Sales rise amidst the credit crunch

Oxford Street, London

According to figures released by the Office of National Statistics (ONS), the volume of sales between September and November rose by 0.5% as compared to the three months before it. This may not sound good, but compared to all the doom and gloom and the difficulty of obtaining credit, it does sound good. Also, the value of weekly sales in November were 2.9% higher than in November last year.

However, the high street retailers beg to differ with the figures. The British Retail Consortium (BRC) said that the figures released by the ONS were optimistic and painted a “rosy picture” of the current difficulties. According to BRC’s own findings, the sales value actually fell by 0.4%. Experian reported that the footfall (the amount of traffic generated by shoppers visiting the stores) in stores for the first three days of the week had decreased by 11.5% compared to last year.

It seems hard to believe that the increase in the volume in sales could have lead to a increase in the value of sales. After all, the increase in the volume of sales is largely due to a wave of heavy discounting by the high street retailers, especially after Woolworths slashed its prices to get rid of its stock. It is likely that the spectacular and well-publicised offers by retailers would have made some reluctant consumers go out and spend. It is also equally likely that many who generally would have waited for Boxing Day sales have instead done their shopping before Christmas since they feel that the discounts offer good value for money. After all, there is a limit to the amount of discounts that the retailers can offer before it starts eroding their profits. So many consumers may feel that the discounts are as good as they are going to get. If this is true, what would happen is that the average amount of sales during the Christmas period hasn’t really increased, but the shopping has been concentrated to a few weeks before Christmas.

The reason for this difference in figures, according to Reuters, is that the figures of “the ONS figures capture internet shopping more fully”. According to the ONS, the value of online sales was £220 million in November and it accounted for 3.8% of the total retail revenues. According to Experian, its company Hitwise which is an online competitive intelligence service, found that the websites of high street retailers had 22% more visits than its internet-only rivals. This could explain why the sales have increased even though the number of shoppers visiting the stores seem to have decreased.

Many shoppers percieve the prices of online retailers to be cheaper than their high street counterparts. And this has been shown to be true in most cases. After all, they do not have to worry about expensive overhead costs like rent and sales staff. However, many shops on the high street nowadays allow their customers to haggle and bag bargains, and this is not available to online shoppers.

It would be interesting to see the figures of  the overall retail sales before and after Christmas since that would allow us to see the whole picture.
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Inflation? Worry about Deflation instead.

John Lewis , Oxford St., London

It was announced today that the Consumer Price Index (CPI) fell by 0.4% from 4.5% in October to 4.1% in November. The CPI is the official measure of inflation used by the Government. The biggest factor for this fall is being attributed to the fall in crude oil prices. The average price of petrol was 95.2p. On the other hand, prices of fresh fruit and vegetables and non-alcoholic beverages is said to have risen compared to last year.

Although the drop is good news, the rate of inflation is still twice the official target of 2%. So, Mervyn King, the governor of the Bank of England put pen to paper and wrote a letter to the Government explaining why the rate of inflation had not hit the target. The governor of the Bank of England is required to write a letter to the Government whenever the rate of inflation is either 1% above or below the target and explain the possible action the BoE might take to solve it. However, Mervyn King feels that the next time he has to write a letter to the Government, it may not be about the reasons for inflation, but deflation instead.

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What are Inflation and Deflation?

Inflation is regarded to be a bad thing since it means a rise in prices, which is a bad thing for shoppers. Then, deflation must be a good thing, right? In the short term, yes it is. In the long term though, its a dreadful thing. To understand why a drop in prices is such a bad thing, one has to understand the meaning of the terms “inflation” and “deflation” and its causes. Inflation is the general increase in prices or, it is the decrease in the purchasing power of money. There are two possible causes; either the cost of production has increased, like the cost of raw materials or labour, or demand is out stripping supply. Take for example a rise in price of a NintendoWii games console. This may be due to a rise in the cost of materials and parts and workers who produce it. Or it could be that the number of units available is less than the number of people wanting to buy it, so the price goes up. Around Christmas, it is likely for the latter to be true. It wouldn’t be unusual around this time to find a NintendoWii on eBay at twice its retail price.

Deflation is the persistent decrease in prices. This happens when supply outstrips demand which could happen due to a surge in productivity. Or, like in the current climate, consumers rein in their spending which means that shops have to cut prices to entice customers to spend. If this happens a couple of times, it creates an anticipation of further cuts in the future. So, although consumers may have the purchasing power, they postpone certain purchases since they would be cheaper in the future. Its a self-fulfilling prophecy where consumers postpone their spending thinking that there would be price cuts, and sure enough, shops cut the prices to persuade shoppers to loosen their purse strings. Good news for shoppers, bad news for businesses. Businesses experience cash flow problems and their staff would have to accept a pay cut or even lose their jobs. So, debt becomes expensive because one owes the same amount of money, but has less income to meet it. Signs of deflation can already be seen on the high-street. Retailers are offering massive discounts, the likes of which are usually seen after Christmas, because they are desperate to clear their stock. And the consumers know this and know that further discounts will follow eventually.

It will be interesting to see how Mervyn King and the Government will go about coaxing the shoppers to spend their money.

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Cool to be Frugal

According to Andy Bond, the Chief Executive of ASDA, its now becoming cool to be frugal and not so cool to be frivolous and wasteful. He feels that consumer’s shopping habits are changing and a new generation of shoppers who are thrifty are emerging as the credit crunch begins to bite even further.

So what does this really mean? It means that consumers will now focus more on products that offer them value for money and will aim to eliminate waste. Value for money doesn’t really mean something that is priced less or discounted. It is actually something that offers satisfaction and quality for its price. Consumers will increasingly try to differentiate their “needs” from their “wants” and think carefully if they really need something or do they just want it. For example, ASDA noted that consumers are beginning to shift from buying ready meals to buying ingredients and cooking at home. People are also beginning to mend or fix items rather than getting rid of them and buying new ones. Cobblers, for example, have seen their business increase since consumers are coming in to get their shoes mended rather than splashing out on a new pair. A quick search on Google Trends showed that visits to the comparison site moneysupermarket.com and myvouchercodes.co.uk which lists voucher codes across a variety of stores had more than doubled.

What’s really interesting is the 40% increase in the number of people who are ignoring best-before dates and consuming the product rather than throwing it in the bin once it is past its sell by date. Perhaps the increase has also something to do with the numerous reports on saving money on television featuring people who regularly consume food, as long as it looks fit, well past the best before date. Consumers are also freezing leftover food rather than wasting it and sales of bottled water and smoothies has also been said to have decreased since many are opting to fill tap water and eat fresh fruit instead.

It is important then that retailers spot this trend and adjust their business models accordingly in order to survive the downturn. Thrifty consumers would focus on long term value and would be willing to spend a little bit extra on an item that is likely to last longer than buy something cheaper in price which would also be cheaper in quality and hence not last as long. Rather than reducing prices on cheap Christmas stocking fillers that perhaps wont even last till next Christmas, retailers should instead focus on reducing prices on items that actually are of some use to the consumers. Also, thrifty consumers are less likely to buy items on impulse which retailers greatly depend on. So, businesses should make sure that they are really operating on a low cost model which aims to eliminate waste as that would be the only way that they would be able to offer low prices and good service at the same time.

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HSBC to increase its lending

HSBC

The World’s Local Bank HSBC announced on Monday that it aimed to lend next year roughly two times the amount it lent to homeowners in 2007. For this purpose, it has set aside around £15 billion. In an environment where banks are becoming increasingly reluctant to lend money, HSBC hopes to increase its market share by lending, thereby getting a huge slice of a, albeit, small market. It is also hoping that its customers will continue to bank with it even when the climate improves, because they will remember that HSBC was there for them when all the other banks closed their doors. This will mean that when the market does get bigger, they will effectively have a huge slice of a huge pie.

So, how can HSBC afford to increase its lending when other banks have had to be injected with capital by the taxpayers. HSBC is one of the few banks thathasn’t gone to the taxpayers cap-in-hand asking for a cash injection, it is in fact well capitalised, according to its CEO Michael Geoghegan . According to its spokesperson, HSBC doesn’t have to depend on the two main sources of finance that the banks that were bailed out depended on- the money markets and UK depositors. It will instead fund it internally using its reserves. The reason why other banks are lending less money is because they don’t have enough money to lend.

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It is true that last Thursday the MPC (Monetary Policy Committee) cut the base rate by 1% to 2%-the lowest it has been for years. However, the primary source of finance for most banks is not by borrowing from the Bank of England, but from the money markets. The rate of interest in the money marketshasn’t gone down at the same rate as the base rate. Hence, the cut in the base rate is unlikely to make the cost of borrowing money any cheaper. Another source of finance for banks is their customers’ deposits. However, in recent years, the levels of savings in the UK is said to have decreased. The cut in savings rate by the banks is unlikely toentice people into put their hard earned cash into banks, except for those whom the interest paid is their income.

HSBC also announced a £1 billion fund for lending to small businesses. Small Businesses that are fundamentally sound and only experiencing cash flow problems are the kinds of businesses it is hoping to lend to. The reluctance of banks to lend to sound businesses has been it the news recently, forcing numerous businesses to cease trading just because they have a cash flow problem and not because their business model is fundamentally flawed. The increase in the number of small businesses going bankrupt no doubt puts the jobs of many people at risk and leads to fear amongst those that are in employment. Small business owners, no doubt, will welcome this announcement which will be akin to a lifeline being thrown at them when they are in dire straits.

It has stressed, however, that the lending criteria will still be strict. In other words, they are not planning to throw money at anybody who asks for it.

Even if this announcement does not completely restore confidence, any good news is welcome in these gloomy times. It is unlikely that any other major bank will come forward and increase its lending in the near future, no matter how much Brown, Darling orMandelson threaten or cajole them into doing so. In a way, one cannot blame the banks which have been bailed out for being reluctant or in their words, “careful”, of lending. On one hand, they are the subject of many a joke and their “irresponsible” lending is being blamed for all this mess, and on the other hand, they are being pushed to lend at levels of last year.The money which has been lent to the banks on behalf of the taxpayers has not come cheap, the banks have had to pay a hefty price for it.

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Retailers embrace VAT cut

The cut in the VAT announced last week by the Chancellor initially didn’t receive the reception that he might have been perhaps hoping for. News reports, newspapers and websites were filled with comments against the idea of the VAT cut, some being funny, and some downright ironic. Most were along the lines of “10p saving! Whoopee!”

However, over the weekend, it looks like many retailers are whole-heartedly embracing the VAT cut. Not because they like to go through the trouble of having to change the prices and labels and the IT systems. But because it gives them another reason to slash their prices, much more than the 2.5% VAT cut. But, why do they need a something like a VAT cut to give them a reason to slash prices? Surely, they can do it without that.

Yes they can. And many, like M&S and Debenhams, did a fortnight ago when they had a one-day only “spectacular” sale. Having yet another “spectacular” sale nearly three weeks before Christmas would give the impression that they have a lot of left over stock which they are desperate to sell. Although many shoppers would flock the stores to bag the bargains, which many have been doing due to the ongoing sales, many would stand back and wait for the prices to drop even further – a clear sign of deflation.

Hence, the cut in VAT, although not significant on its own, has provided the retailers with a timely reason to slash their prices further, using the VAT cut as a “mask” for doing so. Some companies, however, like BT and Virgin Media have decided to pass only the 2.5% cut to their customers.

But, how do single price retailers like Poundland, 99p Stores, or numerous other independent single price retailers pass on the VAT cut to their customers? After the VAT cut, an item costing £1 would then cost:
117.5% = 100p (The VAT is already added to the final selling price)
1% = 0.85p
115% = 97.87p (new price)
Poundland wouldn’t be able to rename itself as 97pLand for a period of 13 months, and the slogan “Everything’s £1” would then be deemed misleading. The only other option is for such businesses to increase their profit margins, which is not a bad thing, but they cannot take the advantage of being able to advertise the fact that they are passing on the VAT cut to their customers. Or, they could sell products that they wouldn’t have been able to in the past, as it would’ve been priced above £1, but can now since the cut in VAT allows the price to be £1.

Woolworths goes into administration

The high street retailer Woolworths, fondly known as Woolies, has been forced to go into administration after it failed to find a buyer to snap it up for a nominal £1. So, why didn’t anybody buy it, surely £1 for a whole company seems like a bargain? That’s because the buyer would have not only acquired Woolworth’s assets (things it owns), but also its huge liabilities (money it owes), £385 million to be exact.

So, what is administration and when does a business go into administration? With regards to business, it is when a business doesn’t have enough funds to trade, also known a cash flow crisis. Cash flow is not the same as profitability of a business, but refers to the cash flowing into and out of the business. If cash coming in is less than the cash going out, then the cash flow is negative and it means that the business does not have enough funds to meet the current liabilities, like creditors and suppliers.

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However, going into administration isn’t still the end of the story for Woolworths. In fact, administrators, in this case the accountancy firm Deloitte, protect the company from creditors seizing stock to pay off the money that is owed to them. The administrators are trying to find a buyer for Woolworths, failing which it will be forced to go into liquidation. This is where the administrators try to sell off the assets to recover any money they can to pay off the debts. Woolworths competitors are dreading this because although it will mean less competition in the long term, since there is one less player in the market, in the short term, it will mean a price war during Christmas as the administrators will slash prices to sell off all the stock.

So, is the reason for Woolworth’s difficulties due to the credit crunch? Well, the increase in household bills has meant that consumers are spending less. This is evident from the fact that Woolworth’s like-for-like sales have decreased whereas their costs have increased leading to increased losses. Many analysts say that Woolworth’s difficulties should come as no surprise, as Woolworths didn’t have a clear brand image, what its brand stood for, and its purpose in the market. Additionally, suppliers of Woolworths found it expensive to insure themselves against the risk that it wouldn’t be able to pay them and hence, Woolworths had to pay upfront for the supplies, unable to take advantage of buying on credit that some of its competitors enjoy.

Woolworths has around 815 stores and employs around 30,000 employees. If the business does go into liquidation, all these employees stand to lose their jobs. Also, the businesses that supply to Woolworths will also suffer losses. The question many people are asking is why isn’t the Government bailing Woolworths out, after all, it did bail out the banks. Well, the Government can’t bailout every business in difficulty; it’s a natural business process where the one with the weakest business model fails hence making the others stronger due to decreased competition.

Other than its retail business, Woolworths Plc. also owns Entertainment UK and 2Entertain. Entertainment UK specialises in the supply of CDs and DVDs to retailers such as Tesco, Zavvi, W H Smith, Asda, Sainsbury’s, Morrisons and of course Woolworths itself. EUK is said to be a profitable business and the administrators are looking for a buyer for it as well. If EUK is shut down, it will no doubt affect the retailers it supplies, especially during the crucial trading period of Christmas. BBC Worldwide and Woolworths Plc., on the other hand jointly own 2Entertain, and there are talks of BBC Worldwide buying Woolworth’s share of the business.
It has also been reported that MFI is also going into administration, and it looks like a few more will follow, certainly after Christmas. If you want to see Woolworth’s Interim report for 2008, click here.

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First the Chancellor giveth, then the Chancellor taketh away.

Chancellor of the Exchequer, Alistair Darling

Yesterday, the Chancellor Alistair Darling announced in his Pre-Budget Report the much talked about 2.5% cut in the VAT, bringing it down to 15% from 17.5%. In the same breath, he also announced an increase in income tax for those earning £140,000 and above. From April 2011, people falling into this income bracket will have to pay income tax at the rate of 45p.

The cut in VAT is to come into effect from the 1^st of December. This leaves ample time for businesses to revise their prices and change the all the labels in the stores, but at the same time, being just in time before the Christmas shopping.

So, how will the change affect the prices? Will a loaf of bread or a bunch of carrots be any cheaper? No, because food products do not attract VAT. Surely, utility bills as a result will go down. Sadly, no because the VAT on utilities such as gas and electricity already have a lower rate of VAT charged at 5%. A cut of 2.5% doesn’t look as if it will make a huge difference in prices, especially compared to the generous 20%, 35%, 40% discounts offered by the retailers already.

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Then, the motive behind the cut is to give confidence to the consumers to go out and spend. But, confidence cannot be used to pay for a brand new PlayStation 3, can it? You need something else, namely, money. The primary reason why people are spending less money on the high street is because they have very little surplus left over after paying the high utility and food bills. And those who have enough surplus choose to save it for a rainy day.

That’s because it’s almost impossible to see a news report nowadays without it mentioning yet another company announcing job cuts. This creates uncertainty among those who are employed about the security of their jobs. Those who have recently been made redundant have no choice but to save money. But those who have a job also save since they don’t know how they are going to put food on the table next month or meet their mortgage repayments.

Another thing that’s hard to miss in a news report is an interview with the boss of a SME (Small & Medium Enterprise) business who has been denied a loan from his bank, or has had his overdraft facility cancelled. This leads to cash flow problems which means the business cant pay its staff, pay its utility bills, or even buy raw materials to maintain production. In addition, creditors, who owe money to the business, are unable or reluctant to part with their money. As a result, staff numbers have to be cut down adding to the number of unemployed across the country.

How can such news create confidence?

Perhaps, the Chancellor should look at reducing the VAT temporarily on utilities, or even get rid of them for the time being. More importantly perhaps, he should make sure that SMEs, who are perfectly healthy, should have access to loans and overdrafts at a reasonable cost to maintain their cash flow. After all, the SMEs are not asking for charity, just for funds which they are prepared to pay back with due interest. It makes sense for the Government to ensure that businesses that are perfectly sound to not go bankrupt just because they do not have enough cash or credit to meet their current liabilities. After all, the SMEs employ a lot of people in the private sector of the economy and contribute to the Treasury in the form of National Insurance and Corporation Tax. Since people are employed, it saves the Government the trouble of have to pay job seekers allowance, hence reducing its outflow.

So, it is perhaps job security and income security that will encourage the consumers to go out and spend, as Alistair Darling and Gordon Brown along with countless retailers are eagerly hoping, fingers crossed.

But it seems highly unlikely that the cut in VAT will have the intended purpose of instilling confidence among the consumers and going on a spending spree, but for the sake of the economy and the countless people who are unemployed, lets hope its not all in vain. The high earners are certainly hoping for it, since they are going to be paying for it, come 2011.

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