Gloomy Consumers Hit UK Retailers Hard
The gloom which has descended on the British high street, with shop closures and well-known chains collapsing, is set to continue as consumers cut back, Mike Dennis, senior consumer analyst at MF Global, told CNBC Thursday.
"The consumer is still very much cutting back on their discretionary spend," said Dennis.
British consumers are staying out of the shops as high food and oil prices, coupled with public spending cuts and unemployment, squeeze their budgets. They are also cutting down on credit card spending and reducing their debts, according to Bank of England figures Wednesday. The number of people claiming unemployment benefit Jobseeker's Allowance rose at its fastest pace in almost two years in May.
RSM Tenon believes that about 67,000 UK retail companies are in danger of failing. Thousands of jobs will be lost in the retail sector in coming months as companies close stores or fall into administration.
"We've still got another six months of staples inflation to come through," Dennis said, citing cotton prices as a key driver of the market.
While consumers are benefiting from historically low mortgage rates as the Bank of England keeps interest rates at their lowest ever rate of 0.5 percent, the other side of the coin is that savers aren't earning as much interest on their money, according to Roger Nightingale, economist at RDN Associates.
"Disposable income is falling, that's why retail sales are falling," he told CNBC.
"Anyone looking at big investments like a television or car is getting a lot more cautious," Rahul Sharma, retail analyst and managing director at Neev Capital, told CNBC.com
"People are treating themselves to smaller ticket items. That manifests itself in some of the weaker players shutting down."
The internet is also playing a part by allowing customers to find cheaper alternatives more quickly, according to Sharma.
"The demographic that's most affected by inflation is the lower end," he added, citing recent disappointing sales from Primark and New Look as evidence that cheaper clothing companies are not doing well out of the downturn.
"Now people are concerned about average annual wage increases in terms of their ability to catch up with inflation in household goods," said Dennis.
He added that electronics stores have performed particularly badly. Comet, the electrical goods chain with about 250 stores in the UK, has been put on the block by its owner Kesa after plunging to its first annual loss in 15 years.
His top picks are Kingfisher , as DIY stores have performed well, and Next , for the strength of its online sales.
Summer sales have kicked off early this year as retailers try harder to persuade shoppers to part with their cash.
"Consumer demand is too low, hampered by inflation as well as the knock-on effect of public sector cuts and relatively high unemployment, [while] costs are too high, thanks to issues such as high rents and high cost of materials," said Carl Jackson, head of corporate insolvency at the restructuring specialist, in a statement.
Thorntons and Carpetright have this week announced extensive store closures after over-expanding during the economic boom.
Jane Norman, a young fashion brand, went into administration, with the loss of over 1,000 jobs, although 33 of its stores were bought by Scottish knitwear retailer The Edinburgh Woollen Mill.
Furniture store Habitat, once a byword for aspirational middle classes, collapsed into administration last week. Home Retail Group, owner of Argos, bought three of its stores in a pre-pack deal.
There are doubts over the future of HomeForm, the owner of Moben, Kitchen Direct and Sharps bedrooms and Dolphin. The company said on Tuesday that it was looking for a buyer for Kitchen Direct and was close to securing a deal to "safeguard the future" of Sharps.
"All these companies had lost their design edge. They used to be cool and their pricing was a bit out of whack, so they weren't offering value for money," Sharma said.
Debenhams, Britain's second largest department store chain, which has struggled in recent years, announced a rise in second-half sales Thursday, but said that its outlook was "cautious".
The chain benefited from relatively good clothing sales in April and May, according to Dennis.