German VAT set to jump Jan. 1, Eurozone retail growth up overall

In one boost to indicators showing steady growth in the Eurozone retail sector, one in five Germans have said in surveys they have made extra purchases this year to beat the 3 percent jump in the country's standard value-added tax that goes into effect on Jan. 1, 2007, while another 11 percent have said they still plan to buy big-ticket items this year to save a little money.

In one boost to indicators showing steady growth in the Eurozone retail sector, one in five Germans have said in surveys they have made extra purchases this year to beat the 3 percent jump in the country's standard value-added tax that goes into effect on Jan. 1, 2007, while another 11 percent have said they still plan to buy big-ticket items this year to save a little money.

Interestingly, the number who said they would buy to beat the tax has gone up since the beginning of the year when shrieks at the planned jump from 16 percent to 19 percent were at their peak. One survey released in February 2006 showed that only 17 percent said they would take the chance to make more or bigger purchases, while a whopping 78 percent they would definitely not. Only 5 percent wasn't sure.

Although much criticism and moaning have been heard throughout the year from both consumers and retailers, the 3-percent jump still only puts Germany about in the middle of the range of VAT applied by European Union member countries. For example, Spain, Cyprus and Luxembourg remain the lowest at either 15 percent or 16 percent. Ten countries levy between 17.5 percent and 19.6 percent, while 11 tax at 20 percent or higher. Denmark and Sweden have the highest VAT rate, both at 25 percent.

The manager of one sport buying group in late January 2006 had said that retail prices would most certainly go up "otherwise the retailer won't survive." Wolfgang Schnellbuegel, managing director of Sport 2000, had said his group foresaw that consumer buying power would go down so it seemed obvious consumers would buy less.

"This is neither something the industry nor retailers can swallow," Schnellbuegel said at a press conference at the winter ispo show a year ago. "It doesn't look good."

Looking better now?
Whether it looks good now or not may be a different story, as the consumer climate is the highest it's been since November 2001, according to the Gfk Group, a market research group based in Germany that tracks trends internationally. The climate also remains stabile, reported Gfk on Nov. 28, 2006; however, expectations for the next year seem to show that consumers aren't convinced the economic outlook won't lose some of its luster.

The German figures jibe with European-wide forecasts, according to the monthly Bloomberg Eurozone Retail Purchasing Managers' Index survey. In the countries using the Euro currency, sales rose for the eighth consecutive month and the rate of acceleration of the growth rose for the third consecutive month. November's jump was also the fifth-largest in the three-year history of the survey.

The jump reflected a "sharp improvement" in sales in Germany -- partly due to consumers buying before the VAT increase -- and a "modest improvement" in France. In contrast, Bloomberg reported, sales in Italy fell for the ninth time in the past 10 months, which was blamed on political and economic uncertainty.

Strongest sales were seen in clothing and footwear, as well as food and drink. For Germans looking to beat the VAT hike, the Gfk Group had reported in early November that clothing, furniture and household appliances were the areas consumers said they would spend more this year, in addition to already spending more on cars and consumer electronics. For younger consumers, the biggest draws to spend more were clothing, footwear and electronics.

Increase prices…or not
Most retailers and suppliers have worked through the prices in advance of the bell tolling on Dec. 31. At several trade shows during the year, manufacturers reported to SNEWS® and in other media different ways of dealing with the change in the tax rate since retailers didn't want to be forced to keep the same price but lose points. Some manufacturers said they would not increase prices on current items and would themselves simply earn less. Most did not want to raise prices on price-point items (such as a jacket that needed to stay under the magic mark of Euro 100). Some indicated they would split the 3 percent difference with their retail customers to ease the pain -- at least for now. Others indicated that retailers would be forced to "share the risk" and give up a few points during a transition period.

As new items are introduced, however, wholesale and retail prices would then reflect the current tax rate while margins for retailers would remain the same, meaning consumer prices would go up in the long run.

Looking ahead
Optimism for December remained mostly strong among retailers, Bloomberg reported. Its index that measures the extent to which retailers believe they will hit or miss sales targets rose sharply to an eight-month high. French retailers were the most upbeat, while Italians were the least. In Germany? Despite the Happy-New-Year present of more VAT to pay and the likelihood for higher prices, expectations in Germany were the second highest recorded in the history of the Bloomberg survey there.


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