Minimum wage increase has disappointed retailers says BRC

The National Minimum Wage increase of 21 pence per hour has disappointed retailers who had hoped for an increase in line with inflation, according to the British Retail Consortium. NMW rose from £5.52 in March to £5.73, but the BRC says it had called for this year's rise to be no more than the rate of inflation.

Stephen Robertson, the BRC's Director General, said: "Retailers had to cope with a £2.7 billion hike in wage bills caused by the 2005 and 2006 above-inflation minimum wage increases. We are facing very difficult trading conditions, while energy prices, rents, rates, and service charges are all on the increase. We need an end to the annual uncertainty on minimum wage rates. There should be a real-terms freeze while the Low Pay Commission reviews future direction."

For more information visit the BRC website here

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Fairtrade for the future

Fairtrade retailing is a defininte trend for the future, according to figures published by the Fairtrade Foundation. Fairtrade products retailed for an estimated £493 million in 2007, a staggering 81 per cent increase on sales in 2006 of £273 million across all retail sectors.

More importantly still, in 2007 the real volumes (by weight or number) of produce more than doubled over 2006, which is great news for the producers whose Fairtrade premiums are based on these volumes.

The Fairtrade Foundation's message for Fairtrade Fortnight 2008 (25 February - 9 March 2008) is that, whilst sales of Fairtrade products continue to soar, change is still not happening quickly enough for the millions of the world's poorest farmers who remain trapped in 'trade poverty'. With 2 billion working people earning less than US$2 a day and many of these producing the products we put in our shopping baskets, the Fairtrade Foundation believes that it is critical to increase the momentum for change through Fairtrade in 2008.

"The fantastic increase in sales of Fairtrade goods in 2007 shows the UK's public's huge and growing appetite for Fairtrade," says Harriet Lamb, Executive Director of the Fairtrade Foundation. "After years of chipping away, Fairtrade supporters are finally beginning to make some significant impression on the way companies trade. Increasing numbers of people in the UK are buying Fairtrade goods as a practical action everyone can take to help tackle poverty in the developing world. And that's good news for the seven million people, growers and their families, around the world who benefit from the Fairtrade system, as well as the thousands of people in this country who have been campaigning since the early 1990s to make trade fairer".

Sales of Fairtrade products have been increasing by over 40 per cent year-on-year since 2002.

For more information visit the Fair Trade website here

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Discounting - Conclusions

Given the RTT's belief that the current landscape of discounts and sales is untenable in the longer term, it discussed how it sees the situation developing. The RTT believes that retailers which use promotion and discounts more strategically, as opposed to tactically, will be more successful.

The group agreed that value will be the key pillar of retailers' strategies going forward. To maintain and improve its prospects, a retailer's focus must be on plans and actions which enhance stakeholder value. Price is only a part of the value equation; product, brand and the environment are equally important.

Across the market as a whole, there is a need for retailers to become more scientific in their approach to pricing.

Tim Denison observed that: "This is traditionally the least 'sexy' part of the marketing mix and yet it is business critical." Retailers are increasingly placing more emphasis on price strategy, development and planning; such as impact assessment, price sensitivity, optimisation research and price-increase management.

The RTT concluded that the retailers which are successful in the future are those giving more attention and dedicated resource to creating their value proposition for consumers, and developing and managing a price strategy with the emphasis on margin maintenance rather than sacrifice, where promotion management and compliance can add more distraction than inherent value.

The appropriate relationship between full price and sales and discounts is a fine balance to optimise price and demand over the long term. If that balance is achieved it will drive value enhancing customer behaviour, such as building loyalty.

As such, the RTT believes the successful retailers in the future will be those who:

• Are committed to adding value to the consumer buying experience.

• Have refocused much of their in-house effort which has previously been put into discounting and promotions into more value-adding activity.

• Hold sales, promotions and discounting activity only at specific, tightly controlled 'sale' times or with very clearly defined objectives which are not 'derailed' by the actions of competitors.

• Look broadly across all channels open to them in considering their price strategy. For example, separating promotional or marked-down goods into outlet stores or using other channels e.g. jobbers, which the RTT observed some retailers do with success and with only very limited damage to their brands.

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Discounting - The future

The RTT believes that the current levels of discounting and promotions in today's financial climate are untenable long-term; unsustainable; and unhealthy for the retail sector.

The situation, the RTT warns, is now one of a self-perpetuating, vicious cycle, where margins for the retail industry as a whole - as well as those of their suppliers - are being negatively impacted.

Richard Hyman of Verdict Consulting highlighted this when he said: "2008 will be yet another year when rises in retailers' costs will outstrip growth in their sales. Following years of cost cutting, most of the low hanging fruit from this source has already been picked. Driving top lines will increasingly determine retailers' fortunes going forward. Since the opportunity to further drive sales volumes as in recent years is clearly receding, and since we have seen negative price inflation in the non-food sector, sales at higher price points are essential. However, this cannot happen without improved added value." This is clearly contrary to the situation currently being seen in the sector, outside of food, in the UK. Mark Teale agreed, saying that it seems there is a current mindset that: "If prices don't change (downwards), stock won't move."

Regulation, however, is not the answer, says the RTT, despite it being commonplace in some other European countries, where local or, indeed, national government determines when a sale can be held or has pre-set rules which require all items to be sold above cost.

However, the RTT firmly considers that a 'rebalancing' is required.

Vicky Redwood, Capital Economics added: "There is some merit in a return to the traditional model, with sales being used primarily for clearance purposes." Not that this means that those whose proposition is based squarely on price will not have a place in the retail sector, particularly at times of difficult trading, such as now. It all is rooted in the basic proposition: 'you get what you pay for'.

It was also noted though that there are instances where discounts and promotions can be useful in facilitating behaviour change. "Discounts and promotions can be used in a positive way," stated Prof. John Dawson of the Universities of Edinburgh and Stirling. "For example, discounting or promoting fruit and vegetables as part of the five-a-day initiative can help to encourage healthier eating habits. No-one can argue against that."

The RTT absolutely concedes that the use of discounting and promotional tactics have a place in modern retail and can be beneficial to consumers by increasing competition between retailers and ensuring prices are competitive. Equally they can create confusion for customers, a less satisfying in-store experience and diminish brand value. From the point of view of retailers, sales and promotions can be very valuable if used in the right way as a strategic tool with a clear objective. However, when used purely as a reactionary tactic, particularly under current market conditions, sales and promotions may not achieve the intended result and should be scrutinised more closely.

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Discounting - The City view

The RTT agrees that the City focuses very heavily on like-for-like sales growth figures as a barometer of the success of retailers.

Tim Denison of SPSL summed this up when he said: "The City should be encouraging retailers to increase margins, not sales at any cost. Retailing is a business like every other. Unfortunately it's far too easy to be fixated on sales figures."

The group feel that the City is, on the whole, unimpressed by 'blanket' discounting, but views discounting for strategic purposes somewhat more favourably. "It can be an art," said Nick Bubb. "The City admires the sales and discounting process if it has the right effect on the bottom line." The RTT observes that many retailers are admired for 'holding firm' and having a very structured sales 'season' and still using sales to move surplus stock.

It is however, quite understandable why the City concentrates on sales-derived performance. It simply does not have the benefit of transparency in the relationships between retailers' revenues and their gross margins and therefore cannot make fair comparisons between different companies and their tactics. Helen Dickinson observed: "There are no requirements for retailers to disclose gross sales before discounts or the impact of discounts on their gross margins and there is little consistency between what costs over-and-above the cost of sales retailers include in their margins."

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Discounting - The effect on consumer behaviour and their brand perception of the retailer

Whilst on the face of it, high levels of discounting and promotional activity may appear attractive to consumers in the form of lower prices, the RTT believes that widespread use of it can create risks for retailers. First and foremost, it believes that erosion of a retailer's brand is one of the biggest risks faced.

Paul Clarke of Barclays Retail & Wholesale Sector posed the question: "If consumers are eventually persuaded to go into stores they don't usually shop in at sale time, do they see a different proposition? Do sales destroy brands?"

The RTT consider that a poorly executed sale or promotionprovides a lesser experience for shoppers and potentially undermines relationships which the retailer has worked hard to create. The value proposition can be diluted and the customer confused. Furthermore consumers are often irritated by seeing goods they bought previously appear at reduced prices at a later date.

The trend towards ongoing promotional tactics has also now 'trained' consumers, if they have the freedom or opportunity, to wait for discounted offers. The RTT suggests that this works to incentivise 'bad' behaviour from the retailer's perspective and turn previously 'good' customers into ones with a constant bargain-hunting mentality. The RTT believes that the consumer has come to expect this continually changing landscape as the norm and that the likelihood of 'every day' discounting by a particular retailer can encourage customers to delay purchases.

There is also the issue of 'breaking faith' with consumers. If a store's point of sale (POS) material always says 'up to 70% off', yet the customer never seems to believe they receive this level of discount, they can easily lose faith and take their custom elsewhere. Constant price reductions devalue goods, and fuel price deflation.

Mark Teale of CB Richard Ellis commented: "During sales, shoppers are often attracted to stores that they do not usually patronize. The number and type of stores visited by shoppers increases during sales periods. Sales, in this context, are a way of broadening the customer base: building the awareness of offers. Events programmes in shopping centres have the same purpose: encouraging visits by shoppers who usually shop elsewhere with the intention of converting them to regular customers. Sales, and events generally, are an important element in the overall retail marketing process. Not having sales - when others do - reduces the opportunity to convert new customers to regular shoppers."

Retailers may now feel that they are trapped between a rock and a hard place and that there is a risk that they cannot very easily or quickly exit the cycle of discounting. "Retailers have confused value for money with bargain-hunting, but this has been created by the sector itself. From the consumer's point of view, it is difficult to justify non-discounted prices when they see retailers are seemingly able to drop them by 70 percent, later in the season," said Sian Davies, Henley Centre Headlight Vision.

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Discounting - The Changing Landscape

For the purposes of the white paper, the RTT considered a broad definition of the topic area including;

• Sales, including clearance, end of year and mid season;

• Special or seasonal discounts or markdowns;

• Promotions, such as buy one, get one free; two-for-ones; on-line/e-mail vouchers etc.

Traditionally, 'end of season' sales were the way in which retailers disposed of surplus stock at regular, pre-determined times during the trading year; primarily in January and at the end of the summer. These sale times were well known by consumers as part of the shopping calendar and people understood that outside these regular sale times they would pay full price. It seemed to be a system that worked well for many years and suited both retailers and consumers.

However, the definition of sale is now thoroughly 'blurred'. As Nick Bubb of Pali International observed: "The concept of more regular and varied types of sale offer was originally brought from the US, where promotions such as '25 percent off for three days' drove business." This then became prevalent in the department store and furniture sectors in the UK.

A huge variety of incentives are now commonplace across the nation and have fundamentally changed the retail canvas. The reasons for sales/discounting may now include one or any combination of:

• Generating footfall to stimulate interest and product exposure;

• Increasing top-line sales;

• Cash generation (e.g. to cover financing shortfalls or peak cash requirements such as quarterly rental or VAT payments);

• Driving market share;

• Targeting or engaging with new/different customer segments;

• Clearing stock;

• Reacting to/anticipating competitor activity;

• Being an integral and planned part of business strategy;

• Supporting a brand proposition built around price-based positioning (e.g. a regular 'always on sale' public face, which is particularly prevalent in certain furniture, carpet and fashion retailers).

The RTT agreed that sales activities have now moved from a rigid, well-understood, pre-determined approach to one that is multi-faceted and complex. The balance has tipped towards something that is often tactical and also more reactive, as one retailer responds to the activity of another. Helen Dickinson of KPMG said: "The problem with sales in the current situation is that it is a 'zero sum' game. In other words, this increasing level of activity has not grown the market, as a whole, in sales terms."

With regards to the true impact on margins of the current promotional approach, the RTT felt this was harder to call. For one thing, there is little visibility externally and for another it is impossible to ascertain what would happen if a discount were not offered. However, at risk of stating the obvious, unless the increased sales compensate for the loss of margin given away by the discount, profitability will inevitably fall.

As the heightened level of promotional activity is not growing the overall market per se and notwithstanding that the impact on margins is difficult to determine, the RTT believes that there will be many retailers in danger of under-achieving the objectives which were set out to justify the activity in the first place.

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Discounting - An introduction

"Discounting, promotions and sales are now a normal part of retailing practice but their widespread use is detrimental to the health of the sector"

The topic for this white paper was debated by the KPMG/SPSL Retail Think Tank in early 2008 during what is traditionally the main 'sale season' of the retailing year. This was also timely as the Christmas shopping season of 2007 was widely reported as having been heavily reliant on discounting to drive footfall.

During its regular quarterly review, the RTT predicted that the first quarter of 2008 will be tougher in terms of its three key indicators of health - costs, demand and margins - with predictions for the latter indicator being the most negative.

So, against this challenging backdrop, can retailers afford to keep discounting and promoting products? And is it good practice to do so anyway? In debating this topic, the RTT concluded the following:

• The use of sales, promotions and discounting has fundamentally changed. Historically, their primary purpose was to dispose of surplus stock at pre-determined times of the year. Over time this has evolved into widespread use of a variety of techniques either on a more tactical or a reactive basis;

• Irrespective of whether the customer has come to expect the current landscape or in fact played a hand in creating it and welcomes it, it continues to affect their behaviour in a way that can be detrimental to the sector. At the same time it has the potential to erode both the brands of, and shopping experience within, individual retailers;

• There is little transparency/visibility outside of a retailer's own business of the level or the effect of promotional activity on its health or future prospects;

• If discounting programmes continue on their present path, the situation runs the risk of becoming untenable for retailers in the longer term;

• Over recent years, sales growth by value has slowed while sales by volume have increased. This has meant negative price inflation in some sectors, obliging retailers to sell more items to grow, and on the back of a burgeoning value sector, retailers have persuaded consumers to buy more. This cannot be sustained ad infinitum and increasing sales volume further has become much more difficult. Customers in 2008 will be looking for more to inspire them to spend more. This means adding more value; better quality, better functionality, greater relevance, fashion, styling etc.;

• Reversion back to a more 'traditional' model of using sales for clearance purposes would provide greater solace, but this might require a significant change of mindset, both on the part of retailer and consumer;

• Retailers which focus on their value proposition and use sales and discounts/promotions as a planned, strategic tool are most likely to be more successful.

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Credit crunch overtakes online retailing as main worry for retailers

Retailers are most worried about the credit crunch and the growth of online retailing, according to a new survey. Property consultancy Hartnell Taylor Cook LLP found that 65 per cent of retailers fear the effects for the next nine to 12 months on business of the credit crunch, with 59 per cent citing the growth of online retailing, and 42 per cent naming additional retail space coming on to the market as their concern.

This compares with twelve months ago, when economic concerns were a source of worry to only 31 per cent of retailers and 85 per cent saw online retail as a major issue. However, despite the tightening credit market, nearly eight out of ten (77 per cent) still feel confident about the retail market generally for 2008.

Andrew Bradley, retail agency partner at Hartnell Taylor Cook, comments: "It comes as little surprise that the well-documented credit squeeze is the number one concern for UK retailers. Although the full impact has yet to become clear, it could put a lot of extra pressure on some businesses."

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Prospects for 2008 - Rental inflation here to stay?

At the time of writing, the sharp deterioration in trading conditions, that set in during second half of 2007, looks set to worsen. Retail property markets have meanwhile experienced a rapid fall in capital values.

Allusions to property market conditions in the early 1990s are perhaps inevitable, but misplaced. This time around value corrections have little to do with retail market fundamentals. Or, at least, it was not events in retail or consumer markets that triggered the recent decline in retail property values.

The yield compression seen over the last two to three years occurred despite the poor rental and sales growth outlook prevailing at the time (growth prospects have been poor for a long while). Indeed, current rental forecasts are not a lot worse than they were a year ago or more. And nothing much has changed on the supply or retailer demand side either. True, the jump in interest rates last year worsened an already weak sales outlook. But downward pressure on property values has traditionally come after, not before, recession sets in: perhaps the reason why property bargain-hunters, in spirit at least, have emerged so speedily.

Of course the current wave of value corrections are not restricted to retail. Yields have moved out in all commercial and industrial property sectors: a knee-jerk response to the turmoil in financial markets. Some further softening of yields looks likely, though - in retail markets - value corrections, in the absence of recession, should be played out well before the end of the year.

With the supply-side picture benign, and no sign at all of the kind of retail sector retrenchment that blighted leasing activity during the early 1990s, rental growth may stay muted but is set to remain in positive territory.

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Prospects for 2008 - Economic pressure intensifies

The economic pressures on consumers are set to intensify this year. Most importantly, cracks are finally starting to show in the housing market. The credit crunch has made lenders far more picky about who they lend to, while the previous interest rate rises mean that many potential buyers had lost interest anyway. Significant house price falls are looking increasingly likely.

Not only will this reduce the amount of housing equity available for households to withdraw and spend, but consumer confidence will take a knock too. Household saving fell to a record low last year but with the housing market no longer doing people�s saving for them, I expect people to start to think twice before blowing their pay packets on the High Street.

Rising unemployment is likely to dampen the feel-good factor too, as weaker economic growth prompts firms to work harder to lower staff costs. And as if all that wasn't enough, the renewed rise in the oil price has meant that many consumers have started 2008 with the news that their gas and electricity prices will go up again.

On the bright side, the Monetary Policy Committee has already been quick to reduce interest rates, cutting them in December of last year. And more rate cuts are on the cards. But the Committee will be constrained in how quickly they can act by the likely prospect of inflation rising back significantly above its target over the next few months. And consumer spending takes up to a year to respond to interest rate cuts anyway. Accordingly, rate cuts will not stop consumer spending growth from weakening sharply this year.

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Prospects for 2008 - A year to forget?

All the ingredients needed for a nightmare 2008 are aligned to make this a year to forget for most retailers. The portents are bad: history shows that however weak consumer's appetites were over the December period, they will be considerably weaker still as 2008 unfolds, particularly the first half.

Year-on-year retail spending at Christmas is rarely lower and the 2007 festive season was no exception. Depending on which source one uses the value of spending only grew year-on-year for December by 2.3% (BRC) or 1.4% (ONS). Spending growth at this level has failed to keep the wolf from the doors of many retailers. Given that people pull out many of the stops for Christmas it is safe to conclude that something of a hiatus will follow.

With so many people on fixed rate mortgages, rising interest rates in 2007 failed to impact fully on consumer's spending. This will only percolate through as 2008 unfolds, even if rates are now starting to come down.

I expect the value of retail spend in 2008 to be just below 2%. This figure needs to be viewed alongside some other key metrics. First, floorspace. I expect selling space (net of closures) to grow by nearly 1.5%. Second, I think costs across the industry will increase by around 4%. In combination, these numbers will mean everyone has to run much faster just to stand still, and driving sales will be critical.

In spite of this unpromising background, some retailers will prosper. Those that do will all have one thing in common: a fundamental understanding of demand and the skills to turn that into sales growth.

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Prospects for 2008 - Leaner and fitter

There is no doubt that the year ahead will be a challenging one. It may represent the worst trading conditions for over 20 years - although the market will still grow, albeit marginally, cost base inflation is likely to outstrip growth in the top line for many.

I see three key challenges for retailers. Those managing them effectively will emerge from this difficult time leaner and stronger. It's all to play for!

Delivering value:

Two camps - finding growth, either from new markets (a challenge given difficulties at the current time) or increasing market share, and optimising costs and cash. The best performers will have ongoing plans to realise 5-10% cost savings in certain areas which will offset rises in the remainder of the business. They will also act decisively to 'fix'/exit the worst performing units to mitigate value leakage.

Preparing for uncertainty:

A robust plan is critical but it will also have in-built contingency plans which can be enacted under different trading outcomes. The quality of up to date and accurate information will be key to enable speed of response. The ability to flex supply and respond quickly and effectively to changing market conditions will be a differentiator.

Lack of experience:

Many of the leaders and key stakeholders in the sector today will not have seen such trading conditions in their career. Drawing on the knowledge and experience of some of the 'longer serving' players will be hugely valuable as will ensuring management teams stay focused and respond as conditions change.

Sounds easy? Indeed, it does, but in this environment, those with the broader and all encompassing retailing skills, who are already well down the road to responding to these challenges, will shine through.

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Prospects for 2008 - Footfall to fall

The anticipated softening of sales growth in 2008 won't automatically be driven by fewer shopping expeditions. People�s motivations to shop and to buy are very different. However, I expect footfall entering shops to be lower than 2007, by as much as 3%, influenced by key economic and social changes:

* More opportunity for non-food shopping at grocery stores will continue to influence footfall into specialists.

* The growing strain on consumer's budgets will increase people's desire for lower prices, particularly on goods other than everyday consumables. More price-checking on the internet before venturing out to inspect/buy. Paradoxically, more of us will turn towards old-fashioned legwork for reconnaissance purposes, which will actually stimulate footfall.

* More diversity in store traffic levels between retailers and across sectors, as consumers' choice and favour become polarised. Both value chains and luxury stores will punch above their weight, but the specialist middle-market might suffer.

* The sectors set to see the steepest decline in footfall are those associated with housing. Price realignment combined with a reduction in mortgage offers will depress house sales and home improvement projects. Less affordability of big ticket items from carpets to kitchens will translate into fewer visits to sheds and showrooms. Consequently, other retailers sharing these retail park locations could also suffer a decline in traffic.

* The irrepressible impact of busier lives causing recreational shopping to get marginalised is an ongoing social trend. Finite leisure time and discretionary income at a time of expanding choice of competing activities will continue to suppress casual browsing.

Whatever else 2008 brings, retailers will be determined to make every customer count.

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Prospects for 2008 - British retailing in a wider world

With many retailers considering the UK to be a 'mature market' so the retail-grass can appear greener elsewhere. 2008 will see UK retailers opening more stores outside the UK. And, in the same perceptual mindset we will see some new retailers, from their own 'mature markets' outside the UK, opening stores in UK.

Central Europe and China are likely to continue to attract investments together with pioneering interest into Eastern Europe and Russia. India is the big attraction but is unlikely to be a realistic destination in 2008 because of entrenched governmental constraints. For retailers with a substantial presence in the East Asian and Central European growth markets, major expansion opportunities remain. Strong sales performances in these markets will help soften the negativity in the UK.

2008 will also give us a better perspective on the performance of Tesco in the USA. Whilst full critical mass is unlikely to be achieved during 2008 nonetheless the post-entry adaptations in response to local markets will become apparent and a clearer view of the responses of Wal-Mart and other local retailers will be seen.

Despite fierce competition in the UK, the market size has attraction for foreign retailers. Fashion retailers from outside the UK will continue to develop their brands and offerings with growth of those with a limited presence, for example Fast Retailing, and new entrants.

The pressures for pan-national sector consolidation are likely to provide opportunities, encouraged by weaker sterling or low share price, for a few substantial acquisitions by non-UK retailers. These companies will be looking beyond the current short term low growth to make investments that fit with their own strategic objectives of broader international expansion.

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Prospects for 2008 - Consumer trends shape retail

Last year saw the intensification of pre-existing trends in the needs and aspirations of UK shoppers. The relatively good performance of the food sector against the non food sector is one example, and is consistent with UK consumers' growing emphasis on the quality of the food they consume, and in trading up to 'better' options, for a combination of health and feel good reasons.

Another trend in clear evidence was UK shoppers ever heightening expectations of value, convenience and quality. The John Lewis Group epitomised the success that flows from consistently delivering against these fundamental consumer needs.

Arguably the newest and fastest moving trend on the High Street was the rise of ethical and environmental activity. Henley Centre HeadlightVision's own research shows that a majority of UK consumers have ethical and environmental concerns on their radar, but these concerns are not yet driving widespread and consistent changes in shopping habits. This gap between aspiration and actual behaviour is creating a window of opportunity for leading retailers to shape future shopping patterns. Marks and Spencer's Plan A and high profile initiatives and commitments from Tesco and Sainsbury's are the tip of the iceberg.

The congruence of the above trends will prove particularly interesting in what looks set to be a tougher economic environment on the High Street in 2008. To what extent will consumer motivations around health, indulgence and ethical concerns, among others, hold sway in the face of pressure on wallets? Which retailers will be most adept at navigating through this uncertain environment and emerging as winners? 2008 looks set to be a fascinating and challenging year for UK retailing. We can expect some drama on the British High Street this year.

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Prospects for 2008 - A different banking market

At the beginning of 2007 retailers had just enjoyed a much better than expected Christmas and many banks were prepared to commit large sums of money to highly leveraged retail transactions. As a consequence prices being paid by venture capitalists (VC) were high.

By the second half of 2007 the picture looked very different as the credit crunch developed. With a reduction in institutional liquidity in the leveraged finance markets the volume of transactions supported by banks fell, especially at the higher end of the market.

So what does 2008 bring? Generally this is likely to be a challenging year, although we are also seeing some encouraging signs.

The market for retail leveraged debt should remain open for mid market deals. At the high end of the market, the backlog for leverage deals is immense and whilst liquidity is likely to return, the timing remains uncertain. The terms on which banks lent in 2007, both price and amount of leverage, increased and reduced respectively and this is unlikely to change in 2008. Consequently the price that a VC house is prepared to pay will either reduce, to enable them to achieve their financial returns, or they will have to accept lower returns. Price reductions will enable trade buyers to once again compete in the acquisition marketplace.

So what else? At present there is certainly less demand from retailers to borrow and this is likely to continue as they rein back on capital expenditure in order to conserve cash for the tougher times that are expected this year. Fortunately the high street is generally in good shape and this conservative approach should minimise the risk of failures. Banks will remain keen to support the sector but will, as ever, be looking to find the winners.

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Prospects for 2008 - Volatility ahead?

The stockmarket, as one venerable sage once put it, acts like a voting machine in the short-term, but in the long-term it is a weighing machine. The market is sentiment driven and can over-react, but in the long term it tends to get things right and discounts the future rather efficiently.

So, what does the brutal and savage de-rating of the general retail sector, which has accelerated since last autumn tell us? It may imply that the future for retailers will be brutal and savage... The stockmarket is clearly factoring in a significant chance of a hard landing, as the global credit crunch undermines consumer spending power and consumer confidence and deflates the housing market.

How much of the consumer downturn that began last October is a long-term adjustment to excessive debt-financed spending in the past and how much is a short-term reaction to recent events is hard to say, but there is no doubt that 2008 will be a challenging year for retailers and the stockmarket is taking no prisoners. Falling sales, rising costs and weakening margins spell only one thing and that is falling profits and the stockmarket is pricing in that risk by lowering retailer's valuations across the board.

Food retailers are still seen as a different breed, but most general retailers, even those with freehold properties are now trading on price-earning ratio's of below 10 for the 2008/09 year. But what about the 'E' in the PE's? Earnings are expected to come under some pressure this year, as like for like sales flatten or dip slightly, but in a real recession sales would fall by more than that, particularly for household goods retailers. Uncertainty rules and stockmarkets hate uncertainty. Stockmarkets love interest rate cuts, but there comes a point, when consumer confidence is really low, when cutting interest rates is like pushing on a string. Retailers live in interesting (and volatile) times...

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What really happened in 2007?

2007 was a tougher year for retailers than many before it, especially for the non-food sector. Right from the off, we feared that the outlook for the year looked poor.

A heavy cost base continued, with swinging increases in both utility prices and business rates particularly in quarter 1. Thankfully though, the rate of growth was slowing, after the onslaught of double-digit price inflation in fuel costs of 2006.

However, the real concern at the start of the year majored on speculation over a slowdown in the rate of demand growth, driven by the three 2006 interest rate rises the anticipated impact on consumer confidence and raised public consciousness of personal debt.

In the event, demand growth did not weaken in quarter 1 - it accelerated. For the quarter, the BRC-KPMG Sales Monitor registered a 3.5% like-for-like year- on-year basis, up strongly from 1.9% on the previous quarter. This set the tone for much of the year: consumer resilience flying in the face of growing economic pressure, buoyed on, we believe, primarily by the ongoing strength in the housing market - enabling growth in mortgage equity withdrawals and the possibility of individuals restructuring their personal borrowings.

Two more interest rate rises by the Bank of England in quarter 2 did little to curb retail spending. Food sales remained very strong, seemingly untouched by conditions, but non-food goods, particularly clothing, struggled in the rain deluge that besieged the country in May and June. As a consequence the overall rate of sales growth slowed.

Costs remained the key worry to retail health during quarter 2. Notwithstanding slowing rental and energy price growth, the true like-for-like growth in retail costs was up to 3.5 - 4% and sales were struggling to keep up.

During the autumn it was a matter of retailers sticking it out amidst fears that a downturn in consumer demand was imminent. There was consensus among the Retail Think Tank members that a change was on its way, but there was disagreement as to when. The broader impact of the Northern Rock debacle and a slowing in GDP helped create a general air of uncertainty. The most telling data discussed in October, perhaps, came from the housing market, where a step increase in the number of households (up from 70,000 to 120,000 a month) coming off existing fixed rates and onto more expensive deals was feeding through the pipeline.

In actual fact the rate of growth in retail sales did indeed flatten in quarter 3, (the BRC-KPMG Sales Monitor saw growth slow from 2.5% like-for-like in quarter 2 to 2.1% in quarter 3), but this certainly didn't represent the free fall situation that had been feared as early as from the start of the year.

A continued slowing of rental increases, alongside subdued staff costs rises in the sector helped ease cost pressures in quarter 3, though they remained a negative influence on overall retail health.

By quarter 4, for the first time of the year, the three key drivers of demand, margin and costs had all contributed to the deteriorating overall state of health in the UK retail sector. This was borne out by the difficult trading conditions which were widely reported and the subsequent downbeat trading statements from retailers.

For the first time in the year, the spotlight settled on margins. A weak dollar had helped to protect retail margins throughout 2007. Food retailers had also continued to strengthen their buying-muscle with suppliers, limiting the passage of any cost of sales inflation. However, on the non-food side, higher prices of goods sourced from China were beginning to damage margins, particularly as they were generally not being passed onto the consumer.

Equally, as demand growth weakened, the need to incentivise through discounts and promotions in order to stimulate sales became increasingly necessary. With the exception of high street fashion and footwear, most managed to avoid going to full Sale before Christmas, but many deployed selective damage-limitation campaigns to nurture consumer spend.

2007 began with accelerating demand growth, but by the end of the year this had finally given way to a slowdown. The impact of interest rate rises on mortgages, the credit crunch, a reported leveling off of house prices, rising inflation and a disposable income level expanding at its slowest pace for 25 years were all considered as key contributing factors.

For quarter 1 2008, we expect the state of health to deteriorate further and at a faster rate. Our expectations were downgraded further in two of the three drivers, margins and demand, with the impact on health of costs still being negative. Consequently the Retail Think Tank produced its most pessimistic set of predictions since it was formed in mid 2006.

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