London 6 November 2007– A new forecast* published this week by retail analysts Verdict Research, a Datamonitor company, predicts that shoppers will spend more than ever in the run-up to Christmas. However, with incomes squeezed by high mortgage costs and wages only rising slightly, consumers will rely on credit to fund their festive spending. The downside to this upbeat performance is that consumers will be forced to tighten their belts in the New Year, making trading far tougher, particularly for retailers of home related items.

Despite concerns that waning consumer confidence will result in a weak Christmas for retailers, Verdict expects seasonal trading performance in 2007 to exceed that of last year. Overall, Verdict expects retail sales in the final quarter of the year to reach £77.9bn – or £1,300 per head – a 3.8% increase on 2006. While the growth rate will be slightly lower than the 4.1% uplift achieved last year, the year will finish on a robust note, with consumers spending almost £3bn more than a year ago.

Nick Gladding retail analyst with Verdict comments, “The build up to the Christmas trading period has been surprisingly strong, in spite of factors that should by rights cause trading to slow. Real take home pay - the overriding determinant of purchasing power, has been broadly flat over recent months and the impact of pay rises has been eroded by higher energy bills and mortgage costs.”

In addition many shoppers who took out fixed rate mortgages two or three years ago are experiencing sharp increases in their loan costs as their discounted loan period comes to an end. City bonuses, another key driver of retail are also likely to be substantially lower than a year ago, owing to the decline in profitability of many financial institutions. Moreover, a higher number of shoppers than last year are likely to fly to the US to do their shopping to take advantage of the pound’s strength against the dollar.

However, rather than rein in their festive spending in the light of these concerns, Verdict believes consumers will defer difficult decisions until the New Year. “Shoppers never want to be seen as mean at Christmas and will postpone any cutbacks until the New Year. However, having already run down their savings this year, consumers will need to rely heavily on credit to fund their seasonal generosity,” adds Gladding.

The stretched state of consumer finances will make shoppers particularly responsive to retailers offering value, particularly on easily priced comparable goods like books and electricals. Gross margin gains and a focus on reducing overheads in the wake of earlier energy and logistics price increases give retailers scope to reduce prices while preserving their profitability.

In an intensely competitive market, advertising will be particularly important for retailers to attract shoppers. Larger retailers that can justify the expense of TV campaigns are likely to gain share from smaller operators. John Lewis for instance has tripled its festive campaign budget, while Tesco has enlisted support from the Spice Girls. Smaller retailers will have to adopt lower cost initiatives like viral marketing and email campaigns to ensure they do not lose out.

Forecast in detail Breaking down the seasonal spending patterns by month, Verdict estimates growth of 3.8% in October, with clothing retailers in particular benefiting from a sharp transition in the seasons. In general, the mainly cool dry weather of the month drew consumers back to stores after a summer when clothing sales were impacted by wet weather, though some retailers lost weekend trade due to the Rugby World Cup.

November will be a tougher month for retailers as shoppers take stock after heavy spending in recent months, but in December Verdict predict a last minute pre-Christmas surge in spending. “The timing of Christmas Day on a Tuesday will tempt consumers to leave their Christmas shopping until the last weekend before Christmas and many are likely to take Christmas Eve off as holiday providing them with an extra shopping day. Savvy shoppers will also delay shopping in the belief that retailers will lose their nerve and offer pre-Christmas sales, which are now an expected feature of the Christmas trading period,” says Gladding.

Overall Verdict expects retail prices in Q4 to be 0.9% lower than a year ago, compared with a rise of 0.1% a year ago. This resumes a long term downward trend – 2006 was the first year in six years that prices did not fall.

In the New Year, Verdict expects a sharp deterioration in retailers’ trading environment. Having overspent at Christmas, the retail analysts warn that consumers will be forced to curtail their expenditure. With the number of house moves in decline and stagnant house prices reducing the scope to withdraw equity from property, it will be furniture and DIY retailers that will suffer most.

Electricals set to be star performer Electricals has been the fastest growing sector of 2007 and is certain to be one of the key retail sectors at Christmas. Central to its growth has been the popularity of new technologies that have fallen quickly in price. A star performer has been flat panel TVs which are now cheap enough to make them an affordable present as an extra TV for a bedroom or kitchen. Satellite navigation systems are also going to be popular thanks to further erosion in price points through the year. Games systems too will be a centre of attraction with this being the PS3’s first Christmas since its launch in March – a factor that is set to result in a second bumper year for specialist retailer Game.

High profile advertising will boost clothing The consistently poor weather of the summer months and the need to clear unsold stock to make room for Autumn merchandise has hit many clothing retailers’ margins this year. However Q4 looks far more promising. The fashion colour palette this season is much more sympathetic to British tastes and the trend for smart, structured styles favours higher price points. Handbags continue to sell well and make ideal Christmas presents. Furthermore clothing retailers are expanding their ranges into jewellery which is becoming the latest growth opportunity and also offers an ideal present solution. However retailers are not leaving it to chance to achieve their share of consumers' spending - high profile advertising has become much more prevalent in the sector and smaller retailers are using promotional events such as shopper evenings to encourage early buying. A record e-Christmas Online will be a more important channel than ever before this Christmas with consumers taking advantage of newly launched sites as a welcome alternative to visiting stores. This year will see intense competition for online share of wallet with grocers now viewing online sales as a key channel to boost non-food sales. Tesco Direct’s non-food offer is much more substantial than a year ago, while Asda and Sainsbury too have been augmenting their product offer to neutralise Tesco’s online advantage. Argos and Woolworths also see their multichannel platform allowing customers to order remotely and pick up in store or have goods delivered home, as a key competitive weapon. In total Verdict expects online sales in Q4 to grow by 40% this year to reach £4.8bn, equivalent to 6.1% of all Christmas spending.