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In the Bank of England’s latest quarterly report, governor Mervyn King restates his view that the economy will avoid a double-dip recession but he cautioned that the outlook for growth is “highly uncertain”. Consumers and businesses must cope not only with tax increases and the impact of public spending cuts, but inflation is also expected to remain above target as the rise in VAT, the depreciation of sterling, higher commodity prices and dearer imports affect the cost of living.
With mortgage lending levels at their lowest level in a decade, analysts are predicting the weak housing market will continue for some time. Clearly not good news for the retail sector, and against such a background it is hardly surprising that two other key consumer measures are also moving in the wrong direction.
A steep increase in the number of people fearing for their jobs has driven consumer confidence to its lowest level for a year, according to the latest survey from the British Retail Consortium. Also, average household spending power is now 2% lower than a year ago according to the Asda Income Tracker – the tenth consecutive month of decline, with worse likely to follow.
Stephen Robertson, BRC director general, said: "These results suggest prospects for the early part of 2011 are fragile. People's fears about their job prospects are the main cause. Despite tentative indicators of recovery, four out of five people still think we're in recession and a fifth of those believe that won't have changed by next autumn. With spare cash short and cutting back rising up the household agenda, a strong revival in consumer confidence is likely to be some way off."
Those concerns will not have stopped the majority spending robustly over the holiday period, but the VAT increase and the raft of other austerity measures will add further pressure on household budgets throughout the year.
Like for like growth
As a result of the difficult economic climate, the major electrical retailers have over the past year struggled to gain real momentum, despite weak comparatives.
At the end of November, Dixons posted interim results (16 October) in line with expectations but cautioned that consumer confidence remains fragile. Turnover in its core UK and Ireland division fell by one per cent, like-for-likes rose by two and losses were cut by a third to £10.7 million. Sales were boosted by TVs for the World Cup and the launch of Apple’s iPad, but the following quarter was “challenging”.
Its store transformation programme remains on track, with 250 shops refitted and twenty-five megastores now operational. Fifty-seven stores now trade as Currys and PC World 2-in-1. The transformed stores are delivering consistent gross profit uplifts of 20%. Online sales increased by 20%, driven by Reserve & Collect, up by over a half.
Dixons is also overhauling its service offering by introducing Knowhow, a new brand that aims to help customers get the best out of their purchases – not just a relabelling but a “fundamental shift” in how it does business. It will be introduced from March and replaces Tech Guys.
Comet’s interim results (31 October) disappointed with like-for-like turnover down by 3.7%, and operating losses trebling to £5.4 million. Web-generated sales increased by 8% and now represent nearly 15% of total product sales. Comet is focusing more on higher margin accessories and small domestic appliances. A further 30 stores were refitted, with 16 more in the second half.
Comet has also been reviewing its market stance and updating its image. The arrival of US giant Best Buy and the reinvigoration of market leader Dixons Retail has left Comet seeking its own niche. Now, with the heavily advertised ‘come and play’ approach, the emphasis is on family friendliness, accessibility and fun. It believes its portfolio of mid-sized shops, in contrast to the giant sheds run by its competitors, will be an ongoing strength, especially with an improved internet offer.
A decade ago, Comet was mimicking Best Buy by opening big sheds but there is apparently no chance of such an approach being adopted again. Comet’s managing director Hugh Harvey thinks its business model is right: “In the age of the internet, large format is not where Comet’s future lies.”
Expanding coverage
Neither major multiple would admit publicly to any concern about the impact of Best Buy’s arrival in the UK. The first ‘big box’ store opened in Thurrock in April 2010 followed by Hedge End, Merry Hill, Aintree, Croydon and Derby. Best Buy UK, which is a joint venture between the US giant and Carphone Warehouse, made a loss of £29 million in the first half to September and now expects to lose close to £55 million in the full year – £10 million more than previously expected. It does however stress that “customer response has been overwhelmingly positive”.
Openings planned for 2011 include Bristol, Nottingham, Hayes, Rotherham and Enfield. That will give Best Buy decent coverage across key conurbations. The retail trade press has reported that the company may be considering smaller stores in the future now that its transactional website has been launched.
That would potentially take Best Buy into Comet’s territory, but Best Buy’s spokesman was dismissive: “It’s no surprise that people will speculate. Any updates and news about the business will come from Best Buy Europe and not any individual shareholders or analysts.”
John Lewis has earned increased media coverage for sustained growth over the past year. In the year (to December 4) sales of ‘electricals and home technology’ rose by 7%, compared with ‘home’ 13% and ‘fashion’ 11%. Online sales were up by 40%.
However these headline figures were aided by new openings – a department store in Cardiff in September 2009, and further ‘at home’ stores in Croydon, Swindon and Tunbridge Wells following the successful launch of the new format in Poole in October 2009. Already announced for this autumn are new ‘At Home’ outlets in Exeter and Chester (for a combined investment of £15 million). Eventually at least 30 such stores are expected, thus putting a John Lewis outlet within a forty-minute drive of all UK shoppers.
Pre-tax profits at Richer Sounds which now trades from 48 stores fell by 18% to £2.8 million in the year to the end of April, despite sales growing a quarter to £168 million. It highlighted “inflationary increases in store and central overheads” and reported that a “difficult general trading condition has continued its pressure on gross margins”, though like-for-likes remained above last year.
Rental gains
Boxclever, the amalgamation of Radio Rentals and Granada now owned by private investment firm Cerberus Capital, continues to maintain a low profile, operating online and by call centre. The business is now very much into the cash generation phase, restricting new products to long-standing customers and keeping operating costs low.
Forbes’s income base continues to grow by gaining “an average of 600 new customers per month over the past year”. White goods now account for just over half of new contracts written, and its mobility scooter side continues to grow “at a respectable rate”, as does its hotel and commercial operation. Acquiring existing rental bases has become a less attractive proposition, as the quality, especially when administrators are involved, tends to be poor, with declining customer numbers, dated product and little evidence of recent product investment. Forbes remains wary of the sub-prime market other than for re-rents. It now provides a service facility to run rental books out for finance companies.
Rent-to-own retailer BrightHouse that focuses on low income families reported another set of solid results for the six months to the end of September with like-for-likes up nearly 11%. Total sales reached £109 million, with earnings before interest and tax 16% higher at £17 million. It opened fifteen new stores taking the portfolio to 213, and remains on track to open a further thirty this year.
Looking forward
In such a difficult economic climate, the VAT increase, continuing uncertainty over jobs and the impact of the austerity measures will undoubtedly hit spending in many sectors over the year. However, the desirability of consumer electronics, aided by the continuing digital roll-out programme, should see the sector faring better than other big ticket sectors. The poor state of the housing market will not help white goods.
Supermarkets have for some time sensed a real opportunity, and will continue to pressurise traditional specialist chains and independents. Tesco in particular is driving hard to gain share across all non-food areas. The increasing geographical reach of Best Buy and John Lewis will be a concern for many, though the better independent operators have for some time been placing great emphasis on the importance of consistently providing quality service to a loyal customer base. In such a climate, the gap between strong and weak operators will become even more evident, and casualties are likely across all retail sectors. Growth will come from taking market share from competitors.
