Retailers to lose £2.2 billion 1Q 2011

Retailers are set to lose an estimated £2.2 billion in sales during the first quarter of 2011 because of the 2.5 per cent rise in VAT introduced today, according to new research by Centre for Retail Research. Consumer spending will decline

by 0.5 per cent year-on-year during Q1 and the tax change will cost each UK household on average £520, finds a new study by online shopping comparison site Kelkoo and the Centre for Retail Research (CRR). The report suggests that costs will be passed onto customers gradually, with only one in five retailers planning to pass the full VAT increase onto consumers by the end of January but 95 per cent expecting to do so within three months.

Speaking for media, Chris Simpson, Marketing Director of Kelkoo, commented: “In the new year, consumers will be left facing an increase in the price of everyday goods at a time when salaries are generally being frozen, and unemployment is rising”. “Retailers have spent the last few months encouraging consumers to ‘shop now to avoid the VAT increase’ which more than third seem to have taken on board.

Big ticket and fashion items are likely to see the largest drop-off in sales with 41 per cent of respondents to the study stocking up on electrical goods, 28 per cent on clothing and shoes, and over 15 per cent on home furnishings and white goods before today’s tax rise.

Following data gathered and published by the CRR, from 4 January 2011, when the standard rate of VAT in the UK will be 20%, raising an extra £13 billion over a year, retailers surveyed as part of the study showed that 64% of retailers would pass on 'most of' or the full amount of the VAT rise in the first month. 98% of retailers would ultimately pass on the whole of the VAT increase to customers.

The Centre for Retail Research estimated that this VAT increase would be passed on in full to the public as increased prices. Thus, it will be seen an increase in CPI inflation by between 0.6% and 0.8%, as well as an increase in costs and prices by £520 per household (family).

Some other findings on the new VAT consequences are the following:

3.3% of retailers surveyed expected that the VAT rise would cut sales and most would slim down their labour force. Analysts at Kelkoo and the Centre for Retail Research forecast 9,480 stores to be closed as a result of the VAT rise in the 2011 and a further 5,000 in 2012. 47,000 staff or 1.6% of the labour force would go. The reduction in stores and staff would bear heavily upon petrol retailing, housewares, specialist food shops, furniture, electricals, bookshops and stationers/newsagents. Discounters and 'value' fashion expected to increase the number of stores they operate by around 850. In the Costs and Margins chapter, it should be taken into account that VAT increased from the temporary rate of 15% on 1 January 2010. The further VAT increase in 2010, following on from a deep recession would have a sharply negative impact on retail costs and margins. Higher VAT will improve retailers' cash flow position, but negatively affect customer purchases at a time when trade (although better than 12 months before) has been poor for two years. Strong robust retailers will continue to do comparatively well, but the long tail of weak performers without a strong market position and (perhaps) stuffed with debt and expensive properties will be badly affected.