High street in a panic as shoppers stay away

With no sign yet of the last-minute Christmas rush, retailers are slashing prices in an attempt to stoke up demand
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The Independent Online

Panic hit the high street yesterday as a slew of bad news from Wal-Mart, Hennes & Mauritz and WH Smith shook the already fragile confidence of retail investors. Consumers have a new-found pricing power this Christmas and analysts are fretting that profit margins are under serious threat.

Hennes & Mauritz, Europe's biggest clothing chain, set the tone for the day, announcing that sales growth had slumped to a three-year low of 4 per cent in November, compared with 14 per cent a year before, because consumers had stopped buying winter garments.

Wal-Mart came next. The US retailer, the world's biggest, warned that December sales growth would be at the bottom end of expectations. It said consumers had delayed Christmas shopping and were buying more gift vouchers than physical goods.

Back in the UK, brokers issued downgrades on WH Smith amid fears for its dividend and poor pre-Christmas trading at the books stores and stationers group.

There was other bad news, including a disappointing set of figures from the analysts SPSL on high street footfall, which showed that the amount of retail "traffic" on our pavements was actually down 0.1 per cent last week compared with a year ago.

What has really rattled the market is the growing evidence that retailers are resorting to desperate measures to clear warehouses of inventory that is simply not selling.

Tom Hunter, the retail entrepreneur who made £260m from the sale of Sports Division and who has tried to buy both Selfridges and House of Fraser this year, said: "Everybody is at it, to be honest. I can't think of anyone who hasn't been."

Woolworths is offering CDs at half price, Argos is offering 50 per cent off such familiar Christmas gift names as Remington, and House of Fraser is offering 20 per cent off bedspreads and throws.

Not to be out done, Allders is offering discounts of 50 per cent on a range of goods, having already launched so-called Mega Days where some kind of saving is available on all items in store.

Womenswear and clothing seem to be the worst hit, with all retailers discounting like crazy to clear stocks that are simply not shifting.

Christmas has been delayed, at least as far as consumers are concerned, and while analysts are optimistic that next week will bring a seasonal surge in last-minute shopping, they are convinced profitability is being sacrificed for sales.

Philip Green, the retail entrepreneur who owns the Bhs chain and the Arcadia group of stores, which includes Top Shop, said yesterday: "It's challenging out there. We haven't had any seasonal weather and there has been less footfall. All you have to do is look at the offers in all the newspapers. We are selling through (discounting) the things we have to sell. We have to react to things we need to sell. The Christmas trading results will be interesting."

As the owner of a private group of companies Mr Green can afford to be a bit more relaxed about the current trading conditions than some of his quoted peers on the high street.

Matalan, the discount retailer, last week saw its shares collapse 20 per cent after announcing a 7 per cent decline in like-for-like sales for the 14 weeks to December 6. What spooked the market was that November has always been held out by the company as its most important Christmas trading period.

The company said consumers were buying fewer higher-priced items, such as winter coats and leather jackets, throughout the crucial early winter trading period. It warned that this was a trend being felt across the wider market. Even more worrying, if it proves true, was its claim that despite its poor performance it was still increasing customer numbers and market share.

But the general malaise in the retail sector yesterday hit Matalan's share price again, knocking it down a further 6.57 per cent.

The John Lewis Partnership produced a glimmer of hope over the weekend with a trading statement saying sales last week were up 0.6 per cent to £79.1m and that Christmas had arrived, albeit somewhat belatedly. It added that weekly sales were likely to hit £80m for the first time this week.

However, such optimism soon evaporated yesterday when brokers continued to express concerns about the sectors' profitability. Nick Bubb, a retail analyst at Evolution Beeson Gregory, issued a downbeat assessment of WH Smith's prospects, recommending investors should sell the shares and cutting profit forecasts for the year to £92m from £101m.

"I think even the best people are struggling to grow like-for-like sales without hurting their margins," said Mr Bubb. "Some people are hurting their margins and not even getting the like-for-like sales growth. The biggest worry is margins. With the fabled last-minute rush still likely next week there won't be too many far adrift on sales, but it will come at a cost in the short term."

Mr Bubb and others are worried that retailers who are discounting this early in the Christmas shopping period are simply storing up problems for the future

"In the long term pricing power vis-à-vis the consumer has been eroded. This time next year people are going to be even less motivated in November," he said. "It is the legacy high street retailers, such as Woolworths and WH Smith, who are perhaps most at risk given the rise and rise of the supermarkets."

Of all the traditional high street names, Mr Bubb thinks it may be Boots which has done best out of Christmas. Under the leadership of Richard Baker, the new chief executive, Boots launched a three-for-two offer on Christmas gifts, which it started early and executed well in terms of advertising and promotion.

However, consumers are going to expect no less next Christmas, which makes this year's relatively bad news all the more worrying.

"I haven't known a Christmas as bad as this one," said Richard Ratner, a retail analyst at the stockbroker Seymour Pierce.

"What we're hearing is that there was no pick up in sales last week. Normally you would expect to see a 20 per cent build, week-on-week, at this time of year but that simply did not happen last week.

"There is huge discounting across the board and while there will be a run from next Saturday through to Wednesday the question is how many retailers can hold on to the full margin," he said.

Retailers, meanwhile, are trying to remain upbeat about the prospects for the high street. Peter Williams, the chief executive of Selfridges, said clothing had been hit by mild weather and discounting was common in that area. But next week would be different.

"Christmas has come later," said Mr Williams. "It is a fact that Christmas is on a Thursday. Psychologically, people feel they still have three to four days before Christmas comes to fit in their shopping whereas when it falls on a Monday they tend to shop earlier. Another thing people are talking about is the recent rise in interest rates but I don't think that will make a huge difference as the cost of money is still incredibly low from an historical perspective. The people are still around. I don't think it is a footfall issue, it's more their state of mind."