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Weighing up the cost of Christmas

With consumer confidence at a low, pre-Christmas discounting was brutal last year. So with a recovery on the horizon, will the high street cut just as deeply again?

On November 19, 2008, Debenhams ignited last year’s pre-Christmas discount wars by launching the first in a string of pre-Christmas Spectaculars.

The department store group promised more than £200m worth of price cuts in a three-day Sale that offered, among other discounts, 65% off clothing.

The next day, Marks & Spencer followed suit with a high-profile 20%-off Mega Day – its first pre-Christmas Sale since 2004 – and Arcadia’s Wallis and Dorothy Perkins also cut prices by 20%.

Debenhams retaliated by extending its Spectacular by a further two days and House of Fraser joined the fray with a 40%-off Sale the next week. Even John Lewis, usually the most understated with its promotional activity, talked up its price-matching strategy, before Debenhams and M&S went into Sale again with barely a moment’s respite.

And so began one of the most strongly-contested promotional battles for consumer spend in the festive run-up.

Almost a year to the day later, the industry is watching closely to see which retailers will hold their nerve and retain margin, and which will target sales and market share at all costs.

Last week, M&S executive chairman Sir Stuart Rose told shareholders he planned to trade at full-price through the Christmas period and indicated that the previously waning consumer confidence is on the rebound.

Rose said he would run tactical promotions but would not repeat last year’s deep discounting war in the run-up to Christmas. He said at the press conference: “A year ago people were watching TV and wondering whether the pound they had in the bank would still be there the next day.” He added that those still in employment were now “fed up with being fed up”.

Next, which revealed its third-quarter figures to the City last week, also signalled a stabilisation in consumer spend. Chief executive Simon Wolfson said: “We won’t see a return to the levels of exuberance and the ways consumers stretched themselves before, which will mean a more stable situation.”

In a better place

In September, Drapers reported House of Fraser had told its suppliers it would not go on full Sale in the build-up to Christmas, saying its like-for-likes had improved and stock levels were down.

However, Debenhams – which factors in strategic promotions as part of its annual budget – has forecast that Christmas would be “heavily promotional”. Chief executive Rob Templeman said at the time of Debenhams’ results: “We’re very relaxed about where we are into Christmas. There are lots of reasons why the consumer is in a better position than last year.”

Nick Bubb, analyst at broker Pali International, believes there will be less discounting over the festive period than last year. “I’m not convinced there is going to be any need for it, assuming the weather is normal,” he says.

Bubb adds that the second half of October was “uncertain but OK”, backed up by numbers from the likes of Next, M&S and John Lewis.

Figures released by accountancy firm BDO last week showed that fashion sales in October were up 1.6% on a like-for-like basis, the first increase the sector had seen since April. This week, figures from the British Retail Consortium reiterated that business had improved with total retail like-for-likes up 3.8% in October, driven by strong clothing sales.

However, the statistics have to be viewed in the context of last year’s calamitous drop-off in footfall and consumer spend after the collapse of Lehman Brothers and the ensuing banking crisis. Pandemonium in the markets led to plummeting sales and retailers found themselves with massive amounts of stock to shift. That said, this year the signs are that stock levels have been streamlined and are where they should be for this time of year.

Bubb says: “I don’t think stock levels are a problem in general, although the mild weather must have delayed spending on knitwear and outerwear.”

Andy Wade, analyst at broker Numis, agrees. “People are holding their nerve and trading well. It would have been better if it had been cold, but it’s not like last year when people were watching queues form outside banks instead of shopping,” he says.

Grant Liddell, retail development director at logistics business Uniserve, doesn’t expect to see a lot of retail promotions this year. “Stock levels are definitely down,” he says.

Liddell says that late orders from retailers and consolidation in the factory sector had “created a false market”, with air freight rates doubling in recent weeks and shipping lanes running at capacity. He says: “Sea freight is extremely busy because of late orders and manufacturers are struggling [with demand] because they have cut back their overheads. It appears there is a peak, but capacity has been cut back to make enough supply for demand.”

So, whether or when retailers go on Sale in the run-up to Christmas is likely to be driven by the consumer psyche rather than born out of necessity for retailers.

Leading the way

Debenhams will undoubtedly kick off the Sale season next week, but will others follow? Bubb says Debenhams’ strategy is “creating a perception in the high street which is unhelpful because it forces a reaction”.

He adds that the reason why Next’s Sale on Boxing Day is so well received is that the retailer does not go on Sale outside of traditional Sale periods.

Wade does not believe that M&S will do another 20%-off pre-Christmas Mega Day, even when Debenhams launches a Spectacular. He says: “If competitors do go on Sale, then other retailers will react well.” He adds that he “wouldn’t be surprised if there were more targeted promotions” this year.

Friends and family vouchers and secret Sale emails became the norm last year, and discounts on slow-moving lines are already being ramped up on the high street.

Bubb adds that the biggest impact on pricing could come from the delayed pre-Budget report, which will outline what happens with VAT next year. He says the VAT timing will be “crucial” to pre-Christmas promotions and may affect retailers like House of Fraser, which sells higher-ticket product.

“The elephant in the room is Sir Philip Green,” according to Bubb. He says Green’s Arcadia was “particularly aggressive” a fortnight ago, when a number of its chains ran tactical promotions on knitwear and outerwear.

Bubb adds: “Next will hold its nerve but the wildcard is Arcadia. Consumer confidence is rising and the housing market is coming back. This year should be about normal, sensible retailing, and retailers should be preserving their pricing power.”

2008 Sales

Sales in the run-up to Christmas 2008

November

Wednesday 19 to 21

Debenhams three-day Spectacular. Included 65% off clothing

Thursday 20

Marks & Spencer 20%-off Mega Day

Thursday 20 to Friday 21

Wallis and Dorothy Perkins – 20%-off Sales at both

Friday 21 to Saturday 22

Bhs – 20%-off Sale

Saturday 22 to Sunday 23

Debenhams extends Spectacular to five days

Thursday 27 to Friday 28

House of Fraser 40%-off Sale

December

Wednesday 3 to Friday 5

Debenhams three-day Spectacular – 20% off

Thursday 4

M&S – 20%-off Mega Day

Friday 5 to Saturday 6

Bhs – 20%-off Sale

Saturday 6 to Sunday 7

Debenhams extends Spectacular to
five days

Wednesday 10 to Friday 12

Debenhams three-day spectacular – 20% off. Up to 50% off party dresses and women’s coats

Thursday 11

House of Fraser – up to 50%-off Sale

Friday 12 to Saturday 13

Bhs 20%-off Sale

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