Competition for the retail dollar will remain fierce in 2006 as consumer spending levels improve after a year impacted by peak fuel prices.

An expected improvement in confidence and spending will be a relief for retailers, who also weathered the impact of a nationwide housing slowdown, a central bank rate rise and an unseasonably warm winter in 2005.

CommSec economist Craig James said retail spending will begin trending higher early in the new year. "The key supports are a firm job market, higher wages and an expectation of petrol prices flattening out at current levels," he said.

But Australians will be looking for certainty in the fuel price before loosening their purse strings. "Consumers are still a bit wary about where petrol prices are likely to go,'" Mr James said.

"Provided oil prices flatten out at current levels, we'll see stabilisation in the price of petrol and that will give consumers a little bit more confidence."

Joseph Hersch, chief executive of electrical goods company Housewares International, said a feeling of well being was also key to getting shoppers back in better numbers. "What will it take to get us out of it? The last time it was the Sydney Olympics," he said.

"People need to feel good about themselves, they need to feel confident and the country needs to have a distraction away from the price of fuel, job insecurity and falling house prices."

Retailers are counting on the 2006 Commonwealth Games in Melbourne and Australia's presence at the Soccer World Cup to provide the spark to fuel confidence.

Mr James said sales of electronics were likely to hold up well in coming months, as goods prices continued to fall, but spending on toiletries and cosmetics would probably remain subdued until the retail sector recovery was well advanced.

Shifting big ticket items like whitegoods, furniture and bedding will continue to be a test of nerves with many consumers unwilling to part with their hard earned dollars without the lure of a promotional offer.

"Consumers are generally more sophisticated and wait for the bargains," Wilson HTM retail analyst David Arter said. "It's a permanent shift we have seen in consumer behaviour."

As a result competition in the retail sector will remain fierce, particularly between rival supermarket giants Woolworths (wow.ASX:Quote,News) and Coles Myer (cml.ASX:Quote,News).

Woolworths is already setting the pace in the liquor market after acquiring hotel operator Taverner for $380 million last October and pubs and bottle shops operator ALH for $1.4 billion in March.

It has also expanded its supermarket profile after scooping up Foodland's New Zealand operations in a $3.3 billion carve-up of the Perth-based supermarket chain with Metcash Ltd.

FW Holst analyst David Spry said Woolworths was more pro-active and was putting a lot of pressure on Coles. With a market value of $19 billion at the end of 2005 it's already worth $7 billion more than its rival.

"Woolworths have become more aggressive - more so than in the past," Mr Spry said. "They realise they have a chance to become the Australasian retailing giant." But Coles Myer is fighting back.

It is rolling out big format liquor stores while mulling a possible $600 million sale of its under-performing department store business Myer. Myer, which will have its fate decided early in the new year, was not the only non-food retailer on the chopping block.

Iconic menswear store Gowings appointed administrators in November after three straight years of losses, while discount variety retailers Miller's and New Zealand-based Warehouse offloaded their troubled Australian discount variety stores for more than $200 million.

The 137-year-old Sydney-based Gowings will close in January, after administrator Deloitte failed to find a buyer for the business ahead of a Christmas dead-line.

The two stores will shut by mid-January, while the flagship central Sydney Market Street store will close its doors by the end of the month.

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