Christmas will be fine, but...

Every year, consumers delay their Christmas spending to try to capitalise on any early Sales before, in the vast majority of cases, the tension breaks and shoppers come out in force to purchase those last-minute gifts.

We can have confidence that the same will happen again this year. Christmas will not be cancelled and consumers will spend. Indeed, we believe Christmas retail sales will edge up 1% this year taking the total value of retail sales in December beyond £37bn.

Consumers have been resilient throughout 2010 as historically low interest rates boosted spending power. Coupled with the desire of consumers to treat themselves at Christmas, this season will be relatively good for retailers. The VAT increase will provide an incentive to some consumers to bring forward big-ticket items, delivering a pre-Christmas fillip to retailers of high-value goods.

However, there may be an element of ‘the last hurrah’ about this Christmas as consumers prepare for a year in which reduced disposable income would seem inevitable for many.

Measures announced in the Spending Review, such as cuts in child benefit or increased train prices, will begin to take hold. The anticipated 500,000 public sector job cuts will perhaps have the greatest impact though, and the consequent reduction in household budgets will clearly have a direct impact on the retail sector.

As a result, we do not think there will be any meaningful sales growth in the retail industry next year and the possibility of falling sales values is a real risk. Alongside flat or falling sales, retailers face inflationary pressures that will drive up prices in stores, particularly in non-food.

The era of falling costs and prices, which has defined non-food retailing for over a decade, is coming to an end. The countries from which we import are growing more rapidly than the UK, resulting in imported inflation.

As millions more people join the middle classes in these countries, domestic demand is adding to the pressure as higher volumes of goods are diverted to the home market. Scarcity of output is becoming an issue.

Clothing retailers face the difficult situation of increasing costs at one end, but a squeezed consumer at the other. Prices will certainly rise but with disposable income fundamentally constrained, consumers will have to buy fewer items.

We are seeing the end of the volume-driven non-food market, which has characterised the past decade or more, and a very different trading climate is emerging. It is not clear how much of the price increases retailers will be able to pass on to consumers.

In such a market, the gap between strong and weak will be much more amplified and casualties are likely. Good returns will still be made by some retailers but, on the domestic front at least, growth will have to come from taking competitors’ market share.

Richard Hyman strategic retail adviser to Deloitte