Retailers are ahead at the break, but will they hold on in the second half?

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The Independent Online

As far as retailers are concerned, 2006 looks set to be a game of two halves. Official figures yesterday showed the high street enjoyed its best spring trading session in four years.

Thumping growth of 0.9 per cent last month alone took the increase in the second quarter - April to June - to 2.1 per cent, a figure that has not been surpassed since May 2002.

Some retailers did even better. Household goods stores posted quarterly growth of 4.6 per cent, the best for more than five years.

But dig a little deeper and a strong candidate emerges - the football World Cup. The driving factor behind sales of household goods was electrical goods, within which televisions - and particularly plasma screen sets - were stronger again.

Demand for flat-screen televisions, which has climbed as prices have dropped, escalated from April as the country began to go football crazy. At one point John Lewis department stores saw a near 100 per cent year-on-year rise in television sales. And Comet, the electricals chain owned by Kesa, said yesterday flat-screen televisions were behind its 8.6 per cent rise in like-for-like sales for its first half to 18 July.

Once the tournament started, families swapped shops for their sofas: April's 3.3 per cent monthly growth in household goods stores tapered off to 1.3 per cent by June. This prompted some retail analysts to warn the football boost was temporary. Philip Dorgan, the head of research at Panmure Gordon, said: "There is a concern that some of the sales are purchases that have been brought forward."

Meanwhile, supermarkets had a relatively rum time in the first two months of the quarter - falling 0.2 per cent in April and May - before surging 2 per cent in June as fans cleared shelves of food and drink before England's key games. J Sainsbury and Tesco said hungry fans had lifted sales.

There is even a similar pattern for clothing and textile sales - including football strips and flags - which rose 0.7 per cent and 1.8 per cent in April and May but slumped 0.9 per cent in June.

The last piece of evidence is for department stores that sell electrical goods and clothes. Their sales rose in April and May but slumped 1 per cent in June.

"In some ways the World Cup's impact on the retail sector has followed a logical path," Tim Sleep, the director of retail at the accountants Ernst & Young, said.

"Strong performance from flat-screen TVs, sporting goods and other non-food clothing categories prior to the tournament but dropping off once the football got under way and a strong run from food and drink throughout the tournament."

Now that the half-time whistle has been blown on the year, the issues are what will happen in the second half of the year and how the Bank of England will view the figures when it comes to raising interest rates.

Charlie Mayfield, the managing director of John Lewis Partnership, which also owns Waitrose, warned current trading looked strong in part because last year's figures were so weak. "The market is still very competitive. Customers are not out there spending furiously," he said.

Mr Mayfield added that whereas last year was "universally tough", the difference now was the high street was "more polarised into winners and losers". He said: "Those who had a better performance in the first half will be feeling more confident, but others who found life tough will probably be feeling just as cautious." He disclosed that sales at John Lewis department stores had risen 8 per cent in the two weeks to 15 July, making him one of the most optimistic.

Meanwhile, Ben Gordon, the chief executive of Mothercare, said the anomalies of the past few months - a very cold May, the World Cup and the current heatwave - meant it was impossible to read too much into recent data. At Mothercare like-for-like sales at its UK stores rose 2.3 per cent in the 15 weeks to 14 July, although Mr Gordon admitted the group had not been caught up in the football frenzy.

Jonathan Said, at the analysts CEBR, said the drop-off in clothing and department stores had dragged total non-food stores' sales down to a meagre 0.3 per cent in the month, down from 1.1 per cent in May. "While the UK consumer continues on his upswing, he remains cautious about how much he is willing to spend, and having brought forward spending for the World Cup, we are likely to see a compensating cutback later in the year."

Others say the Bank will be very aware of the potential of sporting tournaments to distort spending patterns, and would therefore be unlikely to adopt a knee-jerk response and raise rates as soon as next month.

Howard Archer, the chief UK economist at Global Insight, said: "It will be largely softer over the coming months as consumers face a number of major headwinds, most notably soaring utility bills, moderate earnings growth and an increasing tax burden."

Hopes that the Bank will keep rates on hold next month were boosted by comments by Sir John Gieve, a deputy governor, who said there was no sign that wages and prices had picked up in response to the huge rise in the cost of oil and gas.

"The market and the public now expect inflation to remain around target, and that appears to have helped damp the overall impact of the recent oil price hikes on the overall inflation rate," he told business leaders in Warrington, Cheshire.

The Office for National Statistics, which produced the figures, said there was a clear upward trend since March "assisted" by the World Cup, but not fully explained by it.

Some City economists agreed. David Page, at Investec bank, said: "There is a more fundamental revival occurring in UK consumer behaviour than a response to the World Cup."

Lombard Street Research said the sales figures had to be taken with a surge in broad money growth - cash and bank accounts - to a 15-year high and the revival in the housing market. "The outlook is for robust domestic demand and higher interest rates in the second half," Maya Bhandari, of Lombard, said.

However, for many, the most worrying statistic in yesterday's retail sales figures, at least in terms of interest rates, was a surprise rise in price pressures.

Prices fell last month compared with a year ago but by the smallest margin in three years. The retail sales deflator climbed to minus 0.4 per cent from 0.9 per cent in May and a recent high of minus 1.2 per cent. Food inflation almost doubled from 0.5 per cent to 0.8 per cent, while the scale of price cuts among mail order firms halved to minus 1.7 from minus 3.5 per cent.

"Growing evidence that higher import costs are diluting price deflation in the consumer goods sector bolsters the case for a modest, precautionary rise in base rates," Ross Walker, at Royal Bank of Scotland, said.

But all analysts agree the Bank's Monetary Policy Committee looks increasingly likely to raise a red card to homeowners and businesses next month or in October. A strong first estimate for economic growth in the second quarter, when figures are published today, could be the deciding shot.

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