High street retailers fearing Jingle-Hell…

Supermarket giants set to reap in the profits with tactics that high-street retailers will not be able to match over the Christmas period.

 

For any high street shop, whether small or big, the thought of Christmas looming in six weeks time would be exciting in terms of increasing revenue. Well one would presume so…

 

The last twelve months have been torture for British high streets across the country with the implications of the recession and consequential decreased consumer disposable income. This has lead to a fall in sales and has forced retailers to cut costs wherever possible. In such circumstances Christmas is a chance to benefit from higher demand. Despite this, media sources have been reporting that this Christmas sales for high street shops will be crushed by bigger players in the market- the supermarkets! Supermarkets? Yes…supermarkets.

 

The Times- “It’s vicious out there”

 

More than one month before Christmas supermarket giants including Tesco and Sainsbury’s have already launched special promotion bonanzas. These include, in the case of Sainsbury, offering half-price on Christmas cards and decorations making it merely impossible for smaller high street retailers (EG: Clinton’s) to compete with such prices. Asda has already started to prepare for what they believe to be their biggest selling period ever, by doubling their toy space offering over 700 choices of toys. Although at first this might seem a little confident of Asda, especially in a financial crisis, their top-seller (Dolls House- £35) sold 25,000 in one week. This is a sign of the strength of supermarkets because they have the scale/capacity to cut prices in order to stimulate demand. For a high street shop this competitive strategy is something they cannot match, as they may not have the financial security to make such a risk.

 

The Telegraph- What do the supermarkets say?

 

The Telegraph concludes that the premature promotions taking place at the moment are being fueled by the drive for supermarkets to beat each other. In other words, supermarkets are competing in their own market way above high street retailers. Although supermarkets are not fretting high street shops, quite surely the Christmas profits of high street shops lies on what supermarkets do next.

 

Asda’s chief financial officer Judith McKenna, has warned to The Telegraph that, “This Christmas will be the most aggressive on price for a decade”.  This price war has already started with Tesco cutting £250 million worth of consumer prices and Asda responding by cutting £150 million worth of prices. This type of strategic performance is unheard on in early November, as in previous years this is known as being a post-Christmas sales tactic. One could argue that 2009 is a unique year due to the recession and in future non-recessional years such pre-Christmas price cutting behaviour will not occur. In other words, this is merely a reaction to the recession. So how are high street shops expected to respond to the recession?

 

Another issue to add to the high streets’ problems…VAT

 

To add to the fear of the market-dominating supermarkets clouding over the high streets, the government are in talks of pushing up VAT to 20% in January. The VAT cut to 15% early this year that was implied to stimulate consumer spending in the recession, has been confirmed to be reversed back to 17.5% in January, according to a report released by The Guardian last week.  However, the decision to push VAT even further to 20% in response to the UK’s inflation is something the British Retail Consortium are trying to persuade Alistair Darling to avoid doing.  The Times also reports that the VAT increase will cut into UK spending growth in the start of 2010.

 

For high street retailers who may have a struggle this Christmas due to the extensive price cuts by supermarkets, the VAT increase will furthermore pro-long their ability to exceed out of the recession. One might say that the only glimmer of hope for small retailers is January sales but they may have to make even bigger discounts for customers in order to cover the 3.5% increase in VAT. This may be the only way of showing customers that their discounted product is a worthwhile buy.

 

In conclusion to the high street and supermarket Christmas sales war, I feel inclined to recognize that the supermarkets are not doing something “out-of-the-ordinary” but they are simply responding to the recession. By making pre-Christmas price cuts they are tactfully assuring their cash flow for the start of the new year- a time that suggests a slow start in terms of consumer spending. As like the supermarkets, small retailers need to develop their own Christmas tactic, especially if Alistair Darling “stick to his guns” and increases VAT in January 2010.

Articles read:

http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6917207.ece

http://www.guardian.co.uk/business/2009/nov/08/high-street-retail-vat-20

http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article6907891.ece

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6555313/Supermarkets-start-Christmas-price-war.html