The posters in shop windows give a clear indication of the challenges on the high street. Retailers are desperately trying to lure shoppers with discounts of up to 70 per cent, following weak Christmas sales.
Many companies have already shut up shop. The final branches of Woolworths closed this week and a number of companies have fallen into administration. Waterford Wedgwood became the latest household name to collapse this week, following, among others, Zavvi, the music retailer, and Adams, the children’s clothing chain.
As a result, equity investors have seen retail stocks lose more than 40 per cent of their value, on average, in the past year. Many stocks look set for further falls as fears of job losses and low interest rates force consumers to rein in spending.
“Pressure on household budgets is unlikely to abate even if fuel and food costs ease,” says Rahul Sharma, consumer fund manager at Martin Currie Investment Management. “If people are scared they could lose their job it makes them want to save rather than spend.”
Also, as banks remain reluctant to lend, many more retailers could run out of funds and have no choice but to close or offload stores.
Experian, which tracks shopper numbers, says average footfall in December was around 3 per cent lower than last year even though many shops started sales early. The group predicts that 440 retailers will fail this year, mainly small independent companies, which operate on tight margins and therefore cannot offer large discounts. There are also likely to be more high-profile casualties.
However, while the whole sector is in for a tough year, analysts say some retailers could still offer opportunities among the gloom.
Sharma believes that while people will not stop spending altogether, they will trade down their purchases. They will not cut out brands entirely, but they will be more price sensitive, he says.
He expects luxury retailers will be the hardest hit, having lost the aspirational shopper, while those with a clear value message are likely to gain market share.
Already, the better value retailers appear to be faring comparatively well. This week, Next announced that underlying sales had dropped 7 per cent from the end of July to the end of 2008. While still pretty dismal, the fall was not as bad as analysts feared and the company reassured the market that it would meet its profit forecasts. Meanwhile, New Look, the privately-owned clothing chain, reported a rise in sales in the 14 weeks to January 3.
Marks & Spencer fared worse, with sales at its clothing-dominated general merchandise category down 8.9 per cent in the 13 weeks to December 27.
So there is a fear that retailers such as M&S could lose shoppers to discounters and see shoppers trade down from premium items. Sainsbury outperformed more upmarket rivals such as M&S and Waitrose with a 4.5 per cent rise in like-for-like sales over the Christmas period.
Jonathan Jackson, an analyst at Killik & Co, says there will be a difference between the performance of discretionary and non-discretionary retailers.
“Spending on food, health and low-ticket items will be more robust than on electrical goods and cars, for example,” he says. “Investors should go for things that people have to buy in a downturn.”
Also, electrical retailers such as DSG, which owns Dixons, do not have wide enough margins to offer the kind of discounts offered by clothing retailers.
Jackson fears that spending could dry up now that Christmas is over and the sales are coming to an end. Also, as the pound is weak, the cost of imports is going to rise, which retailers are unlikely to be able to pass on. “They can’t increase prices so their margins are likely to suffer,” he says.
Sharma believes the factor that will separate the best and worst performers will be cash flow. “Cash flow implications from being overstocked are worse than most people think and could question the survival of even large retailers,” he says. “I’d back a strong balance sheet and a management that has planned its stock cautiously.”
Investors who do want to buy into retailers are advised to be very selective and only look at companies that have positioned themselves carefully for the downturn.
“I would say stick with food retailers and go for resilient and financially-strong businesses with good dividends,” advises Jackson.
Experian says that performance will also depend on a company’s location. “The unprecedented level of retail vacancy will be disproportionately spread across Britain, so that smaller retail destinations, in particular market towns, will be worse affected,” says Jonathan de Mello, director of retail consultancy.
Smaller towns are likely to feel the greatest knock-on effect from the disappearance of big retailers such as Woolworths. Retail parks, which often rely on home furnishing retailers, are also likely to be squeezed as fewer people move or upgrade homes.
