The Big Question: Has it really been such a bad year for retail, and what about its future?

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The Independent Online

Why are we asking this now?

As Boxing Day kicked off the sales season, retailers are expected to slash their prices by up to 70 per cent to convince increasingly wary consumers to continue spending and boost their supposedly flagging sales figures. It has been a challenging year for the sector after a disastrous summer, and some fear there could be further pain ahead.

Did retailers' woes really start with bad weather?

2007 started strongly, with consumers spending against the backdrop of buoyant financial markets. The problems started for the retailers with the onset of the worst summer weather for over 200 years. As the rains came, the punters stayed away from the high street, while much of the seasonal stock was rendered useless anyway. Supermarkets and home retailers were unable to shift barbeque food and equipment.

Analysts also deemed 2007 a "disastrous" year for clothing retailers, as customers found themselves buying waterproofs instead of shorts. Many were forced to bring their sales forward, slashing prices by two-thirds in a bid to clear out stock. Blue chip fashion group Next shed 28 per cent of its value between May and August. Debenhams lost 16 per cent over the same period.

The sector has been littered with profit warnings, none more apparent than in the sports retailers. Sports Direct International and Umbro have both warned the market that they would miss profits targets. These companies have also been hit by dismal performances from England's football team, leaving a warehouse full of unsold replica kits.

Surely the economy played a bigger part?

The retailers can count themselves unlucky. They were smashed by bad weather just as fears of a global economic slowdown began to grow. It started in the US, whose economy tottered after it was hit by the sub-prime housing crisis, which then migrated across the Atlantic, culminating in the near collapse of Northern Rock. The bank was propped up by the Government, fearing the knock on effect should it go bust and depositors lose out.

So is there a crisis in consumer confidence?

While disaster seems to have been averted, the financial markets remain nervous. The interest-rate rises from earlier this year, continued fears over the housing market and an economic slow-down have seen consumers tightening their belts. Retailers have pointed to consumers' discretionary spend failing to rise in the same proportion as food inflation and higher housing bills, which have contributed to a dip in spending.

Have there been any winners?

Most stores are expected to have endured a lousy year, with anecdotal evidence from several companies pretty downbeat. Until further retail figures are released in the next few weeks, the full extent of the damage is unknown. The only major player that seems to have ridden the wave this year is the John Lewis Partnership. The group, which owns Waitrose and 26 department stores, is expecting a record Christmas and managed to protect itself from the vagaries of the summer. Andy Street, managing director of John Lewis, said it was down to having the right products, the right level of discounts and strategic thinking in the run up to Christmas. Even so, the group's numbers show the distinct slowing down this year. In the first half sales were up 6.5 per cent on a like-for-like basis. In the second half, before Christmas, that had fallen to 3.9 per cent.

Was Christmas really that bad?

The simple answer is no. It was looking touch and go until about five weeks ago, but last-minute shoppers piled in over the fortnight before Christmas. John Lewis said yesterday this year has been its best Christmas ever, as it passed the 100m mark on consecutive weeks in December.

Philip Green, head of the Arcadia retail empire, said earlier this year that, whatever the conditions, people always spend at Christmas, and some executives have admitted that they predicted tougher conditions this year. Retail analysts predicted in the run-up to December 25 that shoppers in the UK would spend 4.25bn on food alone in Christmas week. The British Retail Consortium warned back in November that while it expects 12bn through the tills, that would be driven by stores being forced into heavy discounts.

Are the huge sales masking problems for the retailers?

That's what the British Retail Consortium thinks. It said discounts had helped boost sales in the 10-day run-up to Christmas, so it should beat year-on-year sales from last year. Kevin Hawkins, director general of the British Retail Consortium told the Today programme that stores will be slashing prices to rid themselves of seasonal stock. He added that the rise in sales would mask the fact that margins would still be squeezed by the heavy cost-cutting. Having said that, retailers want to clear their stock of their winter ranges to prepare for the new year.

Has the talk of heavy discounts brought in the customers?

Talk of massive discounts and huge sales has had customers queuing outside stores yesterday throughout the country, while others were logging on from home as soon as the last chime rang up at midnight on Christmas day. Some stores are bringing in up to 20 per cent more stock than last year in preparation and at the Brent Cross shopping mall yesterday 10,000 customers went through the doors in the first hour of trading. A spokeswoman for the group said she expects the day's closing figure to be around 100,000. She added that two million items were expected to be sold at the site that's an average of 3,000 a minute.

Is this the end of the high street?

The retail sector's fortunes work on a cyclical basis, according to Street. "It tends to follow similar patterns. If there has been a tougher Christmas, then strong sales tend to follow. This isn't the first time and won't be the last," he added. The retailers also believe that the threat from online buyers is overblown. While online shopping hit record levels of 52m for the high street retailers this year, they believe it is something they can harness and develop alongside their physical locations.

What can be done to boost spending?

The Confederation of British Industry is calling out for further interest-rate cuts, saying they would stimulate growth in consumer spending. The Bank of England lowered rates by a quarter of a basis point in December, its first fall for two years, but the CBI complained that the move wasn't enough. Tesco lent its support, calling for the cut "sooner rather than later". Andrew Higginson, the group's finance director said the risk of inflation had been overstated and was causing consumers excessive concern.

Is the future bleak?

The uncertainty in the financial market means few are brave enough to predict a resurgence in consumer spending soon. One fear raised was the knock on-credit effect into next year. Much of the late Christmas shopping was done on credit cards, according to economists, which could slow buying in the new year.

Street said: "In the short term there will be a tougher spring in the retail sector. The market is expecting growth, but at a significant slow-down. I must stress, however, this is not Doomsday."

High street in decline?

Yes...

* Retailers have been forced to slash prices by up to 70 per cent in a bid to bring people through the door.

* The rise of the internet bit into profits this year, with analysts predicting online shopping will only continue to grow.

* Economic conditions and poor weather have lead to customers staying away from stores.

No...

* Retail executives believe this is just a downward trend in what is a very cyclical business, rather than a sector meltdown.

* Many companies are investing in the creation of a complimentary internet business to its existing stores

* Business groups say the situation could be reversed with interest rate cuts.

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