VAT increase may fuel price war on non-food, says Knight

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Knight: retailers will take the hit

Barry Knight, head of retail at Grant Thornton UK LLP, talks to Retail Times editor, Fiona Briggs, about the likely impact of the VAT hike on retail sales

Fiona Briggs (FB): Who will the VAT increase actually hit? From experience, I would have thought it may be suppliers who take the hit as retailers look to pass the pain back down the supply chain?

Barry Knight (BK): I believe the retailer will take the ultimate hit from the rise. Customers are likely to rein in spending as the VAT increase, coupled with spending cuts, rising interest rates and falling or stagnant house prices, will restrict their disposable income.

This will have a knock-on effect on retailers who might be forced to reduce prices to shift stock. They in turn, after profits get hit, will try to pass some costs on to suppliers. The question is, how much further can suppliers be squeezed. The supply chain is already pretty tight with most retailers having shaved suppliers’ margins, and further margin erosion might mean it could be difficult for them to survive.

Briggs: how will VAT rise impact different retail sectors?

FB: How may it impact different retail sectors? Children’s clothing and food are currently VAT free but alcohol, tobacco and fuel are not – how do you think supermarkets and petrol retailers will respond to/be impacted by the increase? Will sales of these lines, in particular, be hit?

BK: The service and product lines that will be mainly hit are those where the public have been persuaded to buy the goods before the increase, i.e. their demand has already been satisfied and sales are expected to drop going forward. This includes big-ticket purchases such as furniture, TVs and other technology and entertainment products, cars and luxury goods.

However, the suffering of these lines will not just be due to the VAT rise – there are other much bigger issues facing the sector, such as changes to business rates, rises in commodity prices, the onward march of the supermarkets into non-food areas causing fiercer competition, and so on.

The supermarkets are quite likely to use the VAT rise as one reason to launch a price war with other retailers on non-food products. Petrol stations are, however, not expected to employ any other strategy in response to the rise than simply incorporate the increase into their prices.

FB: As for non-food, it’s already suffered in the recession as shoppers cut back on non-discretionary spend – will this trend simply be magnified in 2011?

BK: Yes, but VAT will be only one of many issues which will impact on non-discretionary spend, and aforementioned issues such as falling house prices and Government spending cuts will play a big part.

FB: Is there perhaps a ‘barometer’ of the type of ‘retailers’, who will be most impacted – I would be putting travel operators quite high on this list. Clothing sales are already being hit by hikes in raw material costs – 20% VAT will be a further deterrent to spend?

BK: Furniture retailers are expected to be the most strongly impacted by the rise, followed by product lines such as TVs, cars, travel and luxury goods.

FB: Do you believe we will see a similar list of retail casualties to the early part of last year in 2011?

BK: Yes, but I suspect Christmas sales have been pretty good as the early December snow may have caused a shopping frenzy in the last week, with most retailers operating at full margin during this time. This means that it may take another three months for it to really hurt. Easter is also very late this year and, as a result, the boosted income expected from increased holiday time consumer spending will be delayed.

FB: Can you offer any advice for retailers going forward?

BK: Make sure you are fully mobile and transactional online (even small retailers) and, wherever possible, cut non-prime physical space. This year it is expected internet access via computer or phone will be made more readily available nationwide, and so consumers will more widely expect retailer websites.

In addition, prepare downside forecasts and show them to funders now. This precaution will help you get ahead of other competitors who might also be looking to investors for refinancing in the coming year.