UK Retailers Face a 'Very Blah' Christmas

The money-conscious consumer was spoiled in 2008 with extreme discounting largely due to a huge imbalance in supply-and-demand when the economy turned sour last autumn.

Sharon Lorimer

Retailers have a chance to get it right this Christmas, when 70 percent discounts are unlikely as they stock up very cautiously, running the opposite risk of actually being too light on stock.

“Inventories will be down in the double digits,” Eric Beder, Senior Vice President at Bean Murray, Carret & Co, told CNBC.com.

There will still be great value though, Beder assured, adding that shoppers can still expect 20-50 percent discounts on merchandise.

It is healthier for the retail sector to avoid price-slashing before Christmas, but “there is certainly a domino effect,” Natalie Berg, research director at Planet Retail, told CNBC.com.

“If all of your competitors are slashing prices, you’re not going to sit back and let them steal your customers,” she said.

UK department stores run the risk of this “domino effect,” Berg said. “M&S has vowed not to (cut prices), but if Debenhams continues to slash prices and Next or John Lewis follow suit, then they may be forced into rethinking their strategy.”

Winter Wear Blues

As wallet-wise consumers stroll through the department store, their eyes will certainly be drawn to the one big exception to the lack of price-cuts: winter wear.

It is hard to imagine any downside to the mild weather in the UK, but it has been “awful for fashion retailers, far too warm,” Richard Perks, Director of Retail Research at Mintel International, told CNBC.com.

“Knitwear and coat sales have been very weak, and so already we're seeing quite a lot of markdowns there,” he added.

Another tough sector for the UK retail giants is in youth consumers who are starting to open their eyes and realize that the tough economic times are affecting them, too.

During the past year, retailers have been supported by the young market, but as they head into this Christmas shopping season, those under 35 years of age showed the largest decline in expected shopping budget this holiday season.

Young shoppers “have been slow to admit that they could face problems in spite of the fact that youth unemployment is already back at the peak levels of 1992 and is still rising,” according to a Mintel report looking into Christmas sales projections.

“The teen segment will be one of the worst,” Beder told CNBC.com.

But retailers aren’t giving up hope on the buying power of the youth and are preparing to make this “one of the most promotional Christmases in the teen segment,” in hopes of luring them back.

VAT Hike

Another lure forcing even the wallet-wise shopper to make some big ticket purchases is the expected rise of the VAT to 17.5 percent on January 1, 2010.

The hike is expected to boost December sales by creating an additional rush to the stores in the week following Christmas.

This surge in buying will be a mix of “sales brought forward from January, some will be pent up replacement demand which has been put off this year and some will just be opportunistic buying,” according to the retail outlook report by Mintel.

Regardless of the reason, the rising VAT will do much to boost struggling players in the toy and technology sectors for the Christmas season, the time when they look to generate about half of their annual sales, Berg said.

The effects of better matched supply-and-demand paired with the impending tax rise have left the overall Christmas retail outlook pretty uncertain.

With a return of confidence and lower interest rates, Mintel is forecasting a 2 percent year-on-year growth in retail sales in December.

Beder, however, projects a 1-3 percent drop in year-on-year sales and told CNBC.com that it will be a “very ‘blah’ Christmas.”