Retailers are being forced into heavy discounting as the recession bites. Yet customers still believe there are more price cuts to come. Who will blink first?
By Helen McArdle

RETAILERS are facing a fight for survival this Christmas as the credit crunch bites into consumer confidence and panic-driven discounting risks pushing businesses deeper into debt.

Figures published by the Scottish Retail Consortium (SRC) last Wednesday revealed zero growth in like-for-like sales last month compared with September 2007. It was the worst result for two-and-a-half years.

On Thursday, a report by the Office for National Statistics recorded a 0.4% downturn in retail sales for the UK as a whole - suggesting Scotland's economy is still fractionally stronger than its neighbours.

However, Richard Dodd, a spokesman for the SRC, told the Sunday Herald retailers were anxious about the festive season.

"Retailers are very nervous about Christmas," he said. "For some, 60% of their annual trade relies on the festive season. Conditions have been steadily worsening throughout the year, and the fear is that that will continue and include Christmas.

"A number of small and medium enterprises have gone into administration, and we expect that some jobs will go in the new year - although we don't foresee a mass outbreak of job cuts."

On a more optimistic note, Dodd said many in the industry hoped shoppers were saving in order to celebrate Christmas as an "antidote" to the financial gloom.

"Retailers certainly don't expect a bonanza, but it could be that consumers are more willing to spend money so as not to deprive themselves of the Christmas they had planned," he said.

In fact, shopping patterns last month showed food sales were up 4.2% on last year. However, since this is measured in terms of cashflow through the tills it is difficult to assess how much of the increase is simply due to higher prices.

A 3.9% year-on-year drop in non-food sales last month is seen as an indicator that consumers, in the face of rising energy, fuel and food bills, coupled with insecurity over jobs and mortgages, are resisting non-essential purchases.

Sales of electronics, white goods, furniture and other homeware have all slowed as the number of people joining the property ladder or moving house has fallen.

Shoppers are also prioritising children's clothing and footwear, and there are signs of a backlash against the recent "throwaway" culture as consumers invest in higher-quality, more expensive items - such as winter coats - which they see as giving value for money.

However, even big retailers are feeling the pinch: John Lewis last week reported sales had tumbled by 7.6% to £48.2 million for the week ended October 18. Arcadia, Sir Philip Green's group, which includes brands such as Topshop and Bhs, reported a drop in profits from £199.2m to £188.9m in the year to August 30.

David Lonsdale, the assistant director of CBI Scotland, said the coming months will be "more crucial than usual" for retailers.

He added: "The outlook for the immediate future is far from sunny and the weakness in consumer confidence suggests Scots households will continue to watch the purse strings."

Leigh Sparks, professor of retail studies at Stirling University, said: "Is it the worst it's ever been? No. Is it bad? Yes. Consumers are very cautious. I think the figures are going to get worse before they get better. It's almost impossible to say for how long, but if you look at the Scottish figures for September I think we can safely say it would be a big surprise if October wasn't substantially worse.

"We're not going to see as much of a peak for Christmas as we've seen in previous years, and we're possibly going to see a bigger hangover in the first part of next year."

He warned that retailers' survival in 2009 depended on how they react to the current circumstances, and to what extent they fall victim to a "self-reinforcing panic cycle". Those with surplus stock and too many orders in the pipeline will have to discount "heavily and cleverly" just to get customers through the door, but could still fall victim to shoppers' increasingly reluctance to spend.

"There's this game going on where people are thinking: If I hang on, the retailers are going to panic and put things on sale.' So consumers are postponing purchases and retailers are trying to persuade them to buy now because, if they don't, there's even more stuff coming through the system.

"As a general trend, discounting works. But the problem is when you get everyone doing it, consumers begin to doubt what's real."

For the small and medium-sized firms that form the supply chain, Christmas will be even more vital. They have already been squeezed by energy bills that for some have risen 30%-50% this year, escalating diesel costs for hauliers and banks upping interest rates on overdrafts. Against this backdrop, the trickle-down effect of poor trade by the big companies could be catastrophic.

"If you're waiting for cheques from big business especially, and you've got to pay your VAT bills, you're just hung out to dry," said Andy Willox, Scottish convener of the Federation of Small Businesses.

"There's an expression 80/20: 80% of your business always comes from 20% of your clients, and that is throughout most sectors and trades. If everybody just paid on time, you wouldn't have the domino effect of one person suffering at the end of the day."

However, Garry Clark, of the Scottish Chamber of Commerce, suggested there are worrying signs for Scottish retail as the northeast - a bellwether for economic prosperity - begins to falter.

"Even in Aberdeen, where the economy is going pretty well, we are beginning to see a lot of problems emerging for small and medium businesses. That's not encouraging for the rest of the country."