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No quick fixes
A storm is engulfing the
UK’s high streets and supermarkets; is our retail industry strong
enough to ride it out?
I was delighted to receive an
invitation for St Patrick’s day to dine at The Gaucho at Bell Inn
Yard, a bastion of cowhide-covered chairs, dark lighting,
pampas-reared Argentinean steaks sizzling on open grills and fiery
Bloody Marys. My host was a typically ebullient Irishman for whom
fillies, of both the equine and more refined two-legged variety,
rugby and new business were on the agenda in addition to celebrating
Munster’s most recent Heineken Cup victory. So it was that he
decided to order a clutch of vintage Norton Reserva Malbec which
enjoys a big reputation and an equally stunning price tag; at this
point the sommelier and a tightly clad South African waitress,
sensing a big spender and a big tipper, began to turn on the charm
as if through a fireman’s hosepipe, it was going all over my host
and he was loving it!
My own happiness increased as he chose to discuss and praise the
arguments contained within my recent Business Money article
entitled: “Is it that bad?” However, I made the fatal error of not
adhering to Baroness Thatcher’s famous quip “This Lady’s not for
turning”. My faux pas was to suggest that during the subsequent
months since publication, I had witnessed a compelling avalanche of
testimonies of corporate and consumer gloom that was beginning to
make me revise my position. I tried to defend myself with some facts
and figures without being made to look as if my spine had been
withdrawn from my body and a cheap brand of spaghetti substitute
inserted in its place.
As we slipped comfortably on to the cheese board, I launched a
scathing attack on all things banking, economic and Labour from my
standard blue soap box. To my surprise, my host began to laugh more
liberally than I have ever heard a drunken Irishman guffaw; if there
had been an aisle he would have rolled in it as he gave me the
impression of a hyena which had just heard a good one from another
hyena. He kindly explained the reason for his delirium; he agreed
with the sentiments in my previous article but in a private
conversation during February I had repeated to him the findings of
Pentacle’s survey that confirmed 69% of British executives believe
the UK is heading into a recession. At the same time, I extolled the
virtues of gold. Accordingly, he had gone out, sold his substantial
shareholding in an ailing retailer at cost and moved everything into
my favourite commodity just as the price popped up 12% the next day;
who says the Irish aren’t lucky!
As we continued our discussion over a remarkably aromatic and punchy
Irish coffee, I commented that a week is a long time in politics as
being pretty relevant given the recent newspaper headlines that
demonstrated the massive loss of support towards the likes of Brown
and a certain African dictator; one has become as slippery as an eel
in butter as he desperately seeks to hold onto the power not given
to him democratically or freely by a disenfranchised, frustrated and
misrepresented voting populace, sick and tired of meaningless
political rhetoric and facing a downward spiralling economy; the
other has murderous intent for the once becalmed and fertile plains
of Africa.
Similarly, we discussed the fact that a week is a long term in
retail as the Christmas and first quarter results have been
published detailing a dramatic change of fortune for some of the
most high profile UK retail and supermarket brands.
First one and then another of our key brands have complained of
untreatable wounds to their finances with their own sales
performance made worse by the fact that others have surprised all
predictions by turning in champion results. If one listens to their
arguments, one can begin to believe that the UK economy is like some
wild creature of the forest caught in a snare.
As my Hoskyn Group chairman, Jonathan Wooller, will attest, my glass
is always half full rather than half empty; I am very much the kind
of person who would have tried to cheer up Napoleon Bonaparte on his
grim return journey from Moscow in 1812 by talking about the joys of
winter sports. However, even I have become troubled by the
increasing levels of tangible consumer fear and mixed results from
the UK retail industry. If I liken the UK economy to an amateur
golfer, I would describe it thus: a troubled spirit who has
developed a bad slice with his driver. If I were to predict the
future of a number of the UK retailers, I would suggest that an
undertaker, being deceived by their shabby appearance, would start
measuring them up for coffins and embalm them on sight.
Of genuine concern to the UK retail sector is the fear of a looming
recession. This has halted many people from splashing out on high
value luxury items and curbed the more necessary purchase of
household and fashion items.
It is a sad day indeed when the return of the master of the house to
chez Rowland, aka me, is no longer preceded by the scampering of
feet from the memsahib, aka she who must be obeyed, as she hides in
the airing cupboard those necessarily expensive purchases of
handbags, shoes, handbags, etc.
All joking apart, if we turn the focus of our attention to the
luxury middle end market, e.g. non-haute couture fashion brands,
fountain pens, leather goods, perfumes and watches, there is clear
evidence that the credit crunch has blown a very cold wind through
the usual winners and riders. For example, Burberry has declared
modest sales in the three months to 31 December. Perhaps their poor
UK performance partially comes as a result of losing their cash rich
and drone-like chav following which, after much media lampooning,
has followed its idol Ms M to Top Shop. Despite posting positive
overseas results and an overall 18% increase in sales in the second
half of the year end to March, a missed profit target led to a loss
of £350m in value from its shares.
A key factor that determines who has done well and who has not in
the UK retail industry is to review the haves and the have nots;
those with deep group coffers, strong financial structures, fully
functional and secure online arms have massively bolstered sales. By
comparison, those retailers still reliant upon the tramp of
customers through their doors have suffered greatly diminished
sales.
Of nightmarish concern to the retailers and supermarkets vying for
outright dominance and sovereignty, is the fact that their markets
are being eroded away by consumer caution and fear in the face of an
increasingly challenging and uncertain financial environment; Ernst
& Young reported that the UK retail industry notified 384 profit
warnings across 2007 to be followed by a record 47 profit warnings
in the post-Christmas trading period as clothing, electrical and
footwear retailers begin to feel the pinch.
Notwithstanding the above, Prime Minister Brown continues to state
that the UK economy is in a good position to withstand the global
credit crunch; this despite the fact that the UK’s most respected
business representative, market researcher and economic pollster,
the CBI, The Nationwide Consumer Confidence Index and the GFK NOP,
all confirmed across the back end of February that UK consumer
confidence is at its lowest level for 15 years.
The deflated housing market, rising inflation, rising mortgage
costs, sluggish job growth, the global credit crunch, higher council
taxes, higher food prices, restriction in bank lending and rising
energy prices has led to a decrease in consumer spending; whole
sections of the UK population have found that their income is being
outstripped by the rise in living costs.
There have been many recent market announcements so dreary and flat
that I have seen dead haddock on a fishmonger’s slab with more voie
de vivre. Accordingly, most sensible retailers are calling for an
immediate cull in the Bank of England interest rate to help release
the financial pressure and squeeze on consumers’ disposable income.
If this soothing financial balm is not provided, there is likely to
be a rash of small and medium retailers going to the wall across the
second and third quarter of 2008.
To enable us to gauge what 2008 holds, let’s review a cross-section
of the winners and losers of the high street battlefield and the
performances of the supermarkets:
The winners
Home Retail Group
An increasingly high profile marketing campaign has enabled the Home
Retail Group, owner of Argos and Homebase, to readjust their profit
expectations upwards to £430m for the year to April. Within this
positive statement, Argos grew their sales by £1.9bn (2.5%) but this
represents a 0.2% reduction for the same 18 week period to 5
January.
An overall positive performance has not prevented the CEO, Terry
Duddy, from issuing a gloomy assessment against future earnings by
stating that the trading environment is “increasingly
challenging....the anticipated consumer slowdown is now becoming
more evident...with sales growth in the short term harder.” When
questioned further as to whether he could personally commit to
achieving continued growth, he appeared to be in the frame of mind
where he would have liked to meet Mike Tyson and pick a fight with
him.
Beneath the veneer of the positive figures, one can see that the
usual large demand for expensive and high profit margin white goods
such as fridges and washing machines has all but evaporated. In
their place, the online internet purchase of digital cameras,
computer games, laptops, flat screen TVs, MP3 players, mobile phones
and sat-nav systems has come to the fore. The problem is that all of
these are being bought, imported and distributed on pretty slim
margins.
HMV
HMV has released figures confirming its best ever Christmas sales
period which stands in stark contrast to the gloom and doom
prevalent on the high street. The CEO, Simon Fox, hailed HMV’s
Christmas as highly successful.
With 86 years of trading history and a 2002 stock market flotation
behind it, HMV achieved a 9.4% like-for-like rise in the five weeks
to 5 January. These results evidence a very solid start to the
three-year turnaround project which was launched in 2006-2007 after
download and supermarket competition led to an unexpected and sharp
tumbling of sales and profits.
What makes the performance all the more satisfying for HMV is that
the gross profit margins have remained constant despite the
increased sales being predominantly made up of lower margin DVDs and
video games.
Primark
In the immediate aftermath of Christmas, Primark’s owners,
Associated British Foods, proclaimed better than expected sales
figures with a 25% rise in sales in the 18 weeks to 5 January 2008.
Mothercare
Continuing the theme of strong online sales creating the platform
for a solid sales performance; Mothercare has posted an 11.9%
increase in like-for-like sales with further hurrahs heralded by the
successful acquisition of The Early Learning Centre.
Ted Baker
This company’s unique brand is well-positioned in its chosen market
and has overcome the poor Christmas trading period and tough trading
environment suffered by the morass of same old branded designs.
Accordingly, their sales figures have bucked the trend of retail
sector slumps with the management posting a 10% rise in annual
earnings with retail sales up 16.1% and pre-tax profits increasing
from £20.1m to £22.1m.
Woolworths
Despite a 3.2% drop in like-for-like sales in comparison to 2006,
Woolworths’ 2007 Christmas performance is being heralded by the
board as a huge success. The reason being is that City analysts
predicted in the summer of 2007 an imminent collapse and insolvency;
by contrast, sales rose 8.5% across the group to £2.97bn carrying
profits up 30% to £28.3m against a loss for 2007 of £12.9m.
One can imagine that upon confirmation and release of this
information, there came into the collective eye of the UK
Woolworths’ board the sudden glimmer of hope such as might have come
into the eyes of some wretched man on the Tyburn scaffold who, just
as the executioner is spitting on his hands to pull the lever with a
cheery wave goodbye, sees a messenger galloping up on a foaming
horse waving a piece of paper.
As with most retail success stories, there is no pot of gold at the
end of Woolworths’ rainbow. The complete opposite in fact. The
reason being is that Woolworths’ investors, tired of a decade of
poor leadership, performance and results, are demanding of the
beleaguered board that there should be decisive corporate activity
to return cash through a sale or merger.
An immediate response has been the announcement on 3 April that
Woolworths is looking to create a tie-up with ailing supermarket
Somerfield so that both parties can engage each other’s store space
on a concession basis.
Whether this decision, which is a clear catalyst for an all-out high
street clothing price war, will secure the future of Woolworths’
chain of 800 nationwide stores, is yet to be seen. The reason being
is the news reported on 8 April that Somerfield’s equity owners,
Apax Partners, Barclays Capital, Kaupthing Bank and Robert Tchenguiz,
are apparently in talks with The Co-op to review a potential
enhanced bid of £2bn for the beleaguered chain; an initial bid of
£1.7bn was recently rejected.
The losers
Blacks
The combination of a director suspended and a possible merger
postponed is a pretty thick pill for any company to swallow.
However, when added to the mix of a very poor Christmas trading
period, accounting discrepancies of epic proportions and a £2m
profit black hole, the board of outdoor clothing firm, Blacks
Leisure, is in such a dark, very smelly and wet hole that even their
most robust of rubber waterproofs will fail to keep them dry.
It is very sad to say that if the future of Blacks were a fish, it
would be a pretty unwell fish, discarded from yesterday’s catch and
left on some lonely beach at the mercy of tide and wind.
Debenhams
Sales rose 2.2% against a poor autumn display but there remains an
air of caution from Debenhams’ senior management as a much heralded
refurbishment of the group’s 135 UK and Irish stores has been put on
hold.
A 12.4% fall in first half profits to £84.1m has led to the CEO, Rob
Templeman, commenting that this is the worst market for clothing
sales for eight years.
Challenging conditions have led to more focus being placed onto
their website which saw a 57% increase in traffic and an 85%
increase in sales in comparison to last year.
Dolcis
The first big casualty of 2008 as 482 jobs have been lost and 89
stores shut in the third week of January as KPMG pulled the plug on
the business. The 644 staff in 96 stores remain on the payroll as
the administrator seeks a genuine buyer from the 40 parties that
have formally voiced an interest.
DSG
In boxing, the right cross counter is distinctly one of those things
it is more blessed to give than to receive, and so it is that the
investors in DSG, the owner of Currys, Dixons and PC World, have
been poorly treated as the group has filed its second consecutive
profit warning in four months as consumers put the brakes on
spending.
Analysts believe that the group may have to streamline and close 200
high street stores across the UK as it confronts being unable to
continue operating against a background of overstretched finances
and shrinking profitability.
The only glimmer of hope is that the profits will still remain on
target for £200m despite a 0.8% fall in gross margins.
JJB Sports
JJB Sports has fallen short of its 2006 second half profits despite
a like-for-like sales rise of 2.5% on the back of a very aggressive
pre-Christmas clearance of old clothing stock.
It has been suggested by retail City analysts that JJB’s current
portfolio of 420 shops across the UK may need to be culled by 70
(17%) in an effort to return some stability to the business and
secure the target profit
Kesa
Comet, and its owners Kesa, have come in with a wafer thin increase
of 0.70% in like-for-like sales across Christmas 2006 and 2007.
Moss Bros
The midmarket branded store has posted a £1.4m loss for the past
year having struggled to gain any momentum across the Christmas
period; on the back of these disappointing results, a dividend
payment has been scrapped.
Notwithstanding the above, all may turn out well if the Moss family,
which owns 25% of the company shares, accepts an invitation to
negotiate a £40m offer from the aggressively acquisitive Icelandic
Baugur Group. General opinion is that this figure underestimates the
value by £10m but as we all know, beggars cannot be choosers and the
other genuine suitor, Greenwoods, has inexplicably and surprisingly
withdrawn; nothing so surely introduces a sour note into
negotiations as the abrupt disappearance of the suitor in a cloud of
dust.
SCS
A totally unforeseen 16% drop in like-for-like sales in the SCS
upholstery group and a subsequent 8.4% plunge in share value has
prevented the management from continuing with its plans to open five
new stores by July. In addition, the delivery of a much anticipated
dividend has been cancelled for the foreseeable future.
Many stockbrokers had actively bigged up SCS’ prospects across the
autumn of 2007 with a strong chorus of buy advice to clients. The
company’s dire performance has no doubt led many stockbrokers
awaiting negligent advice writs and sitting in front of their
screens with silent, surprised gaping mouths like a flock of sheep
with foot and mouth at which an abattoir owner would look sharply
and suspiciously.
Sleep Depot
The second big casualty of 2008 has already been carted off to A&E
as Sleep Depot was unable to sustain the negotiations for a
successful financial re-structuring. Accordingly, administrator
Kroll shut the Blackburn HQ on 1 April 2008 with the loss of all its
367 staff together with the closure of Sleep Depot’s own nine
standalone stores, 101 inhouse concessions across Land of Leather
(70) and curtain retailer Paul Simon (31).
Sleep Depot’s business failure could also be a threat to the
business survival of Land of Leather, which hosted Sleep Depots in
72 stores and earned circa £4.8m in rent every year.
WHSmith
WHSmith remains like a fish not in the best of health as sales fell
3% over the same like-for-like 10 weeks to Christmas. This is
despite concentrating on higher margin items to boost earnings and a
particularly strong performance from their airport and railway
station stores.
The supermarkets
Asda
Asda has nudged its figures up 0.1% to 16.9% on the back of
operating and sales figures that have exceeded its targets across
its UK domiciled 345 stores. Accordingly, its USA parent, Walmart,
has sanctioned a £400m investment programme for 2008. This
unexpected move comes on the back of the opportunity to snap up a
number of stores put up for sale by Somerfield and add these to a
new portfolio of 20 new sites creating 800,000 sq ft of additional
floor space to the retailer’s estate and 9,000 new jobs.
Morrisons
During my Royal Navy training at HMS Nelson, our Royal Marine
instructor brusquely informed our class that when you are having a
scrap and your antagonist falls to the ground, you do not wait for
anyone to count to 10; you jump on the victim like a wolf and kick
him in the slats.
So it was that after some encouraging sales figures across
2005-2006, Morrison’s canny CEO, Marc Bolland, decided to lead the
management team into an all-out attack against their competitors
across 2007. Accordingly, they placed their faith in a buy one, get
one free trolley TV advertising campaign featuring the stoic Alan
Hansen, the utterly gorgeous Denise Van Outen and evergreen Lulu.
Their bravery has been rewarded with a set of booming sales figures
that has enabled the industry watcher, TNS Worldpanel, to evidence
that the fourth largest UK supermarket served an additional four
million customers across December to net an 11.5% market share of
the traditionally lucrative Christmas period.
Sir Ken Morrison has left the business after 56 years but remains as
honorary president with a 15% stake. His final presentation to his
faithful board delivered a superb set of financial metrics during
which he demonstrated the transformation of a small Yorkshire market
trader into a business that has achieved a 70% rise in full year
profits to circa £612m and is seeking to gift shareholders, through
the return of cash, a bonanza likely to be worth in excess of £1bn
across the next two years.
One can imagine the battle-scarred
warrior concluding his presentation with such joy and pride that his
audience was hooting like a master of hounds sighting a fox.
Sainsbury’s
Sainsbury’s held a 16.4% share (down 0.1%) for the Christmas period
but an effervescent increase in sales of 4.1% across the Easter
period and a thirteenth consecutive quarter of improvement has led
the CEO, Justin King, to state that Sainsbury’s overall performance
represents: “an outstanding success”.
Tesco
Notwithstanding the strong performance of its competitors, Tesco
remains the dominant domestic player with a very solid 31.4% of
market share, albeit this is down 0.1%, which proved an unwelcome
surprise for City analysts.
I have come to learn through my own experiences that if Lady Luck
slips you a bit of a good one with one hand, she is more than likely
to give you a sharp and stinging chop across the windpipe with the
other!
So it is that Tesco’s profits have risen from £1bn in 2000 to £2bn
in 2004 and are predicted to touch £3bn across 2008; with £1 in
every £8 spent in the UK supermarket industry going through the
tills of a Tesco store, the group enjoys an £8m per day profit.
Accordingly, one would have thought that all was well. However,
Tesco’s performance has been labelled lacklustre and sluggish by
many retail focus groups and City analysts.
In addition, the doom and gloomers are using the consumer
belt-tightening as ammunition to promote their mantra that a
recession is likely.
There are repeated accusations that Tesco’s sales figures are being
artificially increased by inflated food prices. There is an
increasing anger from liberal campaigners that Tesco’s seemingly
remorseless expansionism is decimating local retail communities as
it is allowed to increase its number of stores and floor space
without any check from local or central government planning
committees.
In the face of such headline grabbing commentary and criticism, Sir
Terry Leahy, a man whose business accomplishments demand the highest
praise and respect, appears to be justifiably annoyed. It was
reported that throughout a recent interview he uncharacteristically
wore an expression of peeved surprise like a knight of King Arthur
who happily gallops along in his burnished armour to perform some
act of heroic derring-do, only to have the misfortune of riding slap
bang into a big tree.
Conclusion
I make no apologies for my new-found anxiety as I suggest that the
future of our once proud high streets remains dangerously within the
auspices of an increasingly restrictive banking system and a
government whose chancellor appears unwilling, or more worryingly
unable, to speak with the Bank of England and City analysts to
implement a system of controls to soothe our consumer confidence.
My father once told me that where one can go wrong in life when
looking for the ideal girl is in making one’s selection before
walking the full length of the cocktail bar in a swish West End
hotel; UK consumers have clearly learnt that lesson and are
beginning to search out bargains rather than settle for purchasing
food and goods from a certain store because they always have;
Verdict Research Consulting has commented that more than 60% of
shoppers purchase non-food items valued at £20bn per year from their
preferred supermarket.
This new found shopping pattern will lead to greater competition for
retail consumers’ money. This in turn will lead those retailers who
are already performing poorly to be faced with a certain one way
ticket into financial meltdown as high street insolvencies are set
to rise; the banks are looking to foreclose and the administrators
are beginning to circle overhead.
I genuinely believe that our economy will remain steadfast and that
consumer confidence will eventually return. However, this will not
come easily and there are no quick fixes; our economy will heave
itself up slowly in a motion similar to that of a voluptuous
hippopotamus rising from its regal bed of reeds on a sun-drenched
Egyptian riverbank.
What was required to put some vim and vigour into proceedings was a
vibrant Easter trading period but the damp weather and consumer
caution means that sales fell 1.6% compared to a 3.9% rise in the
same period last year. The British Retail Consortium has confirmed
that Easter has provided the worst trading figures for eight years
as a direct impact of the erosion of consumer confidence.
On the morning of Tuesday 15 April, Prime Minister Gordon Brown
invited to 10 Downing Street the heads of the UK’s leading banks:
Barclays, HBOS, HSBS and RBS. The purpose of the hour-long
discussion was an attempt to gain their immediate support to pass on
rate cuts to their hard pressed customers. This was a bold strategy
and one which may well have fallen upon deaf ears as Brown and his
officials simultaneously championed the let’s blame the banks for
all our financial woes brigade with a running commentary condemning
the UK’s financial institutions for their greed, inadequate banking
practices, under-pricing, under-assessment and poor evaluation of
risks.
Brown’s reputation for productivity, prudence and stability is
beginning to dissolve under a barrage of high explosive political
and economic analysis that presents the UK populace as one that has
suffered a £7bn tax increase since the last election, higher
personal debt than any other G7 country, food prices that have risen
at the fastest rate for 17 years and manufacturers’ raw material
costs that have risen by 20.4% representing the highest recorded
value since records began 22 years ago.
The Labour cabinet trade minister, Lord Jones, publicly confirmed on
the afternoon of Tuesday 15 April that he is standing down at the
next election so as not to be forced into supporting Brown.
In view of the above, what chance a happy meeting and an
announcement from the banks of their support for Brown?
What chance the delivery of a programme of concise and defined
rescue packages such as tax concessions and financial aid to bolster
consumer confidence and retailer survival?
I fear that there is as much chance of this happening as someone in
a dark room trying to shove a pound of melted butter into the left
ear of a particularly angry badger with a red hot needle.
************************************************
Paul Rowland, managing director,
Hoskyn Tasker Partnership,
tel: + 44 (0) 20 7645 9034,
www.hoskynchild.co.uk,
www.taskerpartners.com
