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Will UK retail sales fall off a cliff when VAT rises to 20 per cent after Christmas?

And if they do will that bring this year’s advertising and media recovery to a juddering halt?

There’s no doubt that the looming increase in UK VAT to 20 per cent will boost sales this Christmas, which are already looking set to be pretty robust.

But, once the sales are over, is that going to be it? The UK’s famously hardy shoppers will give it up as a bad job and double padlock their wallets?

Logic would indicate they will but when were shoppers logical? Christmas trading in the UK was strong in both 2008 and 2009, at the beginning of the recession and at its peak. And throughout this period the country’s big retailers, from the supermarket groups to the likes of Marks & Spencer and Sir Philip Green’s Arcadia, have delivered healthy results.

Once the New Year sales have ended (and St Valentine’s Day has passed) there are always retail casualties among those whose hopes of a Christmas bonanza to see them through the year failed to materialise. Woolworth and MFI both collapsed in November 2008.

This year there are other medium-sized retailers praying for a bonus from Santa, sports clothes chain JJB looks the most at risk and there are doubts over HMV which depends almost completely on Christmas.

But the bigger operators have plenty of cash available to absorb the two and a half per cent rise in VAT between the end of the winter sales and the start of the summer ones should they wish. Anyone who’s compared the price of, say, an aubergine (around £1) in Tesco or Sainsbury’s with the price in a high street grocers or market can see that there’s plenty of margin to be cut.

The supermarket chains will also see it as an opportunity to boost their already soaring sales of non-food items at the expense of specialist retailers. And these days they can happily sell online all the stuff they don’t have room to stock in store.

Tesco, which saw its market share in the UK grow slightly in the six months to November (from 30.6 per cent to 30.7) has been carpet bombing consumers with vouchers plus double Clubcard points for months now, acknowledging that it’s a great way to shift non-food and slow-moving items.

As for the ad market the first quarter of 2011 will clearly be testing (no X Factor with TV spots at £250,000 for a start) but the pundits said that about 2010 and they were clearly proved wrong.

So there’s every reason to be cautiously optimistic. So long as the bloody snow doesn’t keep everyone indoors (‘snow boosts online sales’ is what you’ll be reading next).

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About Stephen Foster

Stephen is a former editor of Marketing Week and London Evening Standard advertising columnist. He wrote City Republic for Brand Republic and is a partner in communications consultancy The Editorial Partnership.
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