THE RETAIL BULLETIN - The home of retail news
Lest we forget
HOME
RETAIL NEWS
RETAIL EVENTS
Fashion
Department Stores
Shopping Centres & Retail Parks
Home & DIY
Electricals
Health & Beauty
General Merchandise
Entertainment
Sports & Leisure
Retail Solutions
Food & Drink
Interviews
RETAIL INSIGHTS
RETAIL SOLUTIONS
ABOUT US
CONTACT US
SUBSCRIBE FOR FREE
VAT rise – another damper on already cautious spenders

The increase in VAT will add to inflationary pressures in retail and in most sectors retailers will be forced to pass this on to customers.

CITY & CORPORATE

VAT rise – another damper on already cautious spenders

The increase in VAT will add to inflationary pressures in retail and in most sectors retailers will be forced to pass this on to customers.

Verdict expects to see prices rise in the latter half of 2010 as retailers pre-empt the increase. 

The main outcome will be to reduce volumes but the effect will be minimal given that consumers shopping habits are already changing. Consumers are already cutting back on spending and when purchasing discretionary items, are taking a more cautious approach, considering the benefits of the purchase. The VAT increase will only serve to inflate this trend and ensure that value for money remains top of consumers’ minds when shopping.
 
Clothing & Footwear
 
Cost increases in the supply chain have already produced rising prices in clothing & footwear in 2010, and many retailers, predicting the VAT rise to 20%, have built this into their pricing for Autumn Winter 2010/11 and Spring 2011. This gives them some leeway for discounting at the end of the year as well as preparing clothes shoppers for further price rises in 2011. The trend for buying lots of low price garments has already begun to change, with clothes buyers instead buying fewer garments but willing to invest in higher prices if the intrinsic value of design, quality, styling and branding is evident in a garment. Therefore we expect to see continued growth, driven by inflation and the VAT increase, but volumes under pressure.
 
Big winners will continue to be the supermarkets as women reduce their number of dedicated clothes shopping trips but continue to do their weekly food shop and pick up clothing for their partners and children at the same time.
 
DIY & Gardening
 
The planned rise in VAT will push prices on DIY & Gardening products up yet further, with the sector already under cost inflation pressures. Like furniture & floorcoverings demand for DIY products is heavily reliant on the housing market and demand remaining in the sector has become increasingly price inelastic. Therefore, Verdict believes that while volumes will be affected by the VAT increase the impact will be relatively subdued. Any significant psychological impact on the consumer mindset will likely hit in Q1 2011, typically a quiet quarter for both the DIY and gardening sub sectors.
 
Food & Grocery
 
Though not directly impacted, the VAT rate will restrict overall budgets, causing shoppers to be more cautious overall. In addition, while consumers will get some relief from fuel duty not being hiked even further, the existing planned rises per litre of 1p in October and 0.76p in January 2011 will further erode household budgets and cause greater frugality in the weekly grocery shop.
 
Electricals
 
In electricals demand in categories such as audio visual equipment will continue to be predominately driven by new technology. Moreover, while some consumers may be tempted to make big ticket white good purchases before the rise takes affect, a high proportion of these are needs-driven and reliant on the strength of the housing market or just replacements.  This is a very price-driven, highly competitive sector and Verdict does not expect to see big price increases, or even a big spike in demand before the VAT rise in January 2011.
 
Furniture & Floorcoverings
 
Verdict does not expect the VAT rise to have a great deal of effect on this sector. With deep discounting in furniture & floorcoverings remaining, most rises will be disguised amongst the promotions, and as consumer spending is already constrained there will be little appetite for major purchases. This will be particularly so given the housing market, the sector’s main stimulus, remains stagnant and the emergency budget will do little to change this.
 
Health & Beauty
 
The resilience of the health & beauty sector through the recession, despite inflationary pressures, suggests there will be little price sensitivity to VAT at 20% and more scope for retailers to pass the cost onto consumers. However, rather than pushing prices up in January 2011 Verdict expects the changes to be much smoother with some retailers increasing prices prior to the official change. Despite this, we do not expect consumers to change their shopping habits, with consumers less willing to trade down or cut back on their appearance, health and wellbeing.
 
Homewares
 
While prices will undoubtedly have to go up in homewares to account for the VAT rise, some of this will be offset by the growing influence of non specialists, such as grocers, and the value retailers, keeping prices low. The element of spending in this sector accounted for by needs driven products, such as kitchen utensils and replacement driven purchases in glassware and crockery will remain resilient, particularly because of the participation of non-specialists using price to drive sales. More discretionary purchases, particularly items bought for aesthetic purposes, will be the worst impacted with a higher level of caution exercised by consumers.
 
Music & Video
 
Verdict expects the VAT rise in January 2011 to have little impact on the music and video market. With intense price competition and falling demand due to piracy and the increasing popularity of subscription services such as Spotify, retailers cannot afford to push prices up. Though it should not impact on the amount consumers spend, it will impact on retailer’s level of profitability.

Email this article to a friend

You need to be logged in to use this feature.

Please log in here

Subscribe For Retail News

RETAIL EVENTS

The Retail Design Seminar 2018
The Retail Design Seminar 2018
14 November 2018
The Cavendish Conference Centre
The Retail Design Seminar 2018
Omnichannel Futures Conference 2019
Omnichannel Futures Conference 2019
6 February 2019
Cavendish Conference Centre, London WG1 9DT
A truly omnichannel offering requires an understanding of customer behaviour across all shopping channels and how this should impact your overall business strategy
Customer Engagement Conference 2019
Customer Engagement Conference 2019
5 June 2019
Cavendish Conference Centre, London W1
The 10th Annual Retail Customer Engagement Summit
AI in Retail Conference 2019
AI in Retail Conference 2019
18 September 2019
Cavendish Conference Center, 22 Duchess Mews, London W1G 9DT
Retail marketing is changing pace rapidly by making communication across all platforms personalised, relevant, efficient, and helpful. AI not only helps shoppers find a perfect product but also pre-empts the shopping behaviour and speeds up payment.
The HR Summit 2019
The HR Summit 2019
Tuesday 8 October 2019
The Cavendish Conference Centre, London W1
The 11th HR Summit 2019, The Cavendish Conference Centre, London W1, 8 October 2019