Retail in therapy as 2021 looms

At the end of last year there was some optimism that for all the headlines that we saw in 2019 about various high profile failures in retail that the worst for general retail was largely in the rear view mirror. 

While there were some self-inflicted failures, the inability to carry on trading appears to have owed more to changing consumer shopping habits, as more people shop on line, but also due to rising costs and outdated business models.

The collapse into administration of the likes of like Forever 21, BonMarche, Links of London, LK Bennett and Patisserie Valerie, along with House of Fraser, Debenhams and Mothercare spoke very much to this changing retail landscape, however there were also a number of retailers that managed to thrive in spite of the challenges facing the sector.

This was reflected in the performance of the FTSE350 general retail index in 2019, which had a very positive year, finishing the year up by 35%, driven largely by decent gains from the like of Next PLC, JD Sports, Sports Direct and Dunelm. These helped offset underperformance on the part of Marks and Spencer and Kingfisher, however it is also important to note these gains came off the back of a seven year low for the sector. 

If ever there was a feeling that things couldn’t possibly get any worse, there was certainly optimism that while some retailers were still struggling, we probably weren’t going to see a revisit of the lows we saw in 2018. 

As 2020 unfolded we soon began to realise how wrong that assumption was going to be as the retail sector then had to contend with a Black Swan event to rival all black swans, as the coronavirus pandemic swept across the globe. 

The pandemic, along with the government mandated shutdowns of the economy has ravaged the retail sector even further, and while the furlough scheme has mitigated some of the worst damage, the events this year have proved to be the final straw for a lot of retail businesses which were just about hanging on.

The events of this year have accelerated a change that was already in process and in essence created a scorched earth effect on the sector, with big box retailers feeling the pinch more than most. 

In March the FTSE 350 retail index plunged back to levels last seen in 2009, in the aftermath of the financial crisis, though we have also seen a decent rebound since then as well, with the very real prospect that we could well see all of this year’s losses clawed back.

FTSE 350 Retail Index YTD

Source: CMC Markets

Conclusion:

After a disappointing 2018 the UK retail sector recovered a lot of lost ground in 2019, and while it looked as if 2020 was going to be an absolute horror show, the sector has managed to rebound to some extent.

That’s not to say the sector won’t face further challenges in the weeks and months ahead but it is notable that the retailers that have performed better, have been those that have been able to adapt to the quickly changing retail conditions that have characterised this year.

The coronavirus pandemic has merely served to speed up a trend that was already in motion, and the key challenge going forward for those retailers whose share prices have struggled is how they adapt their business models to this changing paradigm.

Could we see a change of fortune for the likes of Ted Baker, Superdry and Burberry? Both Ted Baker and Burberry have significant exposure in Asia markets, particularly China, which has so far managed to avoid a covid-19 second wave, and where the Chinese consumer is slowly regaining confidence after its own February 2020 lockdown.

In terms of general merchandising Marks and Spencer still has some way to go with its share price, however its deal with Ocado is already paying dividends on the food front. It’s quite likely that we will probably see further store closures, as the company looks to lower its cost base, however it could do a lot worse than take a leaf out of US retailers like Target, who have managed to see huge benefits from investment into its digital operations, with variations on click and collect, kerbside pickup and other digital innovations. One thing it could do is extend its Ocado product catalogue availability to general merchandising.

It’s also worth keeping an eye on Frasers Group as CEO Mike Ashley looks to get his fingers into a variety of different pies. He seems to be moving upmarket now with his stakes in Hugo Boss and the move into Mulberry. 

Whatever you think of the boss of Frasers Group, and he does ruffle feathers, he does speak his mind, and tells it the way he sees it, in the hope that our economically illiterate politicians will look at new ways to try and deal with a problem that now needs to be addressed more than ever as a result of the firestorm that has hit the high street this year.

Rising and inequitable business rates, along with higher staffing and safeguarding costs as a result of the pandemic have eaten into margins even more than was the case in 2019, when most people were more concerned with the Brexit fall out.

Now we have to contend with the end of the Brexit transition period as well as the economic challenges from the slow march out of the pandemic.

The retail sector in 2021 is likely to face serious challenges and changes in the weeks and months ahead, as we look ahead to coming out of the other side of the pandemic, the prospect of higher unemployment levels, as well as looking ahead to the changing nature of a new EU/UK trade relationship.