A Crisis of Confidence, or something bigger?

You may have caught the recent news headlines that a number of leading retailers have either gone into administration or embarked in radical restructuring. Firstly, wine merchants Oddbins moved into administration in March, shortly followed by Focus DIY. During June, long standing furniture retailer Habitat, home improvement firm HomeForm (whose brands include Möben Kitchens,  Sharps Bedrooms and Dolphin Bathrooms) and fashion house Jane Norman and department store T J Hughes have all entered administration. More recently, chocolatier Thorntons and Carpetright have announced a radical plan of store closures. This week, Thomas Cook has warned of weak domestic demand for overseas holidays.

Each company has told of the same story – shoppers simply aren’t spending as much as they used to, and overheads (in terms of fixed costs) are increasing. In the case of HomeForm, Focus DIY and Carpetright, the weak housing market has led to a reduction in volume of sales.

A key measure of Consumer Confidence is published by Nationwide each month, and recent data has indicated that confidence amongst consumers remain low. Indeed, the survey for May 2011 showed confidence levels about the same as they were in the midst of the credit crunch in 2008.

As we have mentioned previously, consumers have been squeezed from all sides over the last three years. Unemployment has risen sharply together with a decrease in job security generally. For those in employment, wage inflation has been minimal. Against this backdrop of static incomes, large increases in the costs of petrol and diesel, gas and electricity bills, higher food prices, more expensive clothing and hikes in car insurance and public transport have all combined to reduce the discretionary spending power of consumers. Undoubtedly, the VAT increase from 17.5% to 20% on January 4^th has not helped either. Even the reduction of base rates to 300 year lows, which has led to cheaper mortgages for many on variable or tracker rates, has done little to help ailing retail sales and consumer confidence.

A further consideration is the consumer’s ability – and willingness – to borrow to fund major purchases.  Much of the spending on big ticket items over the last ten years has been driven by borrowing, particularly through Mortgage Equity Withdrawal (MEW), where homeowners used their house like a “cash machine”. This was fine all the time house prices were rising, however with prices gently falling recently, this is no longer an option for many, together with the stricter lending criteria from banks and other lenders, whose fingers are still smouldering following the much talked about credit crunch of three years ago.

One could argue that once the economic outlook improves (which is the most likely scenario in the next two to three years although growth is likely to remain subdued) consumer confidence will rise along with shoppers’ spending power. However, I wonder whether a bigger change is occurring in the nation’s psyche?  Following the binge during the “Noughties”, shoppers have become far more price-conscious, and this has been witnessed by the rise of discount retailers such as Primark, Matalan, Aldi and Lidl. This is a trend I see continuing. Similarly, top end retailers, such as John Lewis, continue to post impressive results, as the mass affluent are least affected by the weak economic conditions. But for those retailers caught in the overcrowded middle, the prospects are not great.

The announcements of T J Hughes, HomeForm, Jane Norman and Habitat come at the end of a quarter, when rental payments typically become due. One has to wonder how many other retailers will come find themselves in the same situation at the end of September?