2012: An annus horribilis for retail?

Equities trader Michael Jarman sifts through the retail figures and gives his market predictions for the big players on the high street.

by Michael Jarman
Last Updated: 06 Nov 2012

The past fortnight’s slew of economic and corporate data has led to continued market uncertainty and mixed emotions for traders and investors alike. Everyone is hyper aware of the fragility of our economy and the scepticism that blights the UK consumer.

Tesco, Sainsbury’s and Morrison’s have all reported on their trading activity over the Christmas period. The results had one major theme: consumers are driven by what we call "heavy couponing".

Sainsbury’s faired the best of the three, reporting a 2.1% increase in revenue. Unfortunately Morrison’s and Tesco’s drove the overall sector down, missing analyst estimates and re-affirming the bearish sentiment polluting the consumer.

The question is: how do we read last week’s results and plan for the year ahead?

It’s evident that if food retail is being driven by price-sensitive consumers then it’s highly likely that this mentality will transfer to discretionary goods and therefore leave 2012 as an all-out price war as businesses scramble to win over the customer with bigger and better deals.

Blacks Leisure, Barratts, La Senza, Peacocks and HMV are just a few of the high street brands in dire straits and having to undergo transformative change. The old business models are just not sustainable any more.

If retail-focused companies are to survive the Mayan prophecy, they should heed this advice:

  • Focus on customer retention (in a similar fashion to that of John Lewis) ensuring employees are trained to perfection and kept up to date with product development and company marketing strategies.
  • Keep one step ahead of the competition with an innovative online presence and also by offering promotional discounts on themed and seasonal items, rather than just outright discounting on anything.

A macroeconomic view

At present there is a major dysfunction between monetary and fiscal policy (low interest rates but high tax rates) as governments are still keen to monetise debt to provide short-term support to prevent market capitulation. The divide between the wealthy and the not so wealthy is widening. Most troubling is the fact that the eurozone debt crisis seems neverending.

Last year I was advising clients to be underweight retail and, as it stands, this year I’ll be advising the same. The sector is likely to come under pressure from an inflationary environment with regards to costs - the widespread discounting over Christmas may have brought about a decrease in inflation on Tuesday, but it can't be relied in for the coming months. Retailers won't be able to simply pass price increases on, as competitors look to drive discounts lower.

It’s at times like these that we look to the world’s leaders and ask for answers. Just how long will interest rates stay low for? And why are we speaking of tax increases, when clearly we are in need of lower taxes to help promote not only market confidence, but consumer confidence as well?

One thing’s fairly certain: there will be more debt restructuring, more liquidations and the sector itself will face consolidation (the opposite of what our economy needs). The UK thrives on its SME community. By creating an economy dominated by few, large businesses, we are setting ourselves up for another big bust.

Michael Jarman is an equity trader at H20 Markets

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