Retailers facing a perfect storm

Two swallows don’t make a summer; they are almost as rare as companies expressing mild confidence as next week’s budget looms. Yet both Majestic and Tesco have cheered the stock market with comparatively bullish statements.

In an interview after announcing a 117% rise in pre-tax profits, Steve Lewis, Majestic’s chief executive, said: “We’re definitely seeing greater consumer confidence…While the UK economic outlook remains uncertain, we believe that Majestic is well positioned for future growth.”

The very next day, Tesco’s Sir Terry Leahy said: “Although customers in the UK continue to face some uncertainties about their personal finances going forward, we continue to see evidence of a steady consumer recovery.” That was based on the company’s UK sales including VAT and petrol growing by 6.5% in the 13 weeks to the end of May. Excluding petrol, however, like-for-like sales grew minimally.

And that is the problem. Most of the latest sales growth is down to rising petrol prices. As Sainsbury’s latest figures also showed, the gravity-defying level of consumer spending looks like it is ending.

Britain’s third-biggest supermarket chain said its underlying sales growth, excluding petrol and fluctuations in value added tax, was between 0.3% and 0.4% in the 12 weeks to 12 June. It was Sainsbury’s weakest underlying sales performance since the end of 2004.

As widely predicted, inflation is on the way down, having fallen to 3.4% in May, while food price inflation is down to 1.8% and heading south rapidly.

That’s the good news on which the fledgling increase in consumer confidence is probably based. The bad news is that it is likely to be strangled by next week’s budget.

No matter the strength of argument about the law of diminishing returns, expectations about excise duties rising even further are gathering strength while resignation to VAT going up is widespread.

This could mean retailers facing a “perfect storm”. Falling inflation and no real (or even negative) sales growth will mean they are not covering the ever-present increased costs of wages, distribution, business rates and utilities.

Lower margins and profitability are inevitable. And if that is the prospect facing the most powerful retailers, it is even more daunting for their smaller competitors.

That is why Tuesday’s budget must tread a deft line between focusing on reducing Britain’s mountain of debt but at the same time doing as little as possible to harm the profitability of businesses on whom the economy depends.

It will have achieved that if Messrs Lewis and Leahy are still able to see signs of confidence in a few weeks’ time.

Finance on Friday, 18.06.2010