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Christmas on credit: are retailers heading for a festive hangover?

Xmas credit copy copy


Shoppers could be putting more of their Christmas shopping on plastic in the run-up to the crucial peak festive trading period, prompting fears of a lean new year for retailers. Drapers investigates.

Christmas campaigns are well under way and the temperature is dropping. The countdown to the all-important peak Christmas trading period is on. A bumper festive season will be at the top of many retail chief executives’ Christmas lists as another challenging year on the high street draws to a close.

But in 2017 consumers have less disposable income as wages fail to keep pace with rising prices, sparking concerns that a growing number of shoppers will opt to put their Christmas spending on credit cards. Bank of England figures show total credit card debt in the UK hit a record high of £69.4bn in September, up 9.2% year on year. Interest rates also rose for the first time in 10 years this month, and are expected to rise further over the next three years.

Retailers such as the Arcadia Group have also introduced “buy now, pay later” interest-free payment options, which they argue improves conversion rates and prevents dropped baskets.

“More money is going on to credit cards at the moment,” confirmed Marks & Spencer chief executive Steve Rowe at the announcement of its half-year results earlier this month. “Shoppers are feeling squeezed and their spending is volatile. Inflation is having an impact on shopper psychology.”

A lean start to the year is nothing new for retailers, as shoppers tend to cut back in January. One in three people chose to pay for Christmas with credit cards or overdraft facilities in 2016, a report from building society Nationwide shows. Almost 20% felt they suffered financially over the following three months, and one in five took three months or longer to pay off their Christmas debts. Climbing credit card use this Christmas could mean even more shoppers are left struggling to pay their bills well past January and into spring 2018. Retailers are bracing themselves for not just a tough start, but a difficult first quarter, as squeezed shoppers cut back in a spending freeze.

There is a ‘live now, pay later’ culture

Joe Staton, GfK

Joe Staton, head of market dynamics at market research firm GfK, warned last month that consumer’s current enthusiasm for spending is being fuelled by surging credit card use.

“There is a ‘live now, pay later’ culture,” he tells Drapers. “Low interest rates are behind the leap in credit card use. It’s not difficult to borrow at relatively low rates and there’s little or no motivation for saving. It is worrying, because [credit card] spending is associated with crisis points elsewhere in the economy.

“Yes, we have exceptionally high levels of employment, and therefore a large workforce, in theory with money to spend. People are still spending but the big question is: when will this behaviour change? Our October consumer confidence statement showed that views on the general economy – both looking back a year and forward a year – had slipped. These measures have not been in positive territory since August 2015. All this will eventually feed into how consumers view their personal finances.”

Elsewhere, Andrew Bailey, chief executive of City regulator the Financial Conduct Authority, has voiced his concerns about spiralling credit card debit. He argues millennials have been particularly hard hit by falling wages, saddling them with a “pronounced” build-up of credit card debt.

Julie Palmer, a partner at turnaround specialist Begbies Traynor, has also sounded a note of caution, arguing what she labels the “UK’s ever-expanding consumer credit bubble” could burst at any minute.

Director for the Centre of Retail Research Joshua Bamfield, however, argues that although there will be a post-Christmas spending dip, the retail industry is not heading for disaster: “There has been plenty of gloom surrounding the increase in interest rates. The Bank of England is trying to manage expectations, not to create a crisis. It suggests that lenders should make greater provisions against consumer lending going sour and want lenders to reduce the growth in borrowing that they are currently funding.

“This is going to affect clothing retail and make sales growth even more difficult to achieve. The fashion sector is already experiencing a terrible time and this means problems will continue on into next year. We will see more fashion retailers falling by the wayside, but we do not expect a massive jump in retail failures. Once Christmas is out of the way, we think shoppers will cut back and that will have an effect. But will it be a crisis? No.”

Christmas can be expensive, so customers value the option to spread the cost

Matt Dixon, Shop Direct

Nevertheless, retailers can use credit to their advantage. Matt Dixon, group product director at Shop Direct, argues the etailer’s range of payment options gives it a competitive edge in a tough market. Customers at Very, Very Exclusive and Littlewoods can split the cost of their shopping over several months, or buy now and pay in up to 12 months. Around 90% of its customers use credit options.

“We let customers buy the things they want and need through credit – it is our point of difference,” explains Dixon. “In our last financial year, we grew fashion by 6.4% across the group and 14.4% on Very in a declining market. Our flexible ways to pay certainly supported this performance.

“Christmas can be an expensive time, so customers naturally value the option to spread the cost of presents for their families. But credit gives us an opportunity all year round.”

The uncertain economic outlook means there are challenging times ahead for both retailers and consumers. January is always a tough month in the retail calendar, but a potential spending freeze following a credit-heavy Christmas could stretch well into the first quarter of next year.

Retailers such as Shop Direct are able to build credit into their business models, giving them an edge in the eyes of cost-conscious consumers.

However, others will be facing an unwelcome new year’s challenge.

The UK’s credit crisis
  • £69.4bn: total UK credit card debt in September
  • Up 9.2% on the previous year
  • One in five took three months or longer to repay Christmas 2016 debts
  • £8,000 average UK debt per person (not including mortgages)


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