2nd UPDATE:Retailers Says VAT Rise Expected;Finalizing 2011 Changes

22nd Jun 2010 15:29

(Adds company, analyst comment, detail.) By Simon Zekaria Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. retailers Tuesday said the rise in value-added-tax announced in the coalition government's emergency budget was expected and the announcement provides clarity to facilitate industry change next year. "It is good we now have clarity on the VAT issue. We have been preparing for a change and are now finalizing our plan for next years rise," A Marks & Spencer Group PLC (MKS.LN) spokesman said. Other retailers, such as supermarket groups Tesco PLC (TSCO.LN) and J Sainsbury PLC (SBRY.LN) were immediately unavailable for comment. U.K. retail stocks rose after the government announced a VAT rise from next year but kept food and children's clothes exempt. VAT will increase to 20% from 17.5% Jan. 4, George Osborne said, delivering his first budget as U.K. Chancellor of the Exchequer. The 2.5% rise was broadly expected by the retail industry, but the notice period and the fact that VAT wasn't extended to other product categories will soften the blow for high-street retailers and supermarket groups with non-food offers, PricewaterhouseCoopers analyst Mike Bailey said. Head of Retail & Wholesale at Barclays Corporate, Richard Lowe said the timing of the rise protects the key Christmas trading period and will help stimulate sales between now and then as shoppers bring planned big-ticket purchases forward before the change. Lowe said retailers will have been looking at cost bases and price points since January this year. However, Shore Capital analyst Clive Black said the increase will squeeze discretionary income in 2011 and will make it harder for retailers to maintain performance levels, even if this will be partially offset by a lower corporation tax rate. Black also said retailers will face a spike in costs at the year end to prepare their systems for price changes. Food retailers will materially outperform in general retail spaces due to guaranteed footfall, he said. "Overall, we believe that the U.K. food retailers and domestically orientated consumer staples will be relieved by the outcome of the budget, given the already careful management of their companies in recent years," he said. At 1417 GMT, electronics group Kesa Electricals PLC (KESA.LN) was up 2.3% at 118 pence, clothing, food and home ware retailer Marks & Spencer Group PLC (MKS.LN) was up 1.6% at 348 pence and supermarket group Tesco PLC (TSCO.LN) was up 1.4% at 393 pence. Prior to the announcement, retailers expressed concern that a VAT increase could jeopardize the recovery if consumers were to cut back on spending once more. Economists fear that consumer spending and confidence will come under pressure from rising fuel prices, as well as tax increases, public-spending cuts and unemployment as the government reins in borrowing. The British Retail Consortium said it was relieved that the range of items subject to VAT won't be expanded, but increasing the VAT rate will hit jobs, consumer spending and economic growth. "We didn't want a VAT increase. It'll hit jobs, consumer spending, the pace of recovery and add to inflation, but we accept the government has no easy options," British Retail Consortium Director General, Stephen Robertson said. "Changing computer systems and shelf prices on tens of thousands of products is a huge, costly exercise for retailers. Planning for catalogues is a particular nightmare." In addition to consumer spending pressures, softer inflation for food has hit the top line of U.K. supermarkets since the start of the year. Sainsbury's reported last week that sales growth slowed in the first quarter and warned that the company expects little or no short-term industry growth as the U.K. grocer and its peers battle macroeconomic headwinds. -By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; [email protected] (END) Dow Jones Newswires June 22, 2010 10:29 ET (14:29 GMT)