Despite gloomy predictions, UK retail sales growth in the fourth quarter of 2006 was consistently ahead of 2005. However, for many retailers growth has come at the expense of margin and, with 2007 set to be a much more challenging year, new research believes there are lessons to be learnt from the key trends that have emerged.

At the beginning of November 2006, Verdict Research, part of the Datamonitor Group, forecast "retailers can look forward to better Christmas uplifts than a year ago".

As predicted, consumers rose to the occasion, albeit at the very last minute, and produced significantly higher sales growth than in 2005. Despite the mild weather and retailers managing expectations with gloomy predictions, Q4 2006 was consistently ahead of 2005.

However Maureen Hinton, retail analyst with Verdict Research and Rupert Eastell, head of retail at BDO Stoy Hayward, say that for many retailers growth has come at the expense of margin and, with 2007 set to be a much more challenging year, they must learn from the key trends that have emerged.
 
The mild weather dampened shoppers' emotional impulse to buy winter apparel or gifts early in Q4 but despite this, both October and November, at 3.6% and 3.7% respectively, were well ahead of 2005. The surprise was in how strong the late surge was in December considering the strong comparative of 3.7%. Verdict expects the final figure for the month to come in at 3.9%.
 
Margins under pressure
Yet this does not give many retailers cause to celebrate, since they have had to manage margins very tightly in the face of constant pressure in 2006.

Cost inflation has been a key issue throughout the year and consumers are highly price sensitive, which results in continual downward pressure on prices.

Most retailers resorted to promotional discounting at some level early in the Christmas season to encourage spending which, however well planned, erodes margin. Furthermore, the December sales upsurge came in the last two weeks of December, one of which was the full Sale period with heavy discounting prevalent.

But retailers can learn from key themes that have emerged over the period
 
Rupert Eastell, head of retail at BDO Stoy Hayward, said: "This hike in sales in the last two weeks of 2006 was also reflected in our Like-for-Like sale index - which compares sales against the same week last year.
 
"Fluctuating results reflect the difficulty retailers face in making predictions about the climate in the year ahead. They are also a clear indication that today's high street shoppers are, arguably, becoming increasingly savvy.
 
"Given economic pressures and level of choice that now face shoppers, retailers can no longer rely on slashing prices to boost sales as people are no longer tempted to buy 'just because' it's reduced. Coupled with strong discounts, consumers now also expect a high quality, latest season product. Consumers respond to a positive shopping experience more and more."
 
Transactional websites proving essential channels
Firstly shoppers want value, choice and convenience. These factors are behind the success of three channels - online, supermarkets and department stores.

Online retailers benefited from a 40% increase in sales in Q4, increasing retail sales online by GBP1bn to GBP3.5bn compared to the fourth quarter of 2005. The share of online sales was 4.7% of total retail sales in Q4 2006.

"Retailers without transactional websites are losing sales to competitors - and will continue to do so, says Hinton. "However those with web offers must fulfil their obligations to deliver in time for Christmas - which means managing availability, deliveries and the supporting customer services, seamlessly."
 
Availability and service key
Supermarkets, with their expanding non-food offers and multi-channel, multi-format, propositions are fulfilling the modern family's needs. Large out-of-town, child-friendly supermarkets with free car parking, are ideal for time pressed, budget constrained families.
 
Department stores also offer a wide range of products in one location, but with a greater degree of indulgence and service than the more utilitarian supermarket proposition and those with a transactional website, such as John Lewis, have enjoyed phenomenal growth.

This year department stores have benefited from the trend for luxury and premium products such as jewellery and accessories, as well as the traditional fragrance and beauty products.
 
Trading up
Though consumers are price conscious they have been trading up to higher price product - though still at good value. This has ranged from premium food ranges from supermarkets to cashmere from Marks & Spencer, which has kept price deflation at bay.

Hinton concludes: "By offering good value products in higher price points, retailers can persuade shoppers to spend more per transaction."

Several of the areas addressed in this article are covered in the following Verdict Research reports:
UK Department Stores 2006  
UK Footwear Retailers 2006 
How Britain Shops 2006: Composite