Profit boom in store for sector

Recent surveys predict a return to healthy profits for some retailers, with low costs, better efficiency and IT all playing a part.

The improving fortunes of the retail sector are outlined in two new reports published over the past fortnight. Verdict Research predicts a retail mini-boom in the UK that will last for the next three years, and Management Horizons shows that profit margins for UK retailers are now the highest in Europe.

After seven years of hard times in the stores sector, there is a new optimism among retailers. But the improvement in their fortunes will certainly not be uniform, and the benefits of the mini-boom will be restricted to stores in certain sectors. There is not much hope of increasing sales through bumping up prices, as consumers demand better value and shop around before committing themselves to purchases.

The UK’s 20 most profitable retailers are now making a record average 16.2 per cent pre-tax profit margin – the highest in Europe – with half the best performances being filled by smaller, newer business (with sales less than 100m).

Their success, according to retail consultancy Management Horizons, has been achieved not by higher prices but by increasing operating efficiencies in their stores and supply chain, as well as by lower cost sourcing of merchandise.

There are benefits to being small, especially when it comes to retailing. The big players in the stores sector have cumbersome manage-ment structures and find it hard to re spond to new trends and technology.

Two star profit margin performers, Next and Hamleys, stand out for their strong recoveries – led by Next’s 1,000 per cent profit growth over the past five years. Other major improvers include Carpetright, River Island Clothing, Moss Bros, Storehouse and JJB Sports.

Among the relative newcomers in the best profit margin list are a mix of private companies and stock market dynamos. Leading the pack are Games Workshop, DFS Furniture, Ron Wood Greetings Cards, The Sweater Shop and Oasis.

The data, compiled in Management Horizons’ new UK’s Leading Retailers Handbook, supports current views on economic recovery in the consumer sector. It coincides with an optimistic report last week by retail analyst Verdict. The report, Verdict 2000, says that the UK is going through a mini-boom on the high street which will last until 1999, after which a more moderate rate of growth will emerge.

Verdict predicts total retail sales will rise by almost six per cent in 1997 and 1998, followed by a gradual slowdown thereafter. But it warns the mini-boom will not benefit all sectors of retailing equally. It says consumer durables retailers will be among the leading beneficiaries. Furniture and carpets suffered a severe downturn in 1995 but are among the strongest performers today. A recovering housing market will accelerate the improvement and aid the DIY sector equally. The report adds that electrical and computer retailers will be the best performers over the next five years on the back of a surge in demand for PCs and computer-based technology.

But the sophisticated use of technology in stores and supply chain management enable some retailers to enjoy higher margins than in many Western countries.

According to Management Horizons chairman Edward Whitefield: “Out of 300 retail companies examined, 38 have pre-tax profit margins of over ten per cent of sales – including major names such as Marks & Spencer, Boots, Harrods and Storehouse. A further 80 are also delivering very creditable five-to-ten per cent figures including Argos, MFI, Kingfisher, Dixons and Burton Group.

“That contrasts with the other end of the spectrum where we find over 100 retailers making less than two per cent net profit – insufficient to sustain the level of investment to hold or build market share.”

In food retailing, Safeway heads the profit margins, excluding the food arm of Marks & Spencer. Margins for UK food retailers far outstrip those of their Continental counterparts. But margins for the food retailers are still under pressure, and they are looking for ways to take consumers’ eyes off their prices, which they are stubbornly refusing to do.

So, coming years will see retailers stripping down costs through technology and supply chain management. The winners will be those which manage to offer value for money in niche areas.

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