Retailers have had a quiet start to the festive season, but business is expected to hot up over the next few days as end-of-season sales draw in canny shoppers waiting for bargains. "Footfall has been building since the end of November and I expect this to continue," says Helen Dickinson, director-general of the British Retail Consortium (BRC). "There’s still all to play for." There certainly is, but some will inevitably have a far merrier Christmas than others.
The trend of increasing footfall is reflected in the BRC's own figures. The number of people visiting shops last month fell 2.9 per cent on the year before, the same rate of decline as in October. And this is not just peculiar to less affluent parts of the country, either. All regions have seen fewer shoppers over the past three months - even Greater London. High streets have suffered most, with a 3.4 per cent decline, while footfall is down 2.3 per cent at shopping centres and 1.5 per cent in out-of-town retail parks.
And it's likely to be a tough slog this Christmas as savvy shoppers hunt for bargains and stores compete to lure them through the door by slashing prices at the expense of margins - sales are already in full swing, with some shops offering as much as 75 per cent off. According to the BRC and consultancy firm Nielsen, non-food retailing has experienced deflation in 22 of the past 23 months, driven by promotional activity.
As for 2014, consumer spending and sentiment might be improving, but households are no better off. Yes, unemployment is falling, GDP is growing, manufacturing seems to be on the up and house prices have risen sharply. But wages might not rise in real terms until deep into next year and household debt remains stubbornly high. The savings ratio is falling, too, as people use rainy day funds to bankroll spending - it's not new money. These are very shaky grounds on which to fuel a consumer-led recovery, and until households actually generate more income and productivity rises, retailers will struggle to maintain a sustained sales recovery.
Michael Hewson, chief market analyst at CMC Markets, agrees. He says even last year's outperformance was a surprise, given the continued squeeze on incomes, and is concerned that this year's recovery has been driven too much by the consumer. The implication is that some retail stocks could start to "become a little bit frothy". Debenhams (DEB) has already had a "reality check", says Mr Hewson. And while there is far more optimism around than there was a year ago, wage growth must outstrip inflation to sustain recent outperformance over the long term.
The retail sector is already up about 33 per cent this year, far outstripping the FTSE All-Share index, and that followed a 25 per cent rise in 2012. Given the significant re-rating, we believe that retailers must post volume-led sales growth and tasty earnings upgrades to keep this up. But these will be increasingly difficult to come by without growth in real wages. Consumers, meanwhile, are growing smarter, using the internet to hunt for the best deals, and changing their shopping habits, too. Discount retailers like Poundland and Aldi have never been so popular.
Having said that, many retailers who survived the downturn have actually come out stronger. Streamlining their businesses during the recession armed them with strong balance sheets, hardened management teams and extra market share as rivals went bust. The string of retailers lining up for initial public offerings (IPOs) next year is a further sign that general market sentiment is one of optimism. Still, we feel 2014 will be more subdued and would tread carefully - Blockbuster’s closure of its remaining 90-odd stores this month after failing to secure a buyer is a stark reminder of just how competitive, and challenging, the high street remains.
