It's not too late to save Christmas

Christmas is coming, and depending on where you stand in life, that is either a very good thing - or very bad. For a five-year-old, for instance, it's definitely good. For their harassed, time-poor parent - the sort of "tosser" who annoys David Cameron by getting into debt - it's definitely bad.

And so it is for retailers. Most make the bulk of their revenues during the run-up to Christmas, yet the storm clouds are gathering over the high street. Woolworths deepened the depression last week when its chief executive, Trevor Bish-Jones, warned that trading was not progressing as expected. Shopper numbers were down and sales over the past 18 weeks had slumped 6.5 per cent against the same period in 2005.

Then there is the slew of bearish analyst notes, not least from Richard Ratner of Seymour Pierce. "We now believe that Christmas in 2006 will be worse than 2005, and could be as difficult as, or even softer than, 2004, which was the worst Christmas for 23 years," he wrote. "If the latter is the case, it will make it the worst for 25 years."

Consumer confidence has been dented over the year, and the fear is that, consequently, Christmas will be a muted affair. The average British consumer certainly greets this festive season with some hefty financial considerations on their plate. Household expenses, such as council tax, continue to move upwards, as do other costs, such as fuel bills and petrol. And although the Bank of England left interest rates unchanged last week, they still remain, at 5 per cent, 0.5 per cent higher than in December last year.

Meanwhile, personal-debt levels are sky high. According to the British Bankers' Association, personal debt stood at £65.3bn at the end of October. And for the retailers, the bigger problem is that this figure is actually down on last year's £66.1bn, implying that people are no longer borrowing and spending, but are beginning to pay back what they owe as those higher interest rates and costs start to bite.

"Retail is under increasing pressure from interest-rate rises, credit card debt and a slowdown in spending," says James Brown, head of retail research at the property group Donaldsons. "It's also under pressure because of this mild weather - if you sell clothing, then you're going to have winter clothes in stock. We talk about the weather throughout the year, but this year, in particular, it has stayed milder for longer."

Then there's the competition to deal with, primarily from online rivals, and margin-harming price deflation. Last year, internet sales surged in at around £5bn, and this year that figure is expected to be even higher, especially with the likes of Tesco now entering the fray. The supermarket giant launched Tesco Direct in September, selling goods such as sofas, televisions and kitchenware, while a four-week trial retailing clothes online got under way at the start of this month.

But for many, Tesco - for once - is the least of their worries. Last year, for instance, Amazon reported it had received more than 10 million festive orders, pushing up sales by 25 per cent.

"There are a number of fashion retailers that are getting into online," says Mr Brown, "but it's music and book sales that will really suffer." Which goes a long way towards explaining the market's dislike of HMV. The specialist book, CD and DVD seller has seen its shares fall this year from a high of 197p in January to 162p on Friday.

Nor will online bargain hunters hoping to take advantage of the cheap dollar help, even if most experts agree there will be scant savings once import duties are paid.

Retailers can cut prices to lure shoppers away from their computers, and many already are, through so-called "secret sales". These last for a few days and are targeted at selected shoppers only. The wine merchant Thresher and fashion chains Oasis, New Look and Gap, to name just a few, have all held them recently. But while it drives up volumes, such promotional activity eats into margins.

So it is a gloomy picture. But it would be foolish to give up on the high street altogether. No one thinks that trading will be dire across the board.

"Food retailers will do very well," says Jonathan Pritchard, retail analyst at Oriel Securities. "These guys don't invest heavily in price [promotions] over Christmas because they don't need to. People don't buy two turkeys or no turkey." So along with ever-present Tesco, most expect J Sainsbury and Wm Morrison to perform well.

Also likely to do well is Marks & Spencer. Its recovery is more established than those of Morrisons and Sainsbury's, meaning that chief executive Stuart Rose had a strong Christmas last year. So this year, trading will have to be even better if the numbers are to look good in comparison.

But most believe he can pull it off. "M&S will be absolutely fine because they have just got it right," argues Mr Pritchard. "It's what Mrs Middle England has wanted for a very long time."

Other likely winners, says Steve Davies, retail analyst at Numis Securities, will be the home shopping group N Brown and Carphone Warehouse, as people snap up the latest phones and accessories.

Mr Davies is not convinced by concerns that WH Smith could be a festive loser. "It is going to do much better than people think," he says. "The big difference between Smiths and Woolworths is that Smiths is reducing its exposure to [low-margin] entertainment [products such as DVDs]. So like-for-like sales will look bad but that's not what it's all about."

As for electricals, demand for high-definition flat-screen televisions will continue, which should give Currys owner DSG International and rival Kesa Electricals a boost. But that demand should not be exaggerated. Last week, for example, Kesa, which owns Comet, unveiled a strong set of figures for the past three months - but also warned of a "slowdown in the rate of growth" towards the end of the quarter.

At department stores, the picture is mixed. Debenhams is tipped to be on course for a tough Christmas, John Lewis a bumper one. Driving sales at the latter is demand for electrical appliances and computers; as one retail insider notes, Debenhams, unlike John Lewis, suffers from having a heavy accent on fashion.

And therein lies the rub. For all the predictions of doom, the retailers that sell products people want, in the way they want to buy them, will have a happy Christmas. Fashion, for example, may not be a favoured sector, but Tesco is still expected to do well in this area. And while trading at Next's stores is, in the words of one analyst, "likely to be awful", the company also has both an online and a catalogue offering. "That helped them out of a hole last year and likely will again," says the analyst.

Or as Oriel's Mr Pritchard puts it: "If you have got the right product and merchandise it properly, then the consumer is there."

Predicting how Christmas will ultimately turn out comes down to a few statistics, a bit of anecdotal evidence and a huge amount of guesswork. And until the trading updates and sales figures are released in January, that is the best anyone can do. The omens are certainly bad. But then, when it comes to the high street, predictions can and have been proved wrong. British shoppers are a fickle bunch; and this year, as with every other, the big high-street retailers will be praying that fickleness works in their favour.

Analysts' Forecasts: The seasonal hits and misses of retail's King Ratty

Forecasting how Christmas is going to turn out is a tough call. This year, Seymour Pierce's well-regarded Richard Ratner - known to all in the City as Ratty - kicked off with a dire warning. But how have his predictions fared in the past?

2006

"We now believe that Christmas in 2006 will be worse than 2005, and could be as difficult as, or even softer than, 2004, which was the worst Christmas for 23 years," Ratner wrote at the end of last month. "If the latter is the case, it will make it the worst for 25 years."

The rationale behind this warning is "anecdotal evidence" of heavy discounting and poor trading. There are also concerns about the unseasonally mild weather, the rising cost of living and Christmas getting "later and later each year", by which he means that shopping is increasingly left to the last minute.

2005

"We hope that you have a better Christmas than the one the retail sector is enjoying," Ratner noted on 23 December last year. "Christmas is likely to be somewhere around the level of the previous year, maybe a bit better or maybe a bit worse." This gloomy prediction was understandable, as the CBI had already warned that retailers were set for the worst Christmas for at least 22 years.

Come January, however, and it emerged that the high street had in fact had its best Christmas for four years. Figures from the Office for National Statistics put volumes at a three-year high, though that was taken as evidence of price-slashing. Notable exceptions to an otherwise decent festive season included the soon-to-be-taken-private discount chain Matalan.

2004

"Have a better Christmas than the general retailers," urged Ratner on Christmas Eve 2004. "We estimate that, on average, retailers have gone into the Christmas weekend 2 to 4 per cent down against last year. We predict there will be more losers than winners." He continued: "We believe this has been the most difficult Christmas since those of 1979 and 1980."

Spot on: government figures put 2004 on par with the bleak Christmases of the early-1980s economic slump.

Sales Figures: Supermarkets made merry last year, but at Boots and Woolies the tills weren't playing jingle bells

How the high street fared last Christmas compared with 2004.

Festive crackers

John Lewis: sales in the six weeks to 7 January up 7.7 per cent.

Carphone Warehouse: sales up 7.1 per cent in 13 weeks to 31 December.

Jessops: store sales up 5.7 per cent in five weeks to 1 January.

Tesco: sales up 5.7 per cent in seven weeks to 7 January.

J Sainsbury: sales up 5.2 per cent in 12 weeks to 31 December.

Monsoon: sales up 5 per cent in six weeks to 7 January.

Currys (part of DSG International): sales up 3 per cent in eight weeks to 7 January.

Marks & Spencer: sales up 2.9 per cent in 13 weeks to 31 December.

Wm Morrison: sales up 2.8 per cent in six weeks to 8 January.

JJB Sports: sales up 2 per cent in six weeks to 1 January.

Festive turkeys

Argos (part of GUS): recorded flat sales for the 14 weeks to 7 January.

Boots: third-quarter sales down 0.7 per cent.

Woolworths: sales down 0.8 per cent in six weeks to 14 January.

Comet (part of Kesa Electricals): sales down 2 per cent in 10 weeks to 8 January.

Clinton Cards: sales down 2.4 per cent in five weeks to 24 December.

Next: stripping out directory sales, sales down 3.2 per cent in 21 weeks to 24 December.

HMV: sales down 5.5 per cent in five weeks to 7 January.

Matalan: sales down 5.5 per cent in 10 weeks to 7 January.

Signet: sales down 9.3 per cent in nine weeks to 31 December.

All sales figures like-for-like; all comparisons against same period in the previous year; all supermarket sales exclude petrol.

Source: Donaldsons Research