‘Unemployment fears could weigh on consumers’ minds even more than price rises’

Fashion and home giant Next put in a typically strong set of quarterly numbers this week, when it reported full-price sales up 10.5% – well ahead of expectations.

The impressive performance was partly the result of woes at competitor Marks & Spencer, where disruption from the recent cyber-attack drove online clothing customers to switch spend into Next.

But it also reflected Next’s fundamental prowess and appeal, and prompted the retailer to up full-year profit guidance by £25m to £1.10bn on the expectation that sales will advance 4.5% in the second half.

Next has a habit of under-promising and over-delivering, so perhaps it was no surprise that it struck a cautious note on the coming half. That reflects strong comparatives last year and because things should be normalising at M&S.

But one reason for Next’s caution will strike a chord with many retailers – employment trends and their impact.

Next noted: “We expect UK employment opportunities to continue to diminish as we enter the second half, with the effects of April’s national insurance changes continuing to filter through into the economy as the year progresses. We believe that this will increasingly dampen consumer spending.”

While some essential costs for consumers, such as food, are rising, it’s noticeable when talking to retailers at present that many see security of employment as a bigger factor in giving people the confidence to spend.

But the jobs market is looking less reassuring. Earlier this month official data showed that the unemployment rate has reached 4.7%. That’s the highest level in four years, and job vacancies have been on a downwards trend for three years.

“Tougher times are not a given, but retailers need to be ready for them nevertheless”

Ironically, as flagged by Next in its comments, one of the contributors to higher joblessness is the hammer-blow of the changes to national insurance, which has dealt many retailers a savage blow.

On the same day as Next reported, trade body the BRC published data compiled from retail finance bosses that showed 42% had frozen recruitment and 38% had reduced job numbers in-store.

The same cost pressures will be felt in other industries and among smaller businesses that are crucial employers of retailers’ customers.

At the moment the school holidays are under way, and many will be enjoying a break in the sun. But within a few weeks, retailers’ efforts will be focused on the run-up to and delivery of the golden quarter.

While retailers know from experience that consumers generally pull out the stops at Christmas, factors such as rising unemployment mean the omens for this year aren’t as auspicious as they could be.

If unemployment continues to rise, or fears about job security take hold among consumers, then the combination of that and inflation could make for a challenging end to the year for retailers.

The BRC study found that the vast majority of chief financial officers reported their companies have had to increase prices and two-thirds expected more rises in the coming year so pressures on the consumer will not abate, potentially prompting more selective purchasing.

The government may have a growth agenda, but so far there’s little sign of delivery of the economic improvement that would encourage shoppers to be freer with the purse strings.

The latest industry sales data has shown sales holding up pretty well, helped by the same weather that contributed to Next’s performance.

However the sunny conditions may well cloud over. Tougher times are not a given, but retailers need to be ready for them nevertheless.