Jeremy Warner's Outlook: Energy bills add to squeeze on incomes

Grim message from retailing updates; Tata closes on Land Rover and Jaguar
Click to follow
The Independent Online

Swingeing increases expected to be announced today by NPower in gas and electricity prices will further underline the policy challenge faced by the Bank of England as it seeks to address a fast slowing economy.

The Bank needs a backdrop of falling inflation to justify the lower interest rates that have to be pushed through to deal with the consequences of the credit crunch. Instead it seems to be getting the reverse, with renewed strength in oil and gas prices adding to inflationary pressures.

In the US, the Federal Reserve seems minded to ignore these pressures in its quest to stop the economy from sliding into recession. This is very much in the tradition of US monetary policy. When the choice has to be made, supporting growth takes preference over fighting inflation.

Despite some early hawkish signals, Ben Bernanke, the still newish Reserve chairman, seems in no mind to break the mould. He's a student of the Great Depression and the Japanese deflation, so knows the dangers of allowing recession to take hold better than any. The position in Britain is more complicated. Britain's history of stable, low-inflation, growth is still a comparatively recent phenomenon of little more than ten years standing. The last thing Mervyn King, Governor of the Bank of England, wants to be doing is writing another letter to the Chancellor explaining why inflation has strayed more than one percentage point above target.

His brief is much less ambiguously than in the US both to control inflation and to keep the economy from slumping. Some little while back, Mr King lamented the passing of what he termed the "nice decade" the word "nice" standing for non-inflationary constant expansion. His comments are proving more prescient than he would have liked to think.

Grim message from retailing updates

There are company-specific reasons for the poor trading updates announced yesterday by Next and DSG International. Next has been losing ground in terms of underlying retail sales for some years. Extensive spending on store refurbishment has yet to make much of a difference. Were it not for the stores expansion programme and steady growth from the directories business, the top line would have looked even worse.

Likewise, DSG International has had some well-chronicled problems at PC World, where prices have been slashed to shift stocks of unsold laptops and desktop computers. Bumper sales of flat-screen TVs failed to come to the company's rescue. Trading has generally been weaker than DSG was budgeting for. The 50m shortfall in profits alluded to yesterday in all likelihood contains an element of kitchen-sinking by the new chief executive, John Browett. Quite a blow, none the less.

Yet it was the degree of caution expressed by both companies over the coming year that really put the frighteners on investors. Simon Wolfson, Next's chief executive, said he was "extremely cautious" about the outlook, pointing to the squeeze on disposable incomes that will result from increases in mortgage charges as favourable fixed-rate mortgage deals expire. Even with the expansion of his online business, he's not predicting any return to like-for-like sales growth for the next year.

Sir John Collins, chairman of DSG International, was equally downbeat about prospects, with the dividend now quite plainly under some threat. Neither of them are saying anything particularly surprising. Even a visitor from the Planet Zog could scarcely have helped but notice that the outlook for the high street over the next 12 months looks decidedly dodgy.

But it was not what the stock market wanted to hear, and, never mind shares in DSG and Next, the entire retail sector took another beating yesterday.

Over the past six months, retailers have been some of the worst-performing shares on the stock market. Only the banking sector seems to match the deterioration in earnings outlook that retailers have experienced.

To some, retail stocks have come to look consequentially cheap, yet it is a brave investor who buys now with the outlook so uncertain. On top of everything else, physical retailers, like traditional media, face a growing online challenge, with the internet taking an ever bigger chunk of the spending pound.

Some retailers seem better positioned than others to weather the storm.

The newly knighted Stuart Rose will be just as cautious as others when updating the market next week on trading at Marks & Spencer, yet he's got at least one thing going for him. He too has been investing heavily in refurbishment with up to a half of stores disrupted by the process over the past twelve months. As these stores come fully back into the sales mix, M&S can be expected further to improve its market share at the expense of the weakened competition.

Tata closes on Land Rover and Jaguar

Ratan Tata, titular head of the eponymous Indian business empire, has been named preferred bidder for Jaguar and Land Rover, both the subject of a distress sale by the US car manufacturer Ford.

The bidding process has long been a two-horse race between rival Indian auto manufacturers, Tata Motors and Mahindra & Mahindra. Tata's emergence as the front runner may have as much to do with the fact that it is the unions' preferred bidder as having the higher offer on the table. Yet also true is that Mahindra has been having second thoughts about the 1bn-to-1.5bn asking price. Even as long ago as last summer, this looked on the high side. With the US auto market going into a tailspin, and some truly grim data beginning to emerge from US car dealerships, it is now looking positively heroic.

The problem is not so much Land Rover, the real prize for both the Indian bidders, as Jaguar, which has been unprofitable for years and shows no sign of becoming profitable any time soon.

To the contrary, with two new vehicle launches scheduled, the cash outflow from Jaguar is set to soar to around the 1bn mark over the next two years, and that's assuming the US car market holds up. With the slowing economy further exaggerating problems for Jaguar already being inflicted by the weak dollar, this seems rather unlikely.

For choice, neither of the two Indian bidders would be buying Jaguar. Rather, it is the strategic opportunity afforded by Land Rover for sport utility vehicles in emerging markets which is the attraction.

Unfortunately for them, the two companies come as a job lot. You cannot buy Land Rover without Jaguar, and there are in any case interlinked production facilities. Mr Tata is too honourable an operator to try and chisel the Americans' asking price down now that he has preferred status. Yet a truly commercial bidder would baulk at the cost, and it is in any case questionable whether Tata Motors can successfully combine the low-cost, mass-market end of the auto industry Tata's one-lakh car is expected to be on sale in India by the end of the year with a substantial presence in the mainly Western, luxury-car market. It's quite a management challenge Tata is taking on.

What's more, Ford is so paranoid about the theft of intellectual property rights that the whole deal will be ringed around with safeguards, making operational synergies between the two companies extremely difficult. Both Land Rover and Jaguar use Ford engines, which is one of the reasons the Chinese were all but excluded from the bidding. India has better protections when it comes to intellectual property rights, but it is far from blameless. Add to all this today's extremely tight credit market conditions and Tata may struggle to finance at the price demanded. Mr Tata showed his mettle in outbidding the Brazilians for Corus, so the betting has to be that he'll see the process through, eventually combining two great symbols of Britain's one-time industrial might the remnants of both her steel and car industries under Indian ownership. Yet there is many a slip...

j.warner@independent.co.uk

Comments