David Prosser's Outlook: Crisis, what crisis? Net retail is booming

The spectre of repossessions; Where there's muck, there's brass
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The Independent Online

Apparently, this is no time to be in retail. Announcing a seriously unpleasant profits warning yesterday, Moss Bros joined a long list of companies blaming their woes on the consumer spending slowdown and said that menswear retailers across the board were suffering.

Well yes, up to a point. Asos, which specialises in the fashionable end of both the men's and womenswear market, doesn't seem to be too affected by consumers' reluctance to part with their dwindling disposable incomes. It has managed to increase sales by 80 per cent in the past six months, with revenues more than doubling during November.

There is, of course, a very obvious difference between the two companies that Moss Bros trades on the high street while Asos is online only. But that doesn't explain their contrasting fortunes or, at least, not in the context that Moss Bros and its fellow strugglers have been flagging. After all, consumers are either skint or they're not. If they've got no cash to spend, they can't go shopping on the internet any more than in the stores.

There's no doubt Asos has done fabulous work over the past year or so, particularly given its former reputation as the unluckiest business in Britain (having had the misfortune to site an enormous warehouse next door to the Buncefield oil depot which exploded so dramatically just before the 2005 Christmas season). But its success also underlines a major trend that some high street retailers are dreading this festive season a dramatic increase in the amount of shopping conducted online.

In October, Forrester Research predicted online spending would total 13.6bn in the run-up to Christmas, 40 per cent more than last year. All sorts of factors are driving the move online, some within the control of retailers and some that are very much not.

The breakthrough of broadband internet access (now the norm for homes with an internet connection) over the past 18 months has certainly been crucial. Shopping online through a dial-up internet connection was often clunky, and sometimes almost as inconvenient as wandering up and down Oxford Street. Now it's quick and easy.

Similarly, there's no doubt that Britain's infrastructure problems crowded roads and underdeveloped public transport, for example are an obstacle for retailers trying to draw in the crowds.

Equally, as the serious discounting policies adopted by many of our biggest retailers demonstrate, the sector remains high-margin. That's given online retailers every opportunity to compete on price.

Even the postal strike hasn't dented shoppers' enthusiasm for ordering online, despite fears that disappointment over delivery delays would linger. The downside to buying on the internet is that one must take a leap of faith about when goods will turn up there's bound to be a scandal again this year when someone's must-have Christmas presents don't turn up before twelfth night but most online merchants now seem to have sufficiently sophisticated delivery operations to satisfy most customers.

Not that online and high street are mutually exclusive. Next, for example, remains the number-one online clothes retailer (indeed, its Directory business is one of the company's few sources of growth). Most of the UK's biggest high street chains have boosted their internet presence in the second half of the year.

In other words, the growth of online retailing is both a threat and an opportunity to established businesses. Those that get it right might just be able to rise above the consumer gloom and enjoy a happy Christmas after all.

The spectre of repossessions

After so many years of runaway house prices and cheap credit, it is difficult to remember the period 15 years or so ago when home repossessions were so much more routine. In 1991, the worst year on record for people losing their homes after defaulting on a mortgage, the number of repossessions peaked at 75,540.

Does the Bank of England's Monetary Policy Committee need to cut interest rates today in order to prevent repossessions climbing back towards that level? Well, notwithstanding the somewhat panic-stricken alert from the Financial Services Authority this week, the Council of Mortgage Lenders is predicting a rise in mortgage defaults to more modest levels. Its current forecast is for 30,000 repossessions this year, up from 22,700 in 2006, and for a total of 45,000 in 2008. It also points out that in 1991 there were 9.8 million mortgages in force, compared with 11.8 million today, so comparisons should take that growth into account.

Still, assuming next year's forecast is accurate, that represents a doubling in the number of people losing their homes in the space of just two years. And while interest rates hit 15 per cent during the last housing crisis, compared to only 5.75 per cent right now, we can't afford to be complacent. The difference between then and now is that borrowers have taken out much larger mortgages relative to their incomes in order to afford much more expensive property. As a result, the average first-time buyer now spends a fifth of their income each month on mortgage repayments almost exactly the same amount as in 1991.

It is against this backdrop that the FSA is so concerned about the 1.5 million people due to come off short-term fixed-rate deals over the next 12 months. These are borrowers who fixed their mortgage costs when base rates were close to 4.5 per cent. And thanks to rampant competition in the market at that time, it was possible to find deals costing as little as 3.5 per cent for the following two to three years.

Right now, by contrast, the cheapest fixed rates cost 5.4 per cent or so more than a third as much again. That's assuming lenders will give you a mortgage. The cheapest providers have become much more picky about who they'll do business with. Could you afford for your mortgage interest costs to rise by a third overnight. Some people will cope with the extra costs, but many more won't hence those CML forecasts.

It's a tough call for the MPC, particularly as it remains far from clear that the inflation outlook offers sufficient latitude for an easing of monetary policy. Still, unlike most of the first-time buyers of recent years who are most vulnerable to the threat of repossession, at least the committee's members are old enough to remember the misery of that last housing crisis. Unless they act sooner rather than later, the memories will come flooding back.

Where there's muck, there's brass

It's not clear why the private equity groups stalking Biffa thought their latest offer for the company was any more likely to succeed than an initial approach in September the waste management company said yesterday both bids were at 330p a share.

What's more certain is that Montagu Private Equity and Hg Pooled Management will have to pay more to snap up Biffa and that they will be tempted to do so. The yardstick for this deal is the waste business Cory, bought by Montagu in 2005 for 200m and subsequently sold last year for the handsome price of 588m.

Analysts argue that, on those sort of valuations, Biffa is worth closer to 420p a share, though a take-out price of 350p to 400p is probably more realistic.

In the modern throwaway world, Biffa has certain key attractions. Not least, unlike many rivals, it owns what is known in the business as the "void space", the land where waste is actually dumped.

For anyone tempted to get out of a commercial property market heading south at some rate of knots, by the way, such space might be a healthy in financial terms, at least alternative. It currently changes hands at around 15 per cubic metre.

d.prosser@independent.co.uk

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