May 2016
It was another grim week for the UK high street. M&S looks set to tumble out of the FTSE 100 as it announced falling profits. It plans to close 100 shops by 2022 at a cost of £321m. It comes after Mothercare announced it would be closing 50 stores as part of its restructuring plan.
- High street names have been hit by weak consumption, the rise of ecommerce and a preference for experiences rather than things
- Pressures on the consumer are easing as inflation dips
- There will be opportunities for those in a position to take market share
Many well-known names have chosen to go through an insolvency process called a Company Voluntary Arrangement (CVA) – Poundworld, Carpetright, New Look – while Toys 'R' Us U.K. and electronics chain Maplin have gone into administration.
In April, research from the Local Data Company showed UK’s high streets saw 5,855 store closures in 2017, more than in any year since 2010, with fashion retailers, shoe shops, travel agents and estate agents particularly hard hit.
The High Street faces three major pressures: the weakness of the U.K. consumer in the face of high inflation and lower wages; the rise and rise of ecommerce; and finally, changing consumer preferences toward "experiences" rather than "things."
It is an uncomfortable moment. However, pressures on the consumer are easing. This week’s inflation statistics showed inflation falling to 2.4%. Wage growth has started to outstrip inflation, which should ease the squeeze on household incomes. This has not yet been reflected in retail sales figures, but this may emerge in the next few month’s figures.
At the same time, argues Mark Barnett at Invesco Perpetual, not all companies exposed to the high street are problematic: “I’m not going to say that the high street doesn’t have structural challenges, because there clearly are areas of the high street which are worrying. And if you read the newspapers, almost on a weekly basis there’s worrying news flow coming out of the high street. However, that doesn’t mean that all companies exposed to consumer spending or to the high street are problematic and most companies facing the high street have been de-rated, and I think there are some opportunities to pick up well-run businesses at very reasonable prices.
“I wouldn’t suggest you can buy any retailer in blind faith, because I do think that the challenges of consumer facing businesses, and particularly high street businesses, will continue, but there are some businesses that have succeeded in working out a path to success.”
As with any major structural shift, there will be those who can progress and take market share as others flounder. It could be a time to pick up those future winners at lower valuations.
