David Kuo: Unhappy Christmas: If Green can't pull the customers in, who can?
Sunday 04 December 2011
You know that things are bad on the high street when even bullet-proof Top Shop is finding the going tough.
After all, Sir Philip Green, the owner of the popular retailer, is renowned for his merchandising skills. So, if he can't tempt shoppers to part with their money then very few shopkeepers can.
Things are so dire that recently Sir Philip revealed a 40 per cent slide in underlying profits for the parent company, Arcadia, after he chose to absorb rising costs rather than pass them on to cash-strapped customers. In response to the poor performance, Arcadia will pull down the shutters on around one in 10 of its stores. Perhaps with lower overheads to recover, Arcadia may try to increase prices to boost profits.
Arcadia is not alone, as UK households battle with low wage growth, high inflation and onerous consumer debts. The UK may not be in technical recession, but for many consumers it certainly feels like one, and as the tills stop ringing, some retailers have had to call it a day – Habitat, Jane Norman, TJ Hughes and Focus DIY among them. Others could follow given that shopkeepers can only opt for fight over flight if there is enough money in the coffers.
Currently, news from a slew of retailers is hardly filling the market with confidence. JJB Sports has reported an 18 per cent fall in sales, and outdoor specialist Blacks Leisure has not only warned on profits but highlighted that it may need additional funding. Thomas Cook has been forced to hold out the begging bowl twice in as many months, and video-games retailer Game may also need a reboot at some point. It has net debts of £90m and a recent statement said trading would be below expectations.
The Confederation of British Industry, worryingly, said retail sales in November fell at their fastest pace in more than two years. Not only did clothing retailers get clobbered but food retailers saw a dive in sales too. The drop in clothing sales can be explained by mild weather hitting demand for winter clothes. But the drop in food sales is almost unprecedented. After all, as the argument goes, we all have to eat, don't we? But it would seem that households that have traded down from steaks to sausages have now been forced to cut back on bangers too.
The worry for retailers is likely to be exacerbated by consumers' lack of confidence. This has been worse only during the banking crisis in 2008 and the economic downturn in 1990. It is unclear how long it will take for consumers to regain their poise, but given recent warnings from the Chancellor and the Bank of England, it could be a while. George Osborne warned that austere times could last longer than expected, and Sir Mervyn King cautioned that Britain should brace itself for a financial crisis.
However, it is not all doom and gloom in the retail sector. Online retailer ASOS reported a 60 per cent rise in sales despite mundane UK sales growth. Its strategy to target faster-growing overseas markets has allowed it to sidestep bargain-hunting UK shoppers.
Although ASOS may provide a glimmer of hope, the harsh reality is that bills are not paid with hope or optimism. For many retailers four key dates are indelibly etched in the financial calendar. These are the "quarter days", when rent is paid. The next quarter day is Christmas Day and the arrival of huge rent bills on 25 December could, for weaker firms, prove to be the final straw.
David Kuo is a director of The Motley Fool
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