Retailers must consolidate after Christmas miracle fails to arrive

Just before Christmas, I rather gloomily predicted that it would take a miracle of Dickens’s Christmas Carol proportions to deliver any cheer to the retail sector during the festive trading season. This week, in the harsh light of New Year analysis, the first evidence of that gloom becomes apparent.

Britain’s largest electrical retailer, Dixons, sets the scene. Brown goods and computers, as a sector, have had a poor time of it and, although Dixons’ trading performance has improved over the past half-year as a whole – with overall sales up about ten per cent – its hopes for shifting product into gift-wrap during Christmas were dashed. Televisions and stereos and such big-ticket items stayed doggedly on the shelves while, at the more competitively priced end of the market, Sony playstations and mobile phones did not produce enough to compensate for the shortfall.

That defines the picture that is emerging. At the discount or catalogue-store end of the market, the season was adequate. So Kingfisher, the Comet-to-Woolworth group, had a satisfactory time, while anyone operating at a premium found that stockings were being filled elsewhere. In quality of management terms, you can round up the usual suspects in this latter category. Laura Ashley and Sears, owner of Selfridges, still appear to be operating in a fantasy world where shoppers will someday appear, so long as they just stick to their “strategies”, whatever they may be.

But it’s not just those who have suffered in recent years from inadequate management that have felt the pinch. Next is also said to have missed its budget. Again, this is partly because consumers appear to have traded down in the presents they gave. But it is also an interesting phenomenon that shoppers appear to have purchased tactically – either waiting for New Year’s discounts, or playing a game of brinkmanship with retailers. Cynical, last-minute discounting in the Christmas market has now been widely rumbled by consumers – retailers will have to be more sophisticated in their choice of seasonal discount weapons in the future.

Overall, then, I was right to say that it would be bleak. The reasons I gave in December related to uncertainties hanging over the economy, such as the potential collapse of Far-eastern markets that were depressing growth and, down the line, consumer spending. That still holds good.

But a new question now arises: what do British retailers do, now they know that the economic climate is not going to support them and that the feelgood factor is still a distant memory, rather than an active prospect? Worse than that, they ought to know the retail scene will get worse before it gets better. Anyone optimistically doubting that should look to the United States, whence all (well, most) retail trends come.

Consumers there continue to spend, despite the fact that consumption has outstripped personal income growth in four of the past five years and the savings rate is at a 50-year low. It can’t last, of course. The US is much more of a share-owning democracy than Britain can ever be and the population has been lulled into a false sense of security. Gains in the recent equities bull markets have given consumers the feeling that they can spend like there’s no tomorrow, while saving for retirement in case.

As I’ve said before, I don’t think the threat of the Far East is as great as the commercial banks would have us believe. But when the US consumer feels the cool winds in the markets, the US could be in for a period of mild recession as spending dries up. What has happened in the UK market at Christmas is evidence of the same thing. It’s just that consumer spending takes longer to run out its cycle in the US, because of its greater exposure to the good run in equities in recent years.

So we have something of a phoney war at the moment. UK retailers are having a tough time of it, but are not quite clear, until a tangible trend appears, what to do about it. My own view is that there is a period of value realisation in the UK retail sector which will presage a period of consolidation.

Retail groups are busy unbundling shareholder value by disposing of those parts that they can, so that they can concentrate on core strengths, before buying (or being bought) as a stratagem for delivering earnings when the harder times come; as they surely will.

Take Burton Group. To realise value, it has split the Debenhams department stores from its fashion chains, the parent of which is renamed Arcadia. This entity is undervalued compared with Debenhams, attracting an earnings multiple of about ten times, compared with the department store’s 17 times. With margins improving at the likes of Dorothy Perkins and Top Shop, Arcadia could attract a predator.

EMI’s joint bid with its former owner Tim Waterstone, for Waterstone’s is another case in point. It pares down the troubled WH Smith and would put HMV music stores and Dillons into a discrete entity. It would make WH Smith more biddable and EMI’s new retail creation more saleable as a separate operation, leaving EMI free to pursue its destiny in music publishing.

This year will see considerable consolidation in the retail industry. What we are witnessing now is the moving of the furniture ahead of the dance.

See Cover Story, page 30


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