The credit crunch, rising unemployment, increased competition, loss of the 'feel-good factor'... British retailers face a difficult Christmas. But reports of disaster are exaggerated. Some will survive unscathed

There are always winners and losers at Christmas," says Martyn Chase, chairman of the British Council of Shopping Centres. "But this year it seems likely that we'll see more losers than winners."  

Chase is anxious to stress that he's not predicting a meltdown in retail sales in the crucial weeks leading up to December 25. As he points out, over the past few years UK consumers have doggedly defied the gloomier predictions of analysts by continuing to spend, and spend heavily, during the Christmas season. Even last year, with the credit crunch very much a reality, December's like-for-like sales—as reported by the British Retail Consortium—managed to ring up a small increase of 0.3 per cent. 

But in 2008, the conditions are even more challenging. Although interest rates have fallen, so have house prices, and the spending power of the UK consumer has been hit by spikes in food and energy prices. Meanwhile, unemployment has increased significantly, a trend that inevitably undermines confidence.

So are retailers facing a Yuletide abyss, or will consumers once again dig deep into their pockets? Perhaps surprisingly there's still a fair degree of optimism, even among those who haven't been having a brilliant year so far. Despite reporting a four per cent dip in sales in the three months to July, the John Lewis Partnership is expecting business to hold up during the festive season. "I'm cautiously optimistic," says Patrick Lewis, director of retail operations. "The market is very tough at the moment, but what we experienced earlier in the year was a drop in sales of big home-based items such as sofas and beds. In the run-up to Christmas, that kind of item becomes less important for us as consumers are coming out to buy gifts. We think we're going to do well," he comments.

There are some who are positively bullish. Jim McCarthy, chief executive of the Poundland chain, is expecting a bumper season. As a chain that has grown to 190 outlets nationally on the back of a business model that involves selling all its products for a pound, Poundland, McCarthy believes, is a retailer for the times. "Traditionally, we've been a shop for people who are seeking value, and many of them need to seek value. However, our research shows that 11 per cent of our customers are in the A or B category, and that group is growing. We're seeing a lot of savvy shopping." 

And according to McCarthy, one of the key themes of Christmas 2008 will be an "escape to value" on the part of consumers, with low-cost shops such as Aldi, Lidl and Poundland itself benefiting from the downturn.   
Value is driving online sales, too. Paul Nikkel runs Quidco, a site that allows its users to source goods from major retailers, with a cashback offer on each transaction as an incentive to buy. "Our business has just been growing, and we expect it to continue to grow at Christmas," he says. "We're probably being helped by the credit crunch, but the increased use of the internet as a way to save money is part of a trend that is happening anyway."    

Chase agrees that a swing in the direction of value retailers will be an important characteristic of Christmas 2008, but he stresses that it is only part of the story. "You would expect chains such as Primark to do well in the current climate. But I think we'll also see a good performance from retailers who put an emphasis on service and those who are offering high-quality goods."

Certainly that's what Simon Hudson, managing director of Lapstone, is hoping. Nestled in the heart of the Cotswolds, Lapstone is a small complex, comprising a shop, hairdresser, spa and restaurant. The emphasis is very much on upmarket gifts, with the shop stocking products that aren't generally available on the High Street. Supported by a customer base comprised of mainly upmarket professionals, Hudson believes that the business is to some extent insulated from the downturn. "I would probably be foolish to say that I'm not just a bit nervous in the current climate," he says. "But on balance, I'm cautiously confident."

Not all specialist retailers are feeling quite so upbeat, though. Annabelle Randle is founder of ByNature, an online retailer specialising in ethically sourced and environmentally friendly products. As the value of the pound in the consumer pocket shrinks, she fears that ventures such as hers will lose out. "We have two types of consumers. Some are committed to buying products that aren't harmful to the environment—we call these the dark greens—and then there are the light greens that are interested but not yet committed. Ethical products are slightly more expensive so there is a danger that we will lose the light greens. I'm not particularly optimistic about Christmas."

Meanwhile, mainstream retailers on the high streets and online also face a squeeze, according to Christian Robinson, managing director of mail-order and online gadget and gift seller, Firebox. He's optimistic about his firm's prospects, but he believes that this will not be a good year for merchants who fail to tick the key boxes. "It's the average retailers who will suffer," he says. "The ones who don't offer either low prices or a service that's out of the ordinary."

As Poundland's McCarthy warns, low prices alone will not bring consumers into the stores at Christmas. People may be planning to economise, but they are not prepared to buy goods that are shoddy or low quality. "Reputation is hugely important," he says. "For instance, if we're selling boxes of crackers for a pound then all of those crackers have to crack. If they don't, people won't come back again." 

Equally, it would be simplistic to suggest that retailers whose reputations are defined in terms of quality are immune to price pressures. Lewis says that his confidence is based on John Lewis offering a mix of attractive products, state-of-the-art presentation and a reputation for service. By the same token, though, he is adamant that the retailer is determined to remain "never knowingly undersold".

To underline his optimism, Lewis adds that the chain has ordered its most popular Christmas product lines in greater quantities than ever. It's a similar story at Poundland. "Last Christmas, we ran out of certain lines early, so we'll be ordering more inventory this year," says McCarthy.  

Of course, the ability of retailers to shift that inventory is dependent on getting consumers into the stores and, faced with an economic slowdown and the growing willingness of shoppers to buy their Christmas gifts online, that will be no mean task this year.

According to Chase, Britain's shopping centres have a major role to play in this, not least because a big part of the consumer experience is based around visiting a selection of  stores-whether on the High Street or in an out-of-town centre—rather than simply making a bee line for Marks & Spencer or John Lewis. Individual retailers have their own strategies, from national advertising campaigns in the case of the major High Street names to more localised initiatives. "We only have 190 stores, so it doesn't make sense to run national advertising campaigns," says Poundland's McCarthy. "But at a local level we do a lot of leafleting."

In theory at least, a drop in footfall won't necessarily spell disaster for those retailers who have embraced online sales as part of a multi-channel strategy. Following Christmas 2007, e-commerce trade body IMRG and consultancy Capgemini reported a hefty £15.2bn in online sales (see feature, page 45). In the case of High Street retailers with an online presence, the internet side of the business often did disproportionately well. Fashion chain Next, for example, saw offline sales fall but revenues from distance selling  (catalogue and internet) rise 2.2 per cent. Meanwhile, Littlewoods posted an overall rise in turnover of seven per cent, while internet sales jumped 44 per cent. 

That should be good news for multi-channel retailers. If shoppers are staying away from the High Street at least they have the option of securing sales online. But it's a complicated market. Fiona Blades is managing partner at MESH Planning, a consultancy that has carried out a number of consumer behaviour studies for major retailers. She cites a survey into TV purchase habits that illustrates the challenges facing multi-channel retailers. "People will see a TV they like on the High Street and take down the name and number. Then they'll go home and research the product on price-comparison sites and through social networks. Then they might go back to a shop to make a purchase." 

The problem facing retailers is that the consumer may not return to the same store to make the purchase, especially if internet research suggests the price is cheaper somewhere else. In other words, a particular store may act as an unpaid showroom for products, only to find that value-led merchants make the sale. The good news is that when it comes to expensive goods, consumers are still very much focused on service and reassurance as well as price. "Retailers who can offer a good service wrap are more likely to get the business," says Blades.

But businesses that trade solely online but which have a good reputation also stand to gain. "Once you buy from Amazon and you see that the book gets delivered the next day, you're more likely to buy from there again," says Blades. 

And Firebox's Robinson sees more willingness to buy big-ticket goods from his internet and mail-order business. "One of our biggest sellers this year is a £1,000 electric scooter. Until recently, that wasn't a price point that would have worked for us," he says.

The implication is that we can expect the internet to take a bigger proportion of sales, not just at Christmas but throughout the year. Does this mean the slow death of the High Street? As Chase points out, shopping centres are continuing to open and thrive. But the hard lines of demarcation that used to separate offline and online retail are fast breaking down as businesses seek to secure the sales at whichever touchpoint suits the consumer.