And another challenge

Spare a thought today for retailers in the UK. Not just because at the time of writing the sun is shining and the England football team are due to play a critical game this afternoon, thus conspiring on both levels to keep people out of the stores. The main reason to feel sympathy for UK retail is that yesterday, the new Government announced that VAT (sales tax) will increase on all applicable goods from 17.5% to 20% next January. After 2009’s temporary decrease and then increase in VAT that was designed to stimulate consumption, the UK consumer will be forgiven come January 2011 for thinking that the tax on goods would have gone up 5% in 12 months.

The VAT increase forms part of an emergency programme announced by the Government to tackle the massive Budget Deficit. Retailers are caught right in the middle of these measures. For some time, leading retailers have been calling for prompt action on the economy but this clearly now comes at a price. Economists and commentators as well as industry experts have differing opinions on the effect this increase will have on spending levels but the general sense is that it will inevitably act to suppress discretionary spend. The economy has many things to balance and the great hope now is that these measures don’t act to push the UK back towards a “double dip”. Retailers are already grappling with the return of inflation in the sourcing of many product lines so the assessment going on now is in how they remain price competitive.

As I said at the outset, spare a thought for UK retailers, because in truth, these pressures already exist for retailers in many markets. Across Europe certainly as well as in the US, the tensions are growing between governments’ fiscal policies, national deficits and the need to keep economic recovery moving forward. This week’s developments in the UK might simply serve to reinforce a growing view that we are looking at a period of low growth or slow growth or as the headline in one national newspaper described it: “Pain now, more pain later”.

Yet another challenge for retailers to face and to find their way through!