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US Consumer Having It Bad? Welcome to the UK

The news flow for retailers in the UK is getting worse while the news for US retailers seems to have bottomed. Not a huge surprise as the US and the UK have taken divergent paths to digging themselves out of a downturn (the US is spending out of a bad situation while the UK is cutting).

The most recent GDP results reflect those different paths — fourth-quarter 2010 UK gross domestic product - 0.5 percent, the biggest loss since Q2 2009, while the US increased 3.2 percent.

High Street retailers are dealing with the same pressures as their US counterparts and more. Rising input costs, higher gas and food costs and recent jitters in consumer sentiment. Add a little extra salt in the UK wound with a recent increase in the value added tax, government austerity measures that are just beginning to take hold and a possible interest rate hike on the horizon.

With the combination of pressures on the consumer and a marked drop offin consumer spending at the end of 2010, many UK retailers (Liberty, Debenhams, John Lewis matches prices) attempted to inspire early Spring spending. Unusual promotions were launched early March, just at the same time new Spring Fashion began hitting shelves.

These early promos did not seem to move the sales needle. And most recently, “mid-season sales” were launched at several additional retailers with 50 percent off promotions. Even the retailers that are not vulnerable to the fashion/seasonal cycle can’t seem to get sales off the ground.

For example, HomeRetail , owner of Argos and Homebase, also cited promotions were not effective in driving typical incremental volume. While retailers seem willing to concede margins in order to get consumers in the door the bottom line is promotions or no promotions, sales continue to deteriorate.

Today Marks and Spencer joined the laundry list of UK retailers feeling the pinch. M&S reported like for like sales of +0.1 percent overall with general merchandise declining 3.9 percent.

Food increased 3.4 percent. While sales numbers were a sigh of relief (consensus was -2.5 percent) the company has a cautious outlook for 2011 as consumers remain under pressure.

M&S is just the most recent on the list of UK exposed retailers waving the caution flag including: Dixon’s , Primark, Debenhams, Sainsbury’s , Home Retail (Argos and Homebase), Laura Ashley, Mothercare and H&M. The list goes on and includes HMV’s third profit warning this year (but that is a case of a dinosaur going extinct similar to Tower Records and Musicland/Sam Goody stores in the US).

We also have to empathise with Consumer Electronics player Dixon’s recent profit warning (hey, we had Circuit City and still have Best Buy ) as these companies are getting hit from online cheaper alternatives.

The real question is not who has it worse (although the UK environment might make US consumers feel better about their situation) rather how will UK and US retailers alike convince consumers to open up their wallets?

The decision for retailers is whether or not to promote (or even hold prices) in a rising cost environment, risking gross margin (clearly that did not go over well recently with H&M’s results). The alternative? — passing on rising input costs and risking market share.

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The author is an independent retail analyst and consultant. She has worked at UBS, SG Cowen, Fulcrum Partners and in 2005 was one of three analysts to launch the Research Department at Pali Capital, where she covered Retail and Home Video for 5 years.