Jeremy Warner's Outlook: Not quite Armageddon on the high street but the internet is beginning to take its toll

Click to follow
The Independent Online

To judge by the howls of pain emanating from the high street, anyone would think that the British consumer has given up spending entirely. Official retail sales figures for April, published yesterday, confirm this contention as something of an exaggeration, with the volume of sales up a little bit last month, both year on year and month on month.

To judge by the howls of pain emanating from the high street, anyone would think that the British consumer has given up spending entirely. Official retail sales figures for April, published yesterday, confirm this contention as something of an exaggeration, with the volume of sales up a little bit last month, both year on year and month on month.

Dig beneath the surface of these figures, and there is still plenty to worry about, but while they confirm that the consumer slowdown is fully entrenched, consumption does not yet appear to be in recession. There's a big difference between a slowdown in growth and an outright fall in sales. The Bank of England, widely accused in recent weeks of tightening too far, will take some comfort for its position from these figures. Consumption, which is about two-thirds of GDP, has slowed, but it hasn't fallen off a cliff.

Yet though the volume of sales rose last month, the value fell, suggesting that retailers have had to cut prices to keep customers shopping. This may be a slightly misleading figure, as the value of retail sales is not seasonally adjusted and the picture is clouded by the fact that Easter fell early this year. Even so, it doesn't bode well for retail profits, for the cost of almost everything outside the high street is rising sharply. More interesting still, all the volume growth in retail sales last month was accounted for by home shopping - mainly internet and catalogue.

This only confirms what many retailers have long suspected. In growing numbers, customers go to the shops only to browse and select. They then return to the home and at the click of the mouse buy their pre-selected goods online. Of course, this is unlikely to occur in everyday spending. But in big ticket items, where retailers complain they are being most severely hurt by the consumer slowdown, the savings achieved buying online can be substantial - say £100 on a £500 cooker.

For how much longer will the high street be willing to act as just a shop window for the online purveyors? The internet always had the power to undermine traditional retailing. There's some evidence that it is now beginning to happen. The present slowdown, though in the round not nearly as bad as many suggest, may be the trigger for some far reaching structural change.

Boots: not yet out of the woods

When Boots announced it was selling its BHI, over-the-counter products business, there was a flurry of speculation that this might spark a private equity bid. None has so far materialised. A glance at yesterday's full-year results tells you why. Richard Baker, the chief executive, has not yet succeeded even in stabilising the business, and despite unchanged guidance on sales, margins and costs, which I guess can be taken as a slight positive in the sense that the outlook doesn't appear to have deteriorated since the last update, everything is still heading in the wrong direction at a time when the business is in serious need of higher investment.

The high leverage generally attached to a private equity bid requires the business to be run for cash, at least until the debt is paid off. Given Boots' particular mix of structural and strategic challenges right now, that's not really an option. Mr Baker is sticking to his guns in insisting that he can grow like-for-like sales by up to 2 per cent this year with broadly maintained gross margins. Few in the City believe him.

Prices have been made more competitive. When Mr Baker arrived, they were on average a quarter higher than at Tesco and Asda. That's been brought down to about 10 per cent, which Mr Baker considers a reasonable differential for the convenience of Boots' extensive high street presence. But the format still needs considerable investment, the stock issue has yet to be properly gripped, and the competition grows more intense by the day. Yesterday, the more keenly priced Superdrug announced plans to expand its high street presence by 40 per cent over the next four years.

Boots has also yet to make up its mind what it really is and how best to exploit its plainly still high brand loyalty and trust. Personally I'm quite sceptical about plans to declutter the stores by carrying fewer brands. Do we really need to carry six different brands of shaving gel, asks Mr Baker. The management textbooks might tell you this is a poor use of space, but it sure is a terrible customer turnoff when he finds that his particular brand has just been dropped.

A breakdown of the figures demonstrates only too plainly where the difficulty lies. Both health and dispensing sales grew strongly last year. Fragrance and premium cosmetics also had an exceptionally good year. If Boots were confined to these product categories alone, then there would be no crisis and the shares would be soaring. The problem lies in toiletries, which barely grew at all in value terms, such were the price cuts Mr Baker had to push through to meet the challenge of the supermarkets.

Understandably, Mr Baker wants to base his growth strategy on health and beauty. Unfortunately, toiletries are still a third of his sales. Shed those, and the economics of sustaining such a strong high street presence breaks down. No wonder private equity is getting cold feet. Boots has got further to descend before it hits bedrock.

LSE best left to its own devices

Clara Furse, chief executive of the London Stock Exchange, was in bullish mood yesterday for the announcement of her full-year results, but then she has to be given that prospects of an auction for the LSE have all but vanished with the demise of Werner Seifert. Less than six months ago, there was every prospect of a battle to the death between Deutsche Börse and Euronext for the hand of the LSE, and the consequent certainty that one of them would end up seriously overpaying.

Now Deutsche Börse is all but out of the game, though perhaps surprisingly, it is still pursuing its case before the Competition Commission. That leaves just Euronext. As the only contender, Jean-François Theodore, Euronext's chief executive, is almost bound to drive a harder bargain. That he would pay as much as 750p a share, the price hinted at yesterday by Ms Furse in her "win, win" appraisal of the LSE's value, seems rather unlikely.

Euronext's potential synergies from acquiring the LSE were always going to be much bigger than Deutsche Börse's, as the Paris-based company already owns the London futures exchange, Liffe. On its own figures, these might be as high as €150m, worth around £3 a share. Add this to the 450p a share the LSE might be worth as a stand alone business, and there you have it - 750p a share.

As a simple cash market, the LSE is far and away the biggest and most successful stock market in Europe. No other European stock exchange has achieved the same success in attracting overseas listings. That in itself should be worth quite a premium.

Yet before they can even begin to argue price, Euronext must first convince the Competition Commission it should be allowed to bid in the first place. Here the mood music is distinctly unencouraging. The LSE's leading customers have been queuing at the door to express their concerns about this takeover - what are the safeguards against higher charges, what about speed of transaction, how quickly does Euronext plan to move to a single trading platform and what safeguards are there for London customers when it does?

In a recent speech, Professor Paul Geroski, chairman of the Competition Commission, noted that competitiveness is about rivalry, "about markets where firms actively try to gain the advantage on each other, trying a variety of different tactics.... Markets that are competitive in this way usually deliver prices that are close to costs ... and lead to innovations which are truly radical ... with large cumulative effects". Would this continue to be the case if the LSE were subsumed by Euronext? It's hard to see why.

j.warner@independent.co.uk

Comments