How tough was tough?

Retailers were overstocked going into Christmas. The trading statements will reveal weak sales achieved at a big cost to margins.

Setting the scene

Over the next 4 weeks we will bring you regular updates as the picture of Christmas trading becomes clearer.

Key dates to look for are:

6th Jan Debenhams

7th Jan M&S

8th Jan Sainsbury’s

13th Jan BRC sales for December

23rd Jan ONS retail sales data for December (on a Friday, for a change)

In this first article we pull together the evidence so far and try to set the scene.

Autumn 2008

There had been plenty of evidence of growing consumer distress through the Summer. People were clearly beginning to trade down. Each M&S trading statement seemed to mark one further notch down in trading.

The John Lewis Department stores data gives a good picture of how the middle mass market was reacting through the Autumn. The step down in September coincides with the failure of Lehmans.

But the recovery in December shows how people were prepared to come out and spend and by the end the week on week declines were little more than could be explained away by the timing of Christmas.

The BRC figures got steadily worse and actually reported sales falling in October and November. Late September saw the beginning of the financial crisis and there was certainly some evidence of a further deterioration in trading around that time

But the ONS data was consistently strong and we have always argued that the ONS retail sales figures are likely to be nearest to the truth because they are based on a larger sample.

It is hard to square the evident retailer distress at the time with the ONS data. The most likely explanation – and one backed up by some of Mintel’s own consumer research, comes from looking at the market in more detail. Those aged between, say, 25 and 50, were hardest hit by the problems of 2008 – the rapid rise in inflation, huge hike in fuel prices and the rise in interest rates. These were the mainstay of the household goods retailers, they had mortgages, children and Commitments. This was the group that began to trade down (witness the strength of Aldi and Lidl and Tesco’s launch of a discount range).

Latest data on the savings ratio and housing equity withdrawal show consumers starting to rebuild their finances in the third quarter.

But the younger end of the market who are very big spenders on the high street, were much less affected. No mortgage, much more disposable income, very fashion conscious and brought up with a culture of living off borrowings. The income squeeze that hit the older age group, more or less passed them by and they carried on spending.

December

But in late November or early December all that changed. The income squeeze was over because inflation was falling and interest rates were at a long term low. But now the credit crunch was beginning to have a direct impact on consumers. The economy was in recession and unemployment was beginning to rise. For the first time the younger end of the market began to feel threatened and the older group were seriously worried.

M&S was the first to alert us to the high street problems when it had its first 20% off spectacular day (there were two more later).

It coincided with a Debenhams promotion and John Lewis followed as well.

The problem with an across the board cut is that the fastest moving merchandise will sell best and the company is still left with the less successful ranges to clear.

Failures

2008 had seen several retail failures, but in late November there were two which rocked the sector and have dominated the national news ever since – Woolworths and MFI. MFI was the number two in the furniture sector, but there appears to have been no interest in a rescue and the business has been closed down.

There appeared to be far more interest in Woolies, but no actual bid materialised. Shorn of its property assets when it was floated off from Kingfisher, Woolies had to justify itself in purely retail terms.

There was no point in mourning its demise. It had never established a compelling reason for its survival and when demand turned down, its losses became unsustainable

The administrator faced with the problem of clearing stock onto an unwilling market took the logical step of clearing through the Christmas season. It has worked and as the stores have come up for closure they have been virtually empty and everything, including fixtures and fittings, have been sold.

The last stores close on Jan 5th.

Woolworths was followed by Whittards, USC and Officers Club, though these have been slimmed down in so-called pre-pack deals and have emerged to trade on. Much the same may happen with Adams.

Stocks

The trouble is that when retailers were stocking up for Christmas, initially last Spring and then finalising orders in August / September, demand was still very strong. It was quite reasonable to suppose that demand would hold up through to the new year. That would have been the case with falling inflation, had it not been for the financial crisis in September and the lurch into recession.

That meant that retailers had too much stock and the reason for the promotions in December was the realisation that stocks were too high just to be cleared through the sales in January.

To go on full sale in December is a sign of real distress – the equivalent of hoisting a flag and saying “I’m in desperate trouble”. But for the first time for many years that is what actually happened.

The distress was spread across the whole spectrum and for the first time there was clear evidence that the younger end of the market was cutting back.

Warehouse, Wallis, H&M, Oasis, Mango, Uniqlo were all on Sale as much as a fortnight before Christmas. Even Ted Baker, until recently one of the best performing younger brands, had deep discounts.

And there was a cut in VAT as well, but in the context of the 20% and more discounts available, the 2.12% cut in prices thanks to VAT was a complete waste of time and, in effect, a further cost for retailers to have to bear.

The Woolworths clearance must also have hurt direct competitors because of sales lost to the deep price cuts as the administrator tried to maximise receipts.

The “January” Sales

The Sales appear to have started well. There were reports of huge crowds on Boxing Day and John Lewis’ sales were up 7% on last year on the first day of its Sale, Saturday 27th.

One problem with going on Sale early is what to do when everyone else actually goes on Sale. The answer is usually to cut some more. So H&M, which was on a 50% Sales before Christmas now offers “up to 70% off”.

In fact this year has seen another step in the inflationary spiral of discounts in the January Sales. “up to 50%” is the norm this year – as at Zara, among many others.

Best placed are those that held their nerve and, as usual, Next gets top marks for this. It did not have to indulge in special promotions before Christmas and it followed its usual practice of cutting prices hard on the first day of the sale.

It has opted for honesty and transparency as well. “All Sales items half price or less” say the signs. And by the time this picture was taken on Monday 29th December this particular store had remarkably little stock left in it.

Other retailers have had to pay the price of heavy discounting before Christmas. Bhs had a “Half price Christmas Spectacular” before Christmas, and is now on “up to 60%”. Benetton is up to 70% off. But so is Debenhams, which, apart from the big discount days, otherwise held its nerve until Boxing day.

So – how good was Christmas?

Sales volumes rose sharply in December – that much is now clear. But those volumes were achieved through massive discounting, of which Woolworths was a significant part – in 2007/08 it accounted for 1.3% of all non-food retailers sales, and a substantially higher proportion of the markets it competes in. The surge in sales after Christmas was also on bigger discounts and may well prove to be short lived.

We have been forecasting flat sales in value terms for December and we still feel that that is likely to be about right.

2009

Christmas was bad for retailers because they went into it overstocked. Retail sales had been so strong in the first three quarters of the year that they, quite reasonably, thought that the trend would continue through Christmas. But sales turned down and while the outturn in sales may not look too bad, the cost in margins will be severe.

• There will be many profits warnings this January and many trading statements brought forward for that reason.
• There will be more failures, some from the list above, but there will be others as well and some of them will be major high street names.

2009 will be the really tough year. Unemployment is rising fast, the housing market is in free fall. These are desperate times and the government’s actions look desperate. The trouble is that they are also inherently inflationary and any recovery is likely to be nipped in the bud by efforts to hold inflation down.

Nor can we expect a quick recovery. No recovery will be possible at all until the banks start lending again and that could be well into the future. Rising bad debts and falling asset values will be the story of 2009 for the banks.

Perhaps 2010 will be better.

Going Alone For the Ride

The very structure of the standard pension is borne from the idea that the State knows best.

We need to save for retirement, but we can’t be trusted to do it under our own steam – so the Government bribes us with tax breaks in order to encourage us to put aside money for the future.

And once we’ve paid into the pension, we can’t be trusted not to blow it on toys and trinkets – so the money is locked in until we hit retirement age. Advisers tell us which pension to buy, and fund managers invest the money on our behalf. Even when we hit retirement, nanny knows best – we can take some of the money in cash, but the rest has to be invested in an annuity, so we can’t fritter it away and run out of cash before we die.

Breaking Away

In its purest form, the SIPP is perhaps the ultimate rejection of this nannying culture. It’s a wrapper that still lets savers benefit from the tax breaks available to those who save for their retirement, but within that wrapper, investors are free to make their own decisions – and their own mistakes.

For a trend to become as pervasive as the nanny culture, it must have some attractions. And in the financial sphere, there are many arguments for the continued existence of this hand-holding. Relatively few people have the inclination to strike out on their own – choosing a pension is complicated enough without having to choose exactly what is going to be held within that pension.

Perhaps just as attractive is the fact that when things go wrong, you can blame someone other than yourself. With a SIPP, you can’t blame the fund manager or the adviser when your investments plummet in value. No chance of claiming for mis-selling when your sure-fire bet on that Peruvian uranium mining firm doesn’t come off.

That said, for a sizeable minority of the population, this is an attractive proposition. Few are ready to go it totally alone – as documented throughout this report, even e-SIPPs are generally managed with the assistance of a trusted adviser. Nevertheless, with the credit crunch showing that even the experts can get it totally, spectacularly wrong, the case for bypassing nanny could appear increasingly compelling.

Recession Cocktails

To get the frugal-types away from drinking at home, liquor companies and bartenders are devising recipes to revive old cocktails that were popular during the Great Depression.

Singapore Sling, Vesper Martini, cognac and bourbons have been popular choices. According to news reports, some bars are offering 35 cents for drinks like Bourbon Bailout. But there's also some new cocktails that more closely reflect the times, one named the 401K.

In December of 2008, a 27-year-old painter, Rebecca Mulligan, drank a cocktail called The Hemingway instead of her usual glass of merlot in LA bar called Edison. She said of the drink, made with champagne and absinthe:

Booze Revisited

Some other popular drinks called Rejected Resume, Battered Bull and Welfare Punch are being promoted at bars.

And it has worked, according to news reports. It seems that people take joy in the tongue-in-cheek humor with these drinks, and it's sort of a cathartic way of sharing the times with others.

The 35-cent promotions also help, of course.

But we can't ignore how deeply things have changed for most consumers. Historically, people have fled to bars in tough economic times. Among the many differences now is, alcohol is more acceptable to drink at home.

• Our research indicates that consumers are spending more time on recreation at home—and in the homes of friends and family members—in order to save money while maintaining and building core social networks.
• This is where bars have to emphasize the importance of home and comfort in their establishments, along with the possibility of meeting new people. It's important to note the play on brands and silliness factor tied in.
• Special events are an alternative, where consumers can interact on a level that is not easily duplicated in their homes.

TransLegacy Universal Life Insurance CD from Transamerica Worksite Marketing

Pomegranate Pillows Drink Mix