The high street's last fling

Some retailers are seeing better than expected Christmas sales, but most don't think it will last. James Thompson reports

Whisper it quietly, but Christmas may not turn out to be the non-event many high-street retailers have been dreading in recent months. With 15 shopping days left before Christmas Day, there are already some tentative indications that the festive season is turning out better than many retail experts had been expecting.

While the British Retail Consortium (BRC) said yesterday that total retail sales had fallen for two consecutive months for the first time in the survey's 14-year history, they only fell by 0.4 per cent in November. And not all retailers are struggling. Primark's flagship London store on Oxford Street, for example, took more than £600,000 last Saturday – the biggest single day of sales in the value fashion giant's 39-year history. While Primark's record day was boosted by a special traffic-free day in the West End, other fashion retailers, such as New Look, H&M, Peacocks and TK Maxx, are understood to be trading robustly nationwide. And in the food sector, Morrisons, Asda and Aldi continue to deliver credit crunch-defying underlying sales.

That's the good news. The less happy seasonal tiding is that, while at least some consumers look set to engage in one last spending fling prior to Christmas, most will then hunker down for what could be a deep and painful consumer recession in 2009.

While this Christmas will no doubt be tough for retailers, no one quite knows just how bad trade will be by the time Auld Lang Syne is heard in pubs. This is because retailers are now entering unchartered waters, with a massive squeeze on credit, a tumbling housing market and the lowest interest rates since 1951. Trade on the high street is also volatile, with retailers such as the bellwether Marks & Spencer and the DSGi-owned chains PC World and Currys reporting that sales are swinging sharply from one week to the next. The 2.5 per cent cut in VAT has only added to this volatility.

Robert Clark, a senior partner at the retail research firm Retail Knowledge Bank, said: "I think it is volatile. One of things that is emphasising the volatility is the price deflation that is coming into play, driven by discounting, particularly in non-food. In addition, consumers are playing the market in terms of waiting for discounts; and the fact that the market is characterised by winners and losers makes it quite difficult to identify what is actually going on."

In addition to massive pre-Christmas discounting, another powerful argument in favour of consumers gearing up for one last fling on their credit cards was provided yesterday by MoneyExpert.com, the financial comparison website. Its site received a 15.6 per cent uplift in November, compared to the same month last year, of people applying for interest-free credit cards.

Sean Gardner, a director of MoneyExpert.com, said: "It can make financial sense to cash in by taking out interest-free cards and then paying them off. But Christmas tends not to be a time for sensible financial planning and the UK economy has been detached from reality for quite a while now."

Worryingly, MoneyExpert.com said that 27 per cent of adults owing money have gone further into the red in the past three months, and 30 per cent were concerned about their ability to manage personal debt. Furthermore, it found that about 4 per cent – equivalent to 1.8 million people – had increased their debts by more than 20 per cent in just three months.

There may well be one last fling for consumers with their plastic, but a major concern for the retail economy is that spending on credit cards has been "flat" this year, said a spokeswoman at APACS, the trade association for payments.

Moreover, while Christmas might not be as bad as feared, few – if any – retail experts expect 2009 to be anything but grim. They fear that rising unemployment, further falls in house prices and a lack of credit for consumers will lead to a fresh wave of retail administrations. This year, a large number of retailers, including Woolworths, the pick 'n' mix retailer, MFI, the furniture chain, and MK One, the discount fashion chain, have hit the buffers.

Phil Duffy, a partner at the restructuring specialist MCR, said: "We expect to be busier next year than this year. The jobless total is likely to rise to 3 million and that will take a huge chunk out of the retail market and people will cut back."

In October, another restructuring firm, Begbies Traynor, said it had a whopping 323 retailers on its "critical watch list".

Bryan Roberts, the global research director at Planet Retail, said he is resolutely sticking to his forecast that another eight "well-known and major high street" chains will fold, following the administrations of Woolworths and The Pier, the homewares chain, in recent weeks. "There will be some apocalyptic bad news and red ink flowing around [in 2009]," he said.

He is particularly gloomy about mid-market clothing and footwear retailers. "In clothing and footwear there will be some quite significant pain this Christmas. The likes of H&M seem to be holding up, but the tumbleweeds seem to be blowing through the mid-market, with Next and M&S two of the victims."

Nick Bubb, the Pali International analyst, added: "I am very gloomy about 2009." Mr Bubb believes that the hefty pre-Christmas discounting by many high street retailers, such as M&S and Debenhams, risks turning consumers off the January sales. "If you look at the retailers who [seem] to have been on sale every week, it devalues the whole notion of the January sales. When people see Debenhams on sale again they yawn," he said.

Still, despite the impending recession, there are retailers who are likely to continue thriving next year. Those that offer quality products at low prices will be top of many people's shopping list. Mr Clark said: "The supermarkets are doing well and the retailers Game and HMV, that sell leisure products, such as the Nintendo Wii, are also performing well." Others bucking the gloom would appear to be the general merchandise retailers, including Wilkinson and Poundland.

The food discounters Aldi, Lidl and Netto, the frozen food specialist Iceland, and the supermarkets Asda and Morrisons are expected to outperform the market again next year. For the 12 weeks to 2 December, Aldi grew its sales by a stunning 25.4 per cent, Iceland by 11.6 per cent and Morrisons by 10.3 per cent, according to TNS Worldpanel.

In fashion, Mr Clark said he expects the value fashion players, H&M, Primark and TK Maxx, to continue to deliver sales ahead of many of their peers in 2009.

While retailers such as H&M typically cater to a younger customer base with fewer financial constraints, he says the reality is somewhat different. "I think a surprising number of older women buy there," he added. "It has a much wider appeal."

However, for most of the retail sector the writing is already on the wall for Christmas and next year and it is already making them wince. While the BRC revealed that like-for-like sales only fell by 2.6 per cent in November, the overall numbers were propped up by buoyant performance from food retailers. Verdict Research has estimated that retail spending on the high street, excluding online and grocery sales, will shrink by more than 4 per cent in 2009 – the largest drop since records began in 1965.

A big storm is heading the way of the retail sector and it could be a lengthy one. Mark Hudson, the lead consultant for the UK retail and consumer sector at PricewaterhouseCoopers, said: "Research suggests that if a recession is preceded by a banking crisis it tends to be twice as deep and twice as long to the bottom."