Today Woolworths is finally closing down. The beleaguered high street chain was unable to find itself a buyer despite being taken into administration by Deloitte. The process of selling off its assets and its stock has begun with its closing down sale. The sale is offering 50% off on the price of goods.
The high street has seen many similar price fluctuations in the run up to Christmas. As part of the financial stimulus package, Gordon Brown announced that there would be a reduction in VAT from 17.5% to a historic low of 15%, cutting prices across the board. Even before December the 1st, Amazon, Currys, Dixons and Argos all reduced their VAT to 15%.
The reduction in VAT is designed to encourage consumers to keep spending. The aim of continued spending is to keep the economy healthy. Reducing VAT is a courageous move but there are some high level voices of dissent. The German finance minister, Peer Steinbruck criticised the government’s move in an interview with Newsweek.
‘Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?’ he said.
‘All this will do is raise Britain’s debt to a level that will take a whole generation to work off.’
Peer Steinbruck may be correct in his assessment. A slight reduction in VAT may not be enough to encourage cash-strapped consumers to hit the shops. And retailers may not even pass this discount on to their customers. In fact there are some manufacturers preparing to raise their prices in the run up to Christmas which will surely impact the price in the shops.
Sony, the consumer electronics giant has announced that it is planning to raise its prices by a whopping 33%. Sony is trying to compensate for a weakening Stirling by increasing prices. A Sony spokesman told the Telegraph newspaper:
‘Sony UK can confirm that in the past 48 hours it has communicated to its trade channel that due to adverse changes in the Yen/Euro & Euro/Pound exchange rate over the last six months, and with this uncertainty set to continue into 2009, Sony will increase the trade price of a number of products over the coming months.’
‘The precise level of price increases has not yet been agreed, but it is likely that the vast majority of products affected will see increases of significantly less than 33 per cent. As these testing trading conditions continue, Sony does not believe that it will be alone in taking this form of action.’
Sony is the company behind the must have gifts this Christmas such as the Play Station 3, PSP, Bravia TVs, Cyber Shot cameras and MP3 players. These are the items at the top of most Christmas lists. An increase in these sorts of items will have a massive impact on the cost of Christmas for many families.
There is a schizophrenic situation on the high street. There are massive discounts to be found as with Woolworths. Many shops are offering pre-Christmas sales. Yet there are companies like Sony who are actively trying to increase their prices of their products. With the decrease in the pound against the Euro, prices of European imports are also bound to rise.
The question remains whether it is the retailers or the consumers that will absorb the price increases? To what length will retailers go to encourage people to keep on spending? Are retailers prepared to actively lose money or will there be a point where they are simply forced by the rules of economics to raise their prices?
The case of Amazon, Currys, Dixons and Play’s reaction to the VAT reduction may be indicative of how retailers may respond if manufacturers insist on price hikes. These companies were willing to implement the VAT changes before they were actually obliged. This shows their determination to attract people to buy from them even if it represents a needless loss in revenue.
However Woolworths is still a sobering reminder of what may happen if retailers ignore economic realities. Although it is not in their interest to raise prices and alienate consumers, retailers may be forced to simply to the avoid the indignity of being carved up and having their stock flogged for half the price.
What if prices do increase?
If the price of high-end electronics increases as with the case of Sony, many people may not be able to afford indispensible electronic items. Luckily most retailers offer finance schemes. Instead of paying for an item upfront, a customer can pay for the item over a period of time with regular payments of a manageable sum.
On top of the regular payments those on a finance scheme also pay interest which is a percentage of the loan amount. Most retailers offer such schemes but the best deals can always be found online.
Dixons
Dixons has a flexible finance scheme which means you can buy now and pay June 2009. This is applicable for all purchases over £599. All you need is 10% deposit and pay nothing till June. There is a typical APR of 29.5%.
Currys
Currys offers finance on all products over £115.
