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The pace of change

September 2018

A messy week in the retail sector should remind investors that structural change is a prolonged and difficult process.

  • This week saw John Lewis report a savage fall in profits, alongside problems at Debenhams and House of Fraser
  • It has been a reminder of how painful these periods of transition can be
  • Adoption of new technologies is getting faster and investors need to ensure their portfolios have staying power

It has been a big week in the retail arena. Previously Teflon-coated John Lewis saw its profits fall 99% for the first half of 2018 as heavy discounting by other groups squeezed its margins. Debenhams was forced to deny that it was planning to use a company voluntary arrangement, while House of Fraser narrowly avoided dissolution as it was bought by Sports Direct.

It is a bloodbath. The John Lewis experience shows how good can get swept along with bad. No matter how good your service proposition and how elegant your stores, it is difficult to convince people to buy when an in-distress neighbour is selling the same stuff at a 20% discount. It’s a little like the housing market – if there are distressed sellers it is going to drag down other houses on the street as well. 

Retail is in flux and the past week has been a reminder of just how painful these periods of transition can be. Those who had hoped to dive in and pick up a bargain must now face the reality that these episodes can go on far longer and be far deeper than people ever expect. We have been talking about the death of the high street for over two years and there is still further to go. 

This is an example for other vulnerable industries. Laggard elements in the car industry, for example, need to take heed. Volvo and Jaguar Landrover have committed to making only electric or hybrid cars within the next two years. This is a sea-change for the industry. Consumer preferences are changing and companies will need to keep pace. 

A recent Facebook meme highlighted the pace of change. It took 75 years for the telephone to reach 50 million users, 38 years for the radio, 13 years for the television. Facebook took a relatively pedestrian 2 years, while Twitter took just 9 months. Pokemon Go? 19 days. 

The average retirement portfolio needs to remain relevant for 20-30 years. At the same time, parts of the investment management industry remain stuck in a time warp. It is important that clients are not invested with those resistant to change, who believe that just because something has worked in the past, it must work in the future.

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