” says Melanie Lansbury.
It may be that things are slow at the moment because customers are aware that the big spend of Christmas is coming up, and having already over stretched finances earlier in the year consumers are holding fire ready for a big spree when the time comes.
The only thing we can be truly sure of is that these are uncertain times and the next month may hold the key to what the coming years hold for retailer’s fortunes.
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Airstream Business Communications Ltd