Retailers should brace themselves, warns Clive Black. Consumer spending continues to be squeezed
We approached 2011 with some concern about the headwinds facing the UK consumer: the January increase in VAT, the commencement of public sector labour shedding and the adjustments to benefits, NI and taxes for many from April.
However, our caution underestimated the consumer sentiment and activity that has taken place throughout the first quarter.
A combination of additional pressures has served to materially constrain UK consumer spending and behaviour is much more akin to times of economic distress rather than recovery.
The dramatic increase of already fulsome forecourt prices, the accompanying increases in home heating costs, rocketing public transport charges and material food and drink inflation is eroding living standards at the most rapid rate for decades. More to the point, we see little to cause a material change in underlying upward momentum. The UK consumer is in for a slog.
There is no easy recourse to the ‘never-never’ following the banking crisis; credit is less available and requires more collateral at a higher price. Credit cards and mortgage equity withdrawals cannot sustain the spending party anymore.
Furthermore, wages are expected to rise below inflation for some time, putting a further squeeze on household expenditure; and wage inflation is the last thing the economy needs, believe it or not, because such pressure would probably lead to faster and sharper interest rate rises, which UK consumers need like a hole in the head.
Proof that our rhetoric is not fanciful is reflected in the downgrades we have put through in recent weeks to sales forecasts for Morrisons, Sainsbury’s and Tesco; larger cuts still have been made to our non-food retailer expectations. April will bring some respite with the longer and hopefully warmer days and the stimuli of Mother’s Day, Easter and a Royal Wedding.
However, whether the underlying position improves remains to be seen there is evidence that consumers are wasting less food in order to save money.
For the retail trade, we expect more administrations and collapses. We expect value to remain to the fore. We suggest retailers focus on customers, costs and cash management and hope that trends level out as the economy progressively digests the reality of austerity Britain. Amid the gloom, brighter times lie ahead. But when?
Dr Clive Black is head of research at Shore Capital Stockbrokers.