Tuesday, January 06, 2009

Christmas Retail Sales turn out OK

It was a bit of a nerve racking wait for results. Prior to the VAT cut, John Lewis had reported that their sales had been 13% down on the same period last year. It looked like there would be a proper bloodbath on the high street. However, immediately post VAT cut, their sales were only down 6.7% on the previous year, and they finally reported that in the five weeks to Jan 3rd, their sales were up 2.9% on the year before.

Other retailers posted a similar story - New Look had like for like sales increasing 2.8% in the 14 weeks to January, Debenhams had posted a 3.5% drop in sales, but said their profit had risen thanks to tight stock control, Ocado, the online grocer had it's sales up 25% compared to last year, Co-Op Group had like for like sales up 5.2% over fourth quarter, and even home furnishings firm Dunhelm managed to maintain margins and was down only 5.6% in sales, despite the housing market being stagnant.

Twas the VAT cut that did it - Alistair Darling saved Christmas for the retailers. It brought people out to shop and it reassured the customer that government would do whatever it took to keep the economy going and therefore brought confidence back into the system. So many armchair analysts tended to assume that people wouldn't turn out for a 2.5% VAT cut when there was a 50% sale on. But the actual shopper (as opposed to those who opine but avoid shopping) understands first-hand that the 50% sales were very much selective. Some things were on sale, but never the stuff you really wanted to buy - no change there from previous years! Shoppers are used to these sales and sceptical about them, even assuming that some retailers deliberately put some prices up, in order to then cut more spectacularly and justify the sales posters. But the VAT cut was very real, it was real money off, and people appreciated it.

The good Christmas also has tax implications - the Treasury might be down on tax revenue from the Banks, but at least VAT should hold up, and retail corporate profits shouldn't be too badly down. It would have been a rout though had the government not acted.

I know the naysayers are going to rush to point to Waterford Wedgewood and Woolworths - but Waterford Wedgewood made six years consecutive losses (i.e. they were doing badly in the boom), and Woolworths were similarly badly placed - nothing could have saved them, apart from someone changing their business models, and that is not usually the job of government. Some businesses go bust even in boom time (Rover anyone?), it is a normal part of the commercial environment.

US Christmas sales figures come out on 7th Jan, and it will be interesting to see how they have fared, as they did not make any attempt to stimulate sales.

Finally, I must comment on Germany. After lashing out, and complaining about Britain "tossing around billions" in an act of "crass Keynesianism ", they have now U-turned. They are going for a €50bn package (much bigger than ours as a % of GDP), which they are borrowing to fund and they include some tax cuts. The Germans have gone for raising income tax personal allowances. Not sure how that will help them though. The American experience with income tax cuts showed people hoarding the money, and the Germans are even more inclined to hoard than the Americans. But I suppose a VAT cut was ruled out after all the fuss they made earlier...

Update: 7th Jan. Car registration figures came out today. They were bad, new car registrations fell 21.2%, but everyone had expected a drop of 35%. According to the FT,

"The Society of Motor Manufacturers and Traders said the cut in value added tax from 17.5 per cent to 15 per cent on December 1 may have been a contributory factor in the smaller than expected dip in sales.

Until December, the slide in car sales had accelerating, from a fall of 18.6 per cent in August to a 36.8 per cent drop in November.

....The better-than-expected UK figures contrasted with much bigger falls elsewhere in the final month of 2008. Earlier this week, all the leading US carmakers reported declines of more than 30 per cent in December, while sales in Japan dropped 22 per cent to the lowest December level on record.

In Europe, registrations fell by almost half in Spain, by 24 per cent in France and 13.2 per cent in Italy"

So VAT cut to the rescue again. Of course some of the benefit will go to those ungrateful Germans, but hopefully the Nissan and Mini plants here were supported too.


Anonymous said...

Well, not everyone thinks the VAT cut helped. Simon Wolfson, Chief Executive of Next has said the VAT reduction was an expensive mistake.


snowflake5 said...

Society of Motor Manufacturers thinks otherwise - see the update to the main article.

Anonymous said...

Selective as ever with your quotes,M&S just announced that it was their worst Christmas sales period for over a decade.

So if it really was such a success why are Darling and co already backtracking on their forecasts of only a few weeks ago that by mid-year the UK would be out of recession.
Incompetent,reckless or just trying again to massage the numbers,looks really stupid when his entire forecast falls to piecees in a ,matter of weeks.

Anonymous said...

If the VAT cut was such a good idea, and a cut in income tax a bad one, why is the government considering rasing the persoanl allowance to £10,000? Surely if more tax cuts were needed then VAT should be reduced further?


Anonymous said...

Frank Field disagrees very strongly with you snowflake..


"It was a fatuous move from the very beginning. And when we had a chance in Parliament sometime before Christmas to debate it I voted against, making a plea that the billions being borrowed to finance the VAT cut should be channelled into new forms of credit for viable businesses who might otherwise go under in the credit crunch"

Anonymous said...

Stuart Rose of M&S also doesn't think the VAT cut did much good.


What that suggests to me, with the motor sales figures, is that the VAT cut has had an effect on big ticket items, where VAT is hundreds of pounds, but not on high street items where VAT is pennies. So perhaps the government should have focused the VAT cut on the big items and saved the taxpayer billions

Tom Powdrill said...

Wolfson is a Tory donor, to Cameron personally actually so he's just giving the party line.

snowflake5 said...

DevonChap and BroncoDelsey - there is no doubt that without the VAT cut, Christmas would have been an absolute bloodbath for the retailers - with the effect that VAT revenue would have gone through the floor.

The VAT cut brought back some confidence - crucial in this trading environment. Tories find it hard to get their brains around this concept - but plus ca change!

Anonymous said...

Please do try and explain why if a product is discounted by 20,30 or 50% more sales are generated if that same product is discounted by 22.1%,32.1% or 52.1%???????

Yet another critic of the VAT cut and the £ 12 billion of our money flushed down the pan.........
'The VAT cut was never going to work' none other than Digby Jones...hang on a minute he's not a Tory..what's happening here???

snowflake5 said...

broncodelsey - it's down to volume. Say you sell 100 units at price A but 200 at price B which is at a discount of 30%. The total amount received in the second scenario is higher, which means turnover is higher and VAT revenue higher. That's essentially what happened with John Lewis, which despite discounting ended up with higher turnover over the 5 weeks to Jan on last year. Tis not rocket science (though shocking how this is straining Tory brains!).

The key thing to note that the VAT cut brought people out to shop when previously they were not shopping despite 30% discounts being offered. As to why people will shop because there is a VAT cut but not if there is a 30% discount? As I said in the piece, the public trusts that when Alistair Darling says VAT has been cut from 17.5% to 15%, it really is so, whereas when a retailer shouts 30% discount, the public thinks he is fibbing (deliberately putting the price of some items up before discounting to justify the sales posters). At the end of the day, the punter trusts the Treasury and not the retailers.

As an aside, I imagine the decent Christmas figures were deeply upsetting to Tories like you. You were rubbing your hands with glee at the prospect of the country doing badly weren't you? Hope the disappointment isn't killing you...

Anonymous said...

What I find difficult to get my brain around is:

The massive cost to the taxpayers of the bank bailout and months later we still have lending totally frozen.

If the banks won't lend when intertest rates are 3% why will they start lending when interest rates are 1.5%????
Time for New Labour to put their pride on one side and adopt the Tory policy of underwriting bank lending.

With latest forecasts putting unemployment at 3 million next year,New Labour needs to put their pride on one side and adopt the Tory policy of National Insurance holiday for new employees and not raising future NI contributions which is a tax on employment.

If the bank bailout,VAT cuts et al had been so successful why the talk of printing money which is straight from the Zimbabwe handbook of economics???????

snowflake5 said...

The banks will start lending when they suddenly realise that they can't make any profits without doing so. At the moment they are relying on widening margins for profits, but as consumers pay down their debt and their loan book shrinks, they will have no choice but to start lending again if they ever want to be seen as profitable companies. It might take them a few more months for the penny to drop, they've had a terrible shock and their brain cells are not working.

I am sure that the taxpayer will make a handsome profit when they come to sell their stake in the banks.

As for the VAT cut - as stated before, Doing Nothing would have resulted in such a calamitous plunge in sales that VAT revenue would have fallen off a cliff. The VAT cut, by supporting commercial activity actually supports VAT revenue to the Treasury. It's a paradox that Do Nothing Dave and Do Nothing Tories find hard to understand, but there it is!

Anonymous said...

Snowflake, I've got a blocked drain, do you want to do something useful? Come round and unblock it.

Anonymous said...

You were quite right, as was I re the temporary VAT reduction. A simple piece of demand management, I suppose they don't teach anyone that small changes CAN have effects anymore. Many a mickle . . .

What is the bet that, should it be reversed as announced, they all howl that they don't remember that it was temporary etc, as with the 10p tax rate?

After soo many years in the wilderness Tories have become tendentious, haven't they?