Sales slump to hit high street in 2011

THE City is expecting further profit warnings from retailers and falling sales from next month when the high street faces one of its most difficult challenges for decades.

Retailers are bracing themselves for a disastrous start to the New Year despite potentially record post-Christmas sales as consumers rush to beat January's VAT rise.

Shoppers are expected to turn out in their droves over the next eight days as they snap up bargains ahead of the 2.5 per cent VAT hike on 4 January. Retailers are also expected to benefit from pent-up demand from before Christmas when the snow and icy conditions saw shoppers stay at home on what would usually be some of the busiest shopping days of the year.

But the Boxing Day sales boom is only expected to mask trouble further down the line as the VAT hike, spending cuts and continued economic uncertainty take their toll.

Last week, women's clothing store Alexon became the first retailer to issue a profit warning following the disastrous weather, but more are expected to follow suit. Markets are keeping a watchful eye on Clinton Cards, HMV and JJB Sports in particular. JJB was forced to go cap in hand to Microsoft founder Bill Gates and other investors for more than 30 million just before Christmas in order to avoid collapse.

Martin Carr, a retail director at Ernst & Young, said: "After 4 January everyone looking at UK retail will say it's going to be a very tough start to the year."

A survey of Britain's biggest retailers published tomorrow is expected to confirm the City's fears. It is believed most companies are bracing themselves for a worse performance next year than in 2010 as households also struggle with falling income but stubbornly high inflation.

Retailers are expected to tempt shoppers out over the coming week with "beat the VAT rise" campaigns, which are expected to boost the sales of white goods and electronics in particular. However, analysts are divided over whether even record-breaking figures will be able to make up for the shortfall from before Christmas when snow wreaked havoc for Britain's high streets.

"The impact of the snow cannot be underestimated," Carr said. "For many retailers, the last Saturday before Christmas would have been equivalent to a week's sales (in just one day], but that was wiped out if not significantly reduced."

Nick Bubb, retail analyst at Arden Partners, is more optimistic, suggesting that the millions spent between today and 4 January will go a long way to make up for the disastrous run-up to the festive season.

However, analysts point out that figures for this December will be up against tough comparisons with 2009 when sales held up well despite the recession. "This week is going to be absolutely massive," Bubb said. "All of the VAT promotions will be on TV and in the papers - given the pent-up demand anyway, it will be huge and it could offset the shortfall in recent weeks."