The latest analysis from the Institute for Fiscal Studies think-tank makes particularly grim reading.  The report, issued the day after the chancellor’s autumn statement, suggests that the spending power of the average family will plummet over the next five years, as high inflation, government spending cuts, and wage stagnation increasingly impact. 

Consumer confidence levels remain depressed, only lower in recent times, according to GfK, during the banking crisis of 2008/09 and the downturn in the early 1990s.  The index measuring consumers’ propensity to spend on major purchases remains well below last year’s rating, not helped by the weak housing market.  Fears of even higher levels of unemployment, the UK returning to recession and the fall out from the euro zone crisis mean confidence levels are unlikely to rise significantly any time soon.

Opting out

Against such a background, it was no surprise that Best Buy decided to end its costly ‘big box’ flirtation with the UK electrical market, just eighteen months after opening the first of eleven stores.  By the time it shuts the lot, along with its website, the joint venture with Carphone Warehouse will have racked up losses of around £200 million.  That includes a half year deficit (to 30 September) of £47 million, plus a further £30 million until the operations close.  An expensive foray indeed. 

The joint venture will now focus on its Wireless World high street stores and online.  Many of Best Buy’s 1,100 staff will join that enterprise, with 141 shops already converted and up to 400 planned by April. 

Best Buy arrived with big ambitions – to shake up the market, create up to 8,000 jobs, open up to two hundred stores, and bring US-style customer service to an eager public.  But it took too long to get going.  Having researched the market for years and pondered over a major acquisition, it gave competitors due warning of its plans, and then procrastinated over store openings.  That gave Dixons in particular time to react and up its game – both in store and in service.  What Best Buy was offering no longer seemed new and fresh. 

Shopping habits were changing too.  An increasing amount of spending moved online.  As fuel costs rocketed, fewer customers were journeying to edge of town stores.  And the technology world changed substantially with smartphones and tablets taking a larger slice of spend, so specialist non-traditional retailers prospered. 

The announcement of Best Buy’s retreat was followed later the same week by news of the sale of Comet to a private equity firm advised by turnaround specialists OpCapita.  The price was a nominal £2.  In addition parent company Kesa paid a dowry of £50 million into the new holding company and Comet will keep a £62 million fund that covers warranties and servicing.  Kesa will also retain liability for the Comet employees' final salary pension scheme.  Kesa will benefit from any subsequent onward sale of the chain, but only if the price exceeds £70 million.

The deal is scheduled to be completed next month and the buyers have promised to keep Comet as a going concern for at least eighteen months.  But seventeen stores were already earmarked for closure, and more are likely to follow.

Round up

Best Buy’s closing down sale, with significant discounting across the board, and Comet’s stock clearance activity will have hit margins generally over the key season. That clearly is not good news for the other major multiples who have struggled over the past year in such challenging market conditions.

Dixons fared better than most, managing to limit half-year losses (to 15 October) in the UK and Ireland to £3.9 million, against £10.7 million last time.  Total sales fell by 5% to £1,530 million with like-for-likes down by 8%. 

The focus on cost reduction programmes, further improvements in stock management, and operational efficiencies delivered significant savings and a slight improvement in gross margins.  White goods held up, mainly due to replacement business.  Computers did well too, with laptops and tablets selling strongly, but televisions remained particularly weak.  There was also a £4 million bill to restock and repair the PC World and Currys stores looted during the summer riots.

The emphasis on service quality, following the rebranding to KNOWHOW, continues apace with improving satisfaction ratings – customers ‘highly likely to recommend’ for instance rising steadily by 28 points over the past year to 71%.

In contrast, Comet, in the six months to the end of October, reported like-for-likes down by nearly 19%.  The chain made a £23 million loss on sales of £600 million.  Web-generated sales were impacted by the implementation of fully aligned store and web prices, with a consequent reduction in ‘click and collect’ transactions; it also scaled down two specialist websites.  This led to a 12% fall in web-generated sales which accounted for 16% of total product sales.  The only piece of good news was a very modest improvement in gross margins, partly due to more small domestic appliances and accessories in the mix.

John Lewis has continued to earn positive media coverage, often being able to quote weekly year-on-year gains, but it is rarely noted that the headline figures include both the benefit of the VAT increase and new openings over the past year or so – one department store and five ‘at home’ stores.  Profits too have been under real pressure as it continues to meet the ‘never knowingly undersold’ pledge, especially in technology products. 

In the eighteen weeks (3 December) total sales of ‘electricals and home technology’ rose by 3%, compared with 1% for home products and 2% fashion.  Online sales increased by 21%.  The ‘at home’ concept was launched in October 2009 so cumulative year-on-year figures are now becoming available – the first store at Poole is down by 1.3% over these eighteen weeks.

The Co-op recorded 0.5% growth on electricals in the past year (to November 25) and is expanding its multi-channel offer by launching click-and-collect for the first time, alongside a revitalised website, a mobile site and in-store kiosks.  Argos saw half-year (to 27 August) like-for-likes decline by 9%, mainly due to the weak consumer electronics market, particularly televisions and video games systems. 

Rental deals

Two rental companies changed ownership in the year.  In May, Weight Partners acquired Boxclever for an undisclosed sum from the US private equity firms Cerberus and Fortress Investment Group.  Created in 2000 by the merger of Radio Rentals and Granada Rentals, and having closed all the shops, Boxclever now has around 300,000 units on rental, delivering sales of £40m.  It only offers products to existing renters.

In June, Dial-A-TV was bought out of administration by its previous owner for £780,000.  Prior to the deal Hitachi Capital took out other finance interests and the new company will repay it £5.25 million over time.  Attempts to sell the business to a third party at an acceptable price proved unsuccessful and thus a ‘hive-down’ to a newly created subsidiary was arranged.

Forbes Direct continues to promote rental strongly through widespread leaflet distribution.  White goods now contribute two-thirds of new accounts, its hotel business continues to grow, and eBay is proving an effective way of selling old domestic stock, in preference to trade sales.  Acquisition activity has slowed in the past year, but Forbes remains interested in acquiring decent rental bases, as long as there is evidence of some product investment in the past three years.   

BrightHouse, the rent-to-own electricals and furniture retailer, reported earnings before interest and tax up by 22% to £21 million in its first half (to September 30), on sales of £127 million, with like-for-likes nearly 7% higher.  Fifteen new stores were opened, taking its portfolio to 243; a further ten are planned before the end of March.  It has completed a debt refinancing exercise, with more than £100m available to repay existing financing and to increase working capital.

Looking forward

Continuing uncertainty over jobs and the impact of austerity measures will undoubtedly continue to affect retail spending adversely.  However, as usual the desirability of consumer electronics, aided by the continuing digital roll-out programme, will help limit the downside, though the likes of Sky and Apple will continue to take an increasing slice of spend, as undoubtedly will Amazon and other internet operators.

The supermarkets’ patchy performance over the past year will make them doubly determined, seeing a real opportunity by picking up the slack from Best Buy’s departure and Comet’s changing ownership – as will John Lewis whose increasing geographical reach is a concern to many rivals.  Newbury, Ashford and Chichester ‘at home’ and its first flexible format department store in Exeter are scheduled to open this year. 

As to independents, retra’s recent decision to move into custom installation will be welcomed by many of its members with product margins under continuing pressure.  Despite the incessant financial pressures of running a business in such tough times, maintaining a consistently high quality service, both in store and in home, to a loyal customer base remains vital.  For all bricks & mortar retailers improving the sales conversion rate (in spite of the increasing number of time-wasters undertaking research before buying online) and maximizing the value of each sale will again be key objectives.  In such a climate, the gap between the proactive and the weaker operators will continue to widen, and sadly more casualties can be expected across all retail sectors.