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• Next's Wolfson says 'retail in UK is going to be different'
• February retail sales down 0.8% on January
• B&Q boss – UK was weakest market after Ireland in 2010
Britain's retailers will have a much tougher time in the next few years and will feel like they are "walking up the down escalator," Next chief executive Lord Wolfson warned on Thursday.
As clothing chains such as Next are hammered by high cotton prices, the recent VAT hike and the government's austerity measures, Wolfson, a working peer who is close to the Conservative party, talked of a "new normal" for shops.
Official figures underlined the scale of the challenge. Retail sales in the UK dropped 0.8% last month from January, when sales were up 1.5% as shoppers took advantage of post-Christmas sales and tried to beat the rise in VAT to 20%.
"Retail in the UK is going to be different over the next few years," Wolfson said. "The consumer environment is likely to be dominated by the challenges of global inflation, public sector cuts and limited growth in consumer credit. These factors mean that retailers cannot plan for never-ending growth in like-for-like sales that many have enjoyed over the last 15 years."
Ian Cheshire – his counterpart at Kingfisher, owner of B&Q – echoed some of his comments as he announced broadly flat sales. "The UK is going to have a tricky first half and probably a slightly better second half. It was our weakest market last year after Ireland." Kingfisher makes only a third of profits in the UK, with the rest from France, Poland and other countries.
Next has worked out that consumers had £21bn less in their pockets in the year to January compared with the previous year, due to hefty rises in transport, food and housing costs which added £10bn, £7bn and £4bn to household bills respectively. "The effect of inflation is going to be at least as much if not more for consumers, certainly for our customers, than the public sector cuts," said Wolfson.
Next's prices are up 8% in the first half and are set to rise 8-10% in the second half, although Wolfson is optimistic that the pressure on cotton prices is likely to ease towards the end of the year. "There is an awful lot more planting this year."
Next's 2010 revenues were broadly flat at £3.45bn, while profits before tax rose 9% to £551m. Sales at Kingfisher were also broadly flat at £10.45bn while underlying pre-tax profits climbed 23% to £670m.
Despite the government's efforts to boost UK manufacturing, Wolfson poured cold water on the idea that Next could start making clothes in Britain again. "It's not viable to manufacture in the UK. Wages are five to six times higher than they are in the Far East." The company has taken steps to secure supplies from China by adding new suppliers and booking fabric and production earlier, after problems in the second half of last year.
Economists said February's fall in retail sales was further evidence of weak consumer spending and the fragility of the economic recovery.
"A weak number always looked likely on the back of the plunge in consumer confidence and the fact that prices are rising at double the pace of household income growth," said Alan Clarke, UK economist at BNP Paribas. "The latter is going to be a major influence over the rest of the year so numbers like today's retail sales are likely to be commonplace."
Cheshire outlined plans to turn Kingfisher from a conglomerate into a more integrated business by introducing similar ranges in different countries, starting with the UK and France, although he stressed: "We don't want to be like Ikea."
The company has successfully piloted "easier" products at its French Castorama chain, such as clip-on tiles that do not need grout and garden fences made from module panels and posts, and is now bringing them to the UK.
He said: "We used to be Europe's great DIYers but seem to have been overtaken by the French."