Written by Dr Tim Denison
Director of Knowledge Management, SPSL

In my review of 2005, I ventured to suggest that 2006 would most likely be a benign year for retail, though much would depend on the strength of the economic squeeze and the consumer’s reaction to it.

2006 turned out to be the start of a rebalance in the drivers of the economy. During the year, the consumer finally embarked on the road of transition, from playing lead to support role in sustaining the national economy, something that the Bank of England has been eager to see happen.

The move marked the regression of a decade-long retail boom and a return towards shopping sobriety. No more so was this change more noticeable than in footfall terms – the number of people actually entering retail outlets. Instead of seeing the number of shoppers entering stores in 2006 fall by 1-2% on 2005 as SPSL had forecast, numbers diminished by 3.9%. This makes it the quietest year in terms of people entering shops since SPSL first published its Retail Traffic Index in 1998. I believe there to be four principal causes for the decline. Each will be discussed in the course of the review, but let’s start with the most influential factor – the downturn in the consumer economy.

After a busier than expected Christmas in 2005 and a hectic first week of Sales, there was a sluggish return to the shops and to ‘normal’ shopping routines. Retail traffic in non-food stores in January was down by 4.0% year-on-year, setting the mark for 2006. The cautious start to the year reflected a general sense of uncertainty about the state of people’s wealth, financial security and household priorities ahead of them. Rising monthly bills and a slowdown in the economy were already taking their toll at the margins. The number of individual insolvency filings rose 57% year-on-year in Q4 2005 and home repossessions were up 22% in the second half of 2005 over the first six months.

The downbeat start to 2006 continued into February, when shopper numbers were 4.9% lower than in 2005. The unrelenting rise in the cost of the ‘staples’ of everyday living, everything from housing to utilities, food and fuel, increasingly dictated people’s spending priorities. Despite consumer goods being cheaper to buy than ever before, and in this regard more affordable, retailers struggled to attract shoppers into their stores.

March was always going to yield poor comparators to 2005, when figures were boosted by Easter. Nevertheless, the 9.5% year-on-year deficit in footfall was greater than expected. A late Spring, accompanied by a subdued housing market and the general cost of living cosh, discouraged shoppers from getting into their normal DIY, home sprucing and improvement spending spree.

With Q1 overall showing a drop in retail footfall of 6.4% against 2005, retail had endured its toughest start in 10 years. The economic rebalance away from an unhealthy reliance on consumer spending and toward more revenue generation by business and the financial services was underway.

Consumer prudence remained the name of the game in Q2. More emphasis on saving rather than spending became de rigeur for a growing band of people, providing some peace of mind against future economic pressures. Despite late Easters usually producing more trips to stores, this wasn’t the case in 2006. On Good Friday, shopper numbers were down 5.5% year-on-year, on Easter Saturday by 4.2% and on Monday by 7.4% - figures that were certainly a disappointment to the home improvement sector. But a least the holiday period helped April record the first 2006 year-on-year rise in footfall, one of 1.4%. It transpired to be the only month of 2006 in which a rise in retail traffic was recorded, but it was solely the consequence of Easter’s distortion.

On a more positive note, the strength of the City in the Spring led to an influx in businesses and financiers from overseas. In turn, this stimulated Central London’s economy. There, house prices boomed and retailing benefited. Shopper numbers returned to levels unseen for years; in April the number of people out shopping in the Central Congestion Zone was 14% up year-on-year.  London’s resurgence was an early sign of a social split in shopping behaviour, which developed over the course of 2006; more of this later.

May followed a similar path to April. Neither of the bank holiday weekends improved on the footfall levels of a year earlier. Hindered by the wettest May for 20 years, retail traffic for the month fell by 3.0% year-on-year. In comparison to the earlier months, this represented a little lift and signs that the end of the consumer “rebalance” was in sight. In part the lift was driven by better news from the housing market. Fears of a downturn in prices had proven unfounded and the softening trend in the winter months had subsided. The change in the number of mortgage approvals rose by almost 8% across the country over April, the highest leap since August 2005. Both the Nationwide and Halifax reported the revival of a strong upward turn in house prices, injecting renewed interest in home improvement. Shopper numbers in that sector matched those of 2005 for the month for the first time in the year.

The big debate in June was whether the advent of the football World Cup would stimulate or suppress shopping. SPSL’s figures showed that the streets were far quieter in the early rounds of the tournament, especially when the England team played Saturday matches. For example for the w/c 25th June the Retail Traffic Index was 10.1% lower than for the corresponding week in 2005.

Overall a fall in footfall of 7.2% against 2005 was recorded in June, showing that non-food retailers generally were penalised. Not so the grocery stores; they reported very strong sales of ready-prepared foods, snacks and drinks. Mainly as a consequence it is estimated that the World Cup generated over £1 billion extra spending in the economy. The result highlighted a stark contrast in the fortunes between food and non-food retailing that developed over the course of the year. Taken as an industry, retailing continued to account for a diminishing proportion of our disposable income. Yet the impact by mid-2006 was being felt far harder by the non-food sector. The inexorable march of the grocery retailers into the non-food sector continued at a pace. Growth in floor space, part-created by a surge in mezzanine openings, before a change in planning law, enabled supermarkets to expand their non-food ranges to include everything from woollies to wardrobes. In 2006 it was demonstrably clear that one-stop shopping increasingly suited people’s lives and through their immense buying powers, supermarkets could be very price competitive beyond their traditional territory. The second cause of the decline in retail traffic in 2006, then, was the growing popularity of supermarkets for non-food goods. Increasingly more of us were browsing and possibly buying from the supermarket aisles during the weekly grocery run, precluding the need for quite so many visits to other stores on other occasions.

For Q2 the deficit in the number of shoppers had reduced to -4.3% year-on-year. There was some sense that retailing was finding its new state of “reality”, that the consumer spending supertanker had slowed down and found its new cruising speed.  What’s more, there had been relatively few retail casualties in the process, with some notable exceptions such as Allders, Powerhouse and Silverscreen.

By mid-2006 the emergent picture was one of resilience and balance, though not necessarily stability. Shoppers, no longer actively avoiding expenditure, seemed to be more accepting of the constraints imposed by high debt levels and ongoing pressures on their disposable incomes. Retailers too, seemed more attuned to the challenges presented by a slower rate of growth, more discerning customers and the quest to preserve margins.  In July, retail footfall levels had strengthened to just 2.5% down year-on-year, flattered somewhat by the weak comparison month in which the London bombings were carried out.
 
With inflation above target, global economies looking healthy, the economy growing at above-trend rate of 0.8%, the manufacturing sector picking up and consumers finding their feet again with mortgage lending hitting a record £32.2 billion in June, it came as no great surprise that the Bank of England elected to put up the interest rate early in August. Any likelihood of finding retail stability in the short term was quashed and the traditional ‘end of summer, back-to-school’ surge in the shops simply didn’t materialise. The decline in the footfall deficit was reversed; the Retail Traffic Index registered a drop of 3.0% against August 2005.

Any change in base rate, however small, affects the portion of society that is highly-geared financially. In 2006 we witnessed the gradual exacerbation of inequality of wealth – the third of the causes behind the fall in footfall in 2006. By the Autumn the high street banks were expressing concerns over bad debt levels which were up by 27% in the first six months of the year. There was a belief of worse to come and fear that they might be compelled to stop lending to some of their customers. Home repossessions reached their highest level since 2001 and August also saw a 12 year low in credit card spending.

For a small, but growing minority debt-servicing was presenting a major challenge. Whereas a trip to the shops might have featured prominently in their past routine, it was now more of a question of avoiding the temptation to spend, by steering clear of the shops except for buying essentials. For others though, like the fortunates working in the City, mentioned above, 2006 rewarded them with record bonuses. American-style consumerism and shopping to them became all the more desirable and affordable. The end result was a diverging society, a small proportion of whom at the very margin were reaching their credit barriers and having to curb their trips to the shops. In September, the numbers out shopping were down by 3.6% year-on-year, slightly worse than the gap in August.

Shopper numbers stood at their lowest October levels for eight years, down 2.4% on the previous year in a month when the change never usually exceeds one point either way. Mid-season Sales failed to inject any telling pace into retail patronage. Raising the national minimum wage also did nothing to help retailers preserve their operating margins. Things got more depressing still in November, when the interest rate was raised to 5%, when the BRC-KPMG Retail Sales Monitor recorded a rise of just 0.5% in like-for-like sales and when our own Retail Traffic Index recorded a year-on-year fall of 4.9%.

Talk of the pending Christmas being the worst in 25 years hit the headlines.
True, the campaign got off to a very slow start. Footfall levels in the shops were down by 5.1% year-on-year in the w/c 26th November, but this was to be expected. Over the last eight years people have left their shopping in stores progressively later each year. The last fortnight of November used to be a time for reconnoitre, walking around the stores gaining inspiration for gifts. Nowadays, many people simply don’t have the luxury of so much time, or the inclination to face congested roads and expensive car parks. Instead many prefer to let their fingers do the intelligence gathering on the keyboard. Internet shopping is the last of the four main influential factors affecting the number of store visits in 2006.

Despite the publicity it receives and its dramatic rate of growth, sales via websites were still relatively low in 2006 – estimated at between 3-5% of retail sales. Its principal impact in 2006 was on shopping behaviour; that increasingly we cut down on the number of browsing forays to the shops and were prepared to do some research on line. Store footfall figures, therefore, understandably looked weaker up to mid-December, but by the w/c 17th December the number of people out in the shops was 0.8% up on 2005.

Christmas 2006 was certainly a year in which consumers left their shopping later again, but it was also the case that they were highly discretionary in their buying. Items considered bargains flew off the shelves, but the overpriced undesirables remained unsold. With hindsight, it truly was a “carpe diem” Christmas! It was a matter of parsimony rather than lethargy, which became even clearer once the Sales began. The weekend before Christmas had not been the record-breaker that we had expected. The reason for this is now more obvious; with most retailers choosing to hold off going into Sale before Christmas, many consumers delayed their final shopping spree until the wholesale bargains materialised – after Christmas Day. December 27th was the most crowded Sale day since 2002, and fully 10% busier than Saturday 16th December, the busiest shopping day in the run-up to Christmas 2006. In the event, retail traffic in December was down by 2.3% against 2005; not the disaster that some had feared and certainly a figure that most retailers would have settled for before the start of the festive campaign.

Q4 finished up by matching Q3. In both quarters retail traffic levels ended 3.1% down against 2005, better than the first two quarters of the year. This points towards me being cautiously optimistic for the year ahead. There is a sense of a new equilibrium being struck between retailers and consumers. Retailers with a strong affinity to their customers’ tastes, needs and lifestyle pressures will continue to attract brisk business in 2007. As in 2006 though, the consumer economy remains fragile and this should not be underestimated. At the start of 2007 there are many imponderables hanging in the air…. over interest rates, inflation, wage settlements, job security, the housing market …. to name but a few. Just a minor change to conditions would change the whole complexion of the scene, making the tipping point into a state of retail turmoil never very far away.