I’m intrigued at the moment by an economic indicator called the misery index. It’s the UK inflation rate plus unemployment, expressed in percentage terms, and it’s been falling sharply this year.
Rising inflation and unemployment are a recipe for misery, so, as trends stand, this index is something of a misnomer. An index that shows falling inflation and falling (or, at least, not rising) unemployment rates is a happy index. Particularly, one would suppose, when interest rates are at historically low levels.
In short, a falling misery index is a firm indicator of the feelgood factor – that all too elusive driving force behind consumer spending. As we know, the relief at a recession not materialising in the first quarter of this year and a relatively strong labour market have not translated into the kind of consumer spending results the retail trade would be entitled to expect. Retailers’ private misery index has remained high, and in some quarters has been climbing steeply.
Nowhere has this private misery index been steeper, perhaps, than at Marks & Spencer, where management has struggled to contain the reaction of institutional investors in the wake of slashed earnings and boardroom infighting. From the first quarter onwards, I have thought that downward pressure on M&S’ share price could make it vulnerable to an opportunistic takeover bid.
It’s evidently not alone. The Storehouse, Bhs and Mothercare combine – born of Sir Terence Conran before catering became his enduring love – saw its shares rocket last Friday by 18 per cent to more than 130p on speculation that a bid from Debenhams was imminent. As I watch the screen, Debenhams is denying talks but noticeably not ruling out a bid. The destiny of Storehouse will doubtless unfold imminently.
During the past year, Storehouse has managed to take some of the heat off M&S, with two profit warnings and a halved share price. Mothercare, meanwhile, is closing 70 branches and cutting 400 jobs. You don’t need to tell it anything about a misery index.
But it doesn’t have to be like that. Debenhams, having shaken off the baggage of the Burton group through a demerger last year, has watched its share price rise by 116p to 440p this year, on the back of interim earnings to the end of February up 16 per cent to £77m.
It’s not alone in bucking the trend of retailers’ very own misery index. I’d have the privately owned Littlewoods down as one of the more staid retail chains, hampered as it was by the hammering the pools side of the business took after the introduction of the National Lottery. But I’d be wrong. Littlewoods this week announces a 45 per cent boost in earnings on the back of a six per cent increase in underlying sales – taking no account of its extraordinary £90m gain from the sale of 19 stores to M&S, which has now backed away from plans to convert one flagship Oxford Street site to its own livery.
If Debenhams doesn’t come through with a bid that’s attractive enough to win over Storehouse’s shareholders, then Littlewoods is one of the tipped alternatives, along with Next and Kingfisher – fresh from being rebuffed by Asda (which favoured Wal-Mart).
So, if the misery index is not common to all UK retail chains, what is it that’s making the difference between Debenhams and Storehouse, or between Littlewoods and M&S?
Quality of management is the glib answer. And, of course, it’ll always be true that somewhere behind a company’s ability to cope will be people who are either succeeding or failing. M&S has a vast management challenge on its hands and, in this context, it’s little wonder Sir Rick Greenbury has decided that being a non-executive chairman is not for him and is making off a year ahead of his planned departure date. The M&S board, under new chief executive Peter Salsbury, spent three days last week away on a strategic brainstorming session – I hope they’re all right.
By contrast, Littlewoods, under the direction of chief executive Barry Gibson, has identified savings worth about £50m through the integration of its three main retail businesses – in particular, through combining its high-street businesses with the television home-shopping joint venture with Granada.
But good housekeeping can only ever be part of the story. Which reminds me of something Lindsay Nicholson, new editor of Good Housekeeping, told me the other day in relation to her appointment to that publishing bastion of supposedly staid, middle-class consumers: “Middle England is having its belly-button pierced.”
Her point is that the British middle class is a moving target. Retailing to it is in a state of millennial flux. And that’s a straight marketing issue – not something that can be addressed simply through good management husbandry and housekeeping.
I don’t know whether the buying policies of Littlewoods and Debenhams are strong at the moment, but M&S and Storehouse have definitely let “New Britain” pass them by.
The misery index will always dog retailers which fail to notice that the market has moved on. And, in the case of M&S, it’ll take a lot more than a brainstorm about dual-branding (Paul Smith at St Michael and the like) to recover the ground it has conceded.