Retail bankruptcies – What are the implications for investors?

30th July 2012

The worsening picture on the high street bucked the wider trend, according to the report by PricewaterhouseCoopers with bankruptcies across the economy declining:

"PricewaterhouseCoopers partner Mike Jervis said: "There has been a clear reduction in the incidence of insolvencies over the current recession compared to previous ones. Retail is the sector which keeps bucking this trend. In fact, quarter-on-quarter retail insolvencies have increased for every one of the last four quarters."

Adapting to the internet age

The immediate reasons for the difficulties were the wet weather, which kept people out of the shops, but it was clear from the types of businesses going bust that the Internet is finally seeing off its high street rivals. The move has been long-predicted, but relatively slow in coming. The two headline bankruptcies during the quarter were Game Group and Clinton cards, both of which have failed to adapt to the internet age. 

As Matt Warman wrote when Game went into administration: "YouTube now lets fans see how games are played – countless videos promote each title, and Amazon is able to deliver games to fans on the day of release. As the web becomes the main source of research for more purchases, so too it is becoming the place to buy everything we need. The high street simply doesn't figure."

Other groups are struggling too. The weak figures emerging from M&G last week were largely attributed to the Internet revolution

Competing with the supermarkets

But the High street is facing more structural headwinds than just the internet. A survey by Simply Business said that newsagents, butchers and independent fashion stores were in marked decline as they struggle to compete with the onslaught from supermarkets and larger chains: "A third of independent high street stores are now cafes, pubs, restaurants and takeaways rather than traditional retailers, according to a study of 75,000 retailers by an insurance company.

"… the number of independent clothes shops has declined to 5% of high street businesses, while they made up 6% of stores in 2008. Hairdressers increased from 4% to 5% of the high street over the same period and beauty salons from 2% to 3%. The number of newsagents and butchers declined the most, with the latter dropping out of the top 20 altogether, victims of the inexorable switch to supermarkets."

Is this necessarily a bad thing? It has become popular to mourn nostalgically for the death of the high street, but as Gumbo counters on the Guardian site: "Consumers consistently choose the convenience, ease, choice and prices offered by supermarkets over local shops when it comes to food and hardware items, plus the options offered by department stores and shopping centres for clothes. It's not some sinister bunch of armed Tesco security officers rounding people up for going to their local shops and forcing them to buy from supermarkets, it's the actual preferences of consumers that are causing this."

Time to let the High Street die

Equally, the Financial Times believes that it is 'Time to let the High Street die'. "The general consumer cares little for heritage or for the sentimental argument. If it is cheaper, they will buy it, and they are right to….. Most of American retail is mall based and focused on a mass offer to the mass consumer. This is also the dominant format in emerging economies."

What investors need to know

The key for investors may be to stop assuming a reversion to the mean for retailers. It may look cheap, but the sector is full of value traps. This piece looks at the companies that may still have a long-term future, such as Halfords, and those that continue to face real structural pressures, such as Mothercare.

There are two other areas that are overlooked in their contribution to the High Street's decline: The first is customer service. As Boris MacDonut says on the Money
Week
community comment boards: " The bit many High Street firms fail to grasp is customer service. So admirably well executed by John Lewis. The antithesis would be Currys/Dixons. The latter is a customer service shambles staffed by monosyllabic oafs who don't care less… In this age where trust is haemorraging from most institutions, banks, police, NHS etc…running the extra few yards makes a big difference to customer loyalty, goodwill and the bottom line."

Certainly there appears to be some correlation between those businesses that have done well through the worst ravages of the recession, such as John Lewis, and strong customer service. For internet businesses, those with strong fulfilment, such as Amazon, have been most successful. It is becoming clear that the winners in the retail revolution will be reliable businesses.

The other key area is the impact of landlords. Rents have not fallen in line with business weakness in many areas of the country. Michael Keogh, senior economic investment analyst for property at Henderson Global Investors, suggests that secondary property may have further to fall in terms of rental and capital yields in the second half of this year: "There is a division of asset flows both by quality of asset and location. In the first half of the year, there was a modest fall in capital values given the wider malaise in economy….we believe that it will feed through into a bigger slowdown in the second half of the year… Prime central London and quality retail are likely to be resilient and stable."  

Parts of the high street and possibly even the high street itself are in terminal decline. Whether they are investing directly into retailers or in related areas such as commercial property, investors need to recognise that some retailers' problems are structural and not cyclical.

 

More on Mindful Money:

The changing face of retail

Experiential retail: The UK high street revolution

Mindless With Money: How to be a mindful investor

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