Festive sales set for early start in UK

An increasing mood of desperation on the UK’s high streets could force some retailers to start their Christmas sales as early as November in a last-ditch attempt to get their tills ringing.

With consumer spending showing no signs of recovery, pressures on the retail sector are mounting and market commentators expect a slew of insolvencies in the new year.

“We are set for pretty aggressive discounting on the high street, and there’s a likelihood that shop windows could be turning red before the start of December due to early Christmas sales,” said Simon Allport, restructuring partner at Ernst & Young, which has handled the administration of retailers including Focus DIY and TJ Hughes this year. “There is a view that Christmas this year could be a last chance saloon for some retailers out there.”

Fears that this Christmas will bring grim tidings come on top of last year’s winter wipeout when disruption from heavy snows caused profit warnings across the retail sector. Retailers left sitting on piles of unsold stock were forced to discount deeply, though the damage was partially offset by the looming VAT increase, as consumers pulled forward their purchases of big-ticket items.

In a year in which retail sales have remained subdued, many high street stores including Debenhams took the decision to start their summer sales early in order to stimulate consumers into spending. However, the strategy does not appear to have been a profitable one.

During the coming weeks, summer trading figures set to be released from quoted retailers are expected to erase any hope of a meaningful recovery in the sector, with some analysts expecting double-digit sales declines. Many brokers have already pruned back their recovery assumptions, substantially lowering sales and profit forecasts for 2013 with the realisation that the trading environment is likely to be depressed for some time.

Surviving a second bad Christmas could prove too much for weaker retailers. With growing support for the prognosis that muted Christmas trading will see more casualties, the sector is facing increased scrutiny from trade credit insurers, who cover suppliers against the risk of default.

“It is unlikely, having gone through a whole year of tough sales, that suddenly the Christmas peak will make it all good,” said Tim Smith, leader of the trade credit practice at Marsh, the insurer. Noting that the prospect of the post-Christmas quarterly rental demand from landlords “has always been a historic high for insolvencies”, he says budget retailers will not be immune, with the clothing sector “particularly vulnerable”.

“There was a feeling earlier in the year that the cheaper clothing retailers might get a benefit from consumers transferring their purchasing power by trading down,” he added. “I don’t believe that has occurred.”