'Buy Now, Pay Later' UK Christmas Shopping Spree Predicted

06 November 2007

LONDON: In a Gadarene rush over the economic precipice, credit card-brandishing Britons will spend record sums in the run-up to Christmas. And perhaps mindful of the prophesy, "Après moi le deluge", by Louis XV's mistress Madam de Pompadour (pictured), UK retail analyst Verdict Research predicts a similar fateful consequence.

With disposable incomes squeezed by high mortgage costs and wages likely to rise only marginally, British consumers - already bearing an average burden of £3,175 in unsecured debt compared with the European average of £1,558 - will rely on yet more credit to fund their festive spending.

Summarises Verdict retail analyst Nick Gladding: "The build up to the Christmas trading period has been surprisingly strong, in spite of factors that should by rights cause trading to slow. Real take home pay - the overriding determinant of purchasing power - has been broadly flat over recent months and the impact of pay rises has been eroded by higher energy bills and mortgage costs."

In addition, many shoppers who took out fixed rate mortgages two or three years ago are experiencing sharp increases in their loan costs as their discounted loan period comes to an end.

Moreover, bonuses within the financial services sector (another key driver of retail spending) are likely to be far lower than last year, owing to profitability plunges at many financial institutions.

"Having already run down their savings this year, consumers will need to rely heavily on credit to fund their seasonal generosity," adds Gladding.

In an intensely competitive market, advertising will be particularly important for retailers to attract shoppers, he believes.

Larger retailers able to fund the expense of TV campaigns are likely to gain share from smaller operators. The latter will have to adopt lower cost initiatives like viral marketing and email campaigns to ensure they do not lose out.

The stretched state of consumer finances will make shoppers particularly responsive to retailers offering value, particularly on easily price-comparable goods like books and electricals.

Gross margin gains and a focus on reducing overheads in the wake of earlier energy and logistics price increases give retailers scope to reduce prices while preserving their profitability.

Overall, Verdict expects retail prices in Q4 to be 0.9% lower than a year ago, compared with a year-on-year rise of 0.1%. This resumes a long term downward trend - 2006 was the first year in six years that prices did not fall.

But even if inflated credit and keen prices help to ensure Yuletide cheer, as of the New Year, "le deluge" will begin, Verdict prophesies.

With consumers' belts tightened several notches, trading will become far tougher, particularly for retailers of home-related items.

And given the expected decline in home moves, plus property price stagnation reducing the scope to withdraw equity, furniture and home improvement retailers will bear the brunt of the new austerity.

Data sourced from multiple origins; additional content by WARC staff