Slump in demand sparks fears recovery is stalling
TWO of Britain and Ireland's biggest retailers reported a cooling in consumer demand yesterday, raising fears that higher taxes and spending cuts aimed at reining in government borrowing could derail the economic recovery.
Next, Britain's second-largest fashion chain, said it expected a fall in first-half underlying sales to deepen in the second half. It also warned that shoppers also faced a hike in clothes prices next year.
Carpetright, Britain's biggest floor coverings chain which also operates here, also reported a drop in underlying sales and said it was planning for spending to stay subdued for the rest of 2010.
"There has been a noticeable cooling in retail demand in recent months," Next chief executive Simon Wolfson said.
"We believe that consumer spending will be more restrained in the second half than in the first as (public) spending cuts and tax rises begin to take effect."
Consumer spending has been showing signs of picking up as Britain emerges from a long and deep recession.
An industry survey last week showed retail sales rose at their fastest pace for three years in July.
Mr Wolfson stressed he did not see a repeat of the plunge in demand that characterised the low point of the recession in late 2008.
"We're talking about a modest slowdown rather than an armageddon scenario," he told Reuters.
However, he warned that clothing prices could rise by 5-8pc early next year, due to higher cotton prices, a lower US dollar and a rise in VAT sales tax in the UK in January 2011.
"Sales are going to be difficult for the foreseeable future," he said.
Next shares dropped as much as 7.4pc, the biggest fall on the benchmark FTSE-100 index and dragging down other retail stocks.
"The outlook for the high street retailers is not good given the forthcoming VAT rise, and cost price inflation... which will put further pressure on already subdued consumer demand," said Collins Stewart analyst Greg Lawless.
Next, which runs over 500 stores in Britain and Ireland, said sales at shops open at least a year fell 1.5pc in the 26 weeks to July 31, and forecast a decline of between 1.5pc and 4.5pc for the second half.
But it also reported a 7.8pc increase in sales at its Directory home shopping arm, and said growth there would help it lift full-year profit by 6-11pc to £535-€556m (€646-€671m) broadly in line with analysts' expectations.
Carpetright said sales at British and Irish stores open at least a year fell 3.4pc in the 13 weeks to July 31, compared with a 1.5pc rise the previous quarter.