Retail sector is looking forward to busy festive season, but rising rates and mounting costs may take heat off the industry, writes Arthur Beesley, Senior Business Correspondent

Christmas is coming. The shopping season won't start in earnest for another fortnight but preparations for the annual onslaught of consumerism are well under way. You might dread it but the peak season in the retail sector is beginning.

The long-running domestic spending boom has enticed many of the biggest international players into a market whose growth has consistently outpaced its European counterparts. And, after years of stellar growth, the story goes that the €16 billion outpouring of cash from the SSIA scheme will drive the sector to even greater heights this year.

But if retailers say they look forward to a busy and highly profitable Christmas, close observers of the sector say that many dangers loom in the period after that. "If people are going to expand their businesses on the basis of things being as they are, I think that would be very foolish," says one senior figure in the sector.

Experts cite two sets of threats to a sector that depends above all on a ready supply of cash in shoppers' pockets and their willingness to spend it:

• rising interest rates, leading to a steady erosion in spending power and consumer confidence;

• and downward pressure on profit margins from the rising cost of rent, labour and security, and currency fluctuations.

If the large international groups have the scale to rebuff such pressures, these forces have the potential to create difficulty for weaker indigenous players.

Yet, just as farmers are given to complaining about their business, retailers rarely downplay their position. On the contrary, it's difficult to hear anything but confident talk.

"We're very bullish for Christmas," says Brown Thomas chief executive Dalton Phillips. "I think you'll probably see a buoyant Christmas."

This view is echoed by Declan Ronayne, head of electrical goods retailer DSL International, which owns Dixons, Currys and PC World. With no less than five stores opening between now and mid-December, Ronayne exudes confidence. "It's a key time of the year in terms of the business. From the start of December through to the end of January is when your business will be made."

But while figures from the Central Statistics Office suggest that the volume of retail sales grew 5.5 per cent in the year to July,experts warn that the heat may yet come off the sector. In a report last month, property consultant Paul McCoy of CB Richard Ellis said the threat of oversupply was looming in some retail sectors.

"Shopping centre accommodation in Ireland has trebled in the last five-year period to over 1.5 million square metres, while, more significantly, the quantum of retail park development has quadrupled since 2001," his repot said.

"There are undoubtedly concerns starting to emerge about the sustainability of all of the new and proposed retail park projects, particularly in provincial locations without the catchment populations to sustain them. In a market where there are a finite number of potential retail park occupiers, it is undoubtedly going to become more difficult to secure anchor lettings in some of these schemes over the next few years."

That's bad news for the developers who have ploughed millions into the shopping sectors, but retailers have been hit with heavy rental increases. "I think they're getting greedy and I think they're going to kill the goose that lays the golden egg," says Phillips.

"In our case we've got a very strong balance sheet because we own a lot of our properties. But for businesses that are leasing properties, where you see landlords introducing double-digit and in many case triple-digit rent increases, it's unsustainable. And I think you'll see fallout after the Christmas period."

Ian Burns, business development partner at professional services firm RSM Robson Rhodes, agrees that rent increases have the potential to put some players under severe pressure. "Post-Christmas, where people's sales expectations haven't been met, they may find themselves in difficulty and that can lead to business failures," he says.

"Labour and security costs continue to increase significantly . . . Normal trading margins are under continuous pressure, purely from competition. But a lot of goods are imported from non-EU countries. A lot of goods are ultimately bought in sterling or dollars, so exchange rates can have a positive or negative affect on your margin."

If retailers are well-placed to be prime beneficiaries from the SSIA scheme, quantifying the gain is difficult. "We certainly didn't see [ the SSIA impact] in the first quarter," says Ronayne. "There's no manager telling me that people are bounding into stores with their SSIA cheque saying 'sell me a product'. They're certainly not irrational."

By contrast, Arnotts chairman Richard Nesbitt SC says the department store's furniture division has seen an uplift this year. He says this could be attributed to consumers spending more on big-ticket items, but it could as easily be due to the company's efforts to promote that business.

In addition, Nesbitt says he is not unduly troubled by the upward creep in interest rates. This is something of a contrarian view.

"The squeeze I think is going to come in the young family area. 25 to 45 year olds, who have young families," says Burns.

He says shoppers in the under-25 bracket and older people will continue to spend, but argues that the rise in interest rates will erode consumer confidence. "Its impact is more on the disposable income. Irish are relatively heavy borrowers. The confidence to borrow more keeps on fuelling spending."

Just as the residential property market slows, retail insiders say that there is evidence that developers are introducing break clauses and performance-linked reviews into rent contracts in an effort to boost demand for new space. Though that's not quite a downturn, it's a far remove from the heady days of "upwards-only" review clauses in contracts.

If the retail gene thrives on Christmas, some in the sector are fearful of what might happen next year if spending slows and shoppers stay at home.