North feels cold blast of sales slump

IT'S not the sort of news that shopkeepers want to hear as they head towards Christmas, but more than a decade of relatively free spending by Scottish shoppers appears to be drawing to a close.

Though some of Britain's biggest retailers continue to report robust performances, the mood in the high street is distinctly nervy.

Rising costs and the looming increase in VAT hang over the sector. Next boss Simon Wolfson last week warned shoppers to expect rising prices and most chains expect a slowdown as consumers worry about the impact of job cuts - particularly in the north of Britain which is more reliant on the public sector.

The effect of all this is the growing emergence of a north-south divide with sales in the shops down south holding up while those in the north head in the opposite direction.

Five-week trading figures published in the run-up to John Lewis's interim results revealed a marked split in the performance of its department stores. While sales gains were registered at nearly every location in the south of England, those in places such as Aberdeen, Glasgow, Newcastle and Sheffield suffered year-on-year declines. Glasgow was down 5.5 per cent and Aberdeen 4.8 per cent lower, while John Lewis in Edinburgh scraped a rise of just 0.8 per cent.

Leigh Sparks, professor at the Institute for Retail Studies at Stirling University, says those figures don't surprise him. He believes the "mood music" is changing in Scottish retail, and sees evidence of a north-south divide beyond what is happening at John Lewis.

"What we are seeing now is a totally new situation," Sparks says. "There is the potential for massive change, as consumers up here are very worried about what is going to happen to their jobs and their savings and so forth.

"The whole sense of what we are like as a country is going to be much different come December. For retailers based in Scotland or heavily reliant upon Scotland, this is going to be a very depressed market."

The prospect of large government job losses is one of the biggest unknowns in predicting consumer sentiment, as the extent of these cuts remains uncertain until the Comprehensive Spending Review is unveiled on 20 October. Though it will likely take several more months thereafter for the full impact to feed through, the psychological effects will be more immediate.

This weighs particularly on Scotland and other regions which tend to be more reliant on government-generated spending. The public sector currently accounts for about 22 per cent of Gross Value Added (GVA) to this country's economy, compared to an 18 per cent average across the UK.

There are signs that Scottish consumers are already mulling over the potential implications. Official figures show that high street spending north of the Border has lagged that of the UK for the last three months in what could be the reversal of the norm of more than a decade.

If Scottish retail does wind up stalled in the lay-by, it won't be because the rest of the sector is powering ahead in the fast lane. Government figures released last week by the Office for National Statistics revealed an unexpected 0.5 per cent drop in UK retail sales during August, with declines broadly based across nearly all categories.

Howard Archer, chief UK economist with IHS Global Insight, says it is important not to read too much into such figures, as retail sales can be extremely volatile on a month-to-month basis. He highlights the fact that even if retail sales are flat in the current month, they would still be 1.1 per cent higher for the whole of the third quarter when compared to Q2.

None the less, he admits the data add to suspicions that UK consumer spending will be muted in the coming months.

"People are clearly worried about consumer spending, particularly as it accounts for such a large proportion of our economy," Archer says. "A figure like that can only fuel concerns."

The mood of consumers remains crucial as retailers gear up for the critical festive shopping season. Though intentions don't always translate into reality, recent findings from Moneysupermarket indicate that most people are already planning to spend less this year.

A survey of 3,000 people across the UK revealed that they expect to spend just 195 on average on gifts for the holiday season, down from 232 last year. The resulting total decline of 2.3 billion equates to a 20 per cent drop in festive spending.

Scots are expected to be among the most generous holiday givers, as those surveyed said they would spend an average of 223. However, that would still represent a hefty 36 per cent decline from last year, taking a total of 504m out of Scottish tills.

Though it remains unclear whether most people stick to their intended budgets, the reluctance to spend could result in a kind of stand-off between consumers and retailers. If individuals hold back in expectation of better deals, shops could be forced into early price-cutting.

"What you might get is a sort of battle of wills between retailers and consumers," says IHS's Archer.

Freddie George, retail analyst with Seymour Pierce, is more sanguine about the prospects for the sector. Though trading conditions will undoubtedly remain tough, he highlights the fact that consumer spending has remained reasonably robust during the last three years despite considerable economic headwinds.

"There is a lot of very bad news, but I can't help but think that maybe the market is getting ahead of itself," he said.

Though not all are as optimistic as George, few are expecting the kind of blood-letting that felled swaths of retailers in the run-up to and months following Christmas 2008. Major chains such as Woolworths, MFI and Viyella went to the wall that time around, but experts agree that most of those remaining today have learned the lessons of controlling stock levels, cutting debt and reducing costs.

Robert Clark, senior partner at Retail Knowledge Bank, says Christmas sales would be most significant for those specialising in traditionally important gift-giving segments such as jewellery, books, entertainment, electricals, cosmetics, seasonal foods and confectionery.

Generals retailers such as department stores will likely do OK, though Clark says there "might be" some winners and losers. Entertainment retailers of products such as books, video games and DVDs are more likely to struggle unless they have a sharp online offering.

Vendors of big-ticket items such as furniture, floor coverings and large electrical appliances are expected to struggle as consumers hold back on major purchases, though the January increase in VAT to 20 per cent could bring forward some activity. Meanwhile, Clark predicts food retailers will continue to hold their own whichever way the economic winds blow.

"Supermarkets always tend to be the least affected anyway," he said. "They have a history of faring reasonably well under any circumstances."