In the last couple of weeks a string of good figures have boosted hopes of an early end to the recession. House prices have stopped falling, businesses have begun to restock, and retail sales have continued to hold-up. Although life on the high street is still far from easy, especially for mid-market and smaller retailers, the Armageddon predictions made at the turn of the year have happily failed to materialise.
Unhappily, one of the planks of this recovery is coming to an end, and for retailers the timing could not be worse. I am of course talking about VAT, or more precisely the impending reversal of the cut made last December.
For all the sniping the decrease has helped underpin consumer spending this year. Although I do not totally go along with forecasts suggesting that it has boosted spending by over £8bn, lower mortgage payments and clever discounting have also played a big part, the cut has undoubtedly assisted in propping up margins if not sales. However, as every retailer knows, come 1 January VAT is scheduled to revert back to 17.5 per cent.
Aside from the obvious logistical nightmare retailers will face changing prices and systems during the busiest shopping period of the year; the VAT hike also carries a very real risk of totally distorting trading patterns. In Germany, when a similar rise was widely publicised and implemented in 2006, retail sales rose steadily then plunged by nearly 10 per cent.
I fear a similar pattern will occur in the UK, with a pull-forward of demand followed by a huge lull. For retailers of higher priced goods, such as furniture and white goods, this trend is likely to be particularly marked.
In a trading environment where there is already a lack of clarity about demand, this can only make cash flow forecasting even more difficult. This is where our working capital teams can help (link to Working Capital). They provide a unique service which can help identify and deliver cash, cost and service benefits throughout the supply chain.
The other uncertainty is what impact higher VAT will have on consumer confidence. There seems to be a general view that the consumer will wear the 2 per cent price increase, but I am not so sure. The perception of rising prices could significantly damage consumer confidence, especially if speculation about a further increase mounts. Whoever wins the next General Election VAT will surely need to rise again, with my money on a summer 2010 VAT rise to 20 per cent.
Until the economy begins to firmly recover, shrewd retailers should continue to plan cautiously, conserving cash wherever possible. The VAT increase could get pushed back a month or so, but lets face facts, VAT is one story that is not going away.
If you would like more information on this subject, please contact Don Williams, Retail Partner, BDO.