The stocks set to benefit from another scorching summer
The UK's changing climate is having a marked impact on retail and leisure stocks. If this summer sees a repeat of last year's high temperatures, barbeque-sellers and the makers of Magners cider should win again.
We have just experienced the warmest April since records began 348 years ago and we look set for a warmer than average summer (again). This information will not be lost on sun-seeking holidaymakers - or the retail and leisure industries where its impact can be of critical commercial importance.
The changing temperature in the UK - with warmer summers and milder winters almost becoming the norm is having a huge impact on trading patterns as consumer spending behaviour is radically affected by the weather.
As such it is now commonplace for the larger retailers to subscribe to weather forecast services in an attempt to position their businesses as best they can. What these services will be telling them is that things are certainly hotting up.
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This summer, for instance, much of Western Europe - including the UK - is predicted to have a mean temperature above the 1971-2000 long-term average, according to the Met Office. Although this should be increasingly expected the last summer with temperatures below the 1971-2000 average was in 1998 the hotter temperatures in the UK do seem to cause great headaches for some companies whilst others appear able to make hay while the sun shines.
UK climate change: the winners
A quick scan through recent results from retailers and leisure operators highlights the great divide in how they are adapting to milder winters and hotter summers. For instance, the DIY market enjoyed a bumper trading period over Easter with the hot spell sending shoppers into B&Q and Homebase stores in their droves.
Market research firm GfK estimates that over the two-week Easter period consumers will have spent nearly 10% more than they did last year on DIY. This shopping bonanza is supported by statistics from SPSL that found the number of people visiting the DIY and homewares stores was up 4% in March. Garden centres also enjoyed great business and can expect much more of this for the rest of the year if the Met Office predictions are correct.
The British Retail Consortium (BRC) reckoned the decent weather had pushed overall retail sales up by 4% compared with last year hitting £7.8bn over the Easter week. "This is a significant time for retailers and the spectacular weather means that DIY, garden furniture and spring fashion lines will have received a welcome boost after a tough start to the year," the BRC stated.
Would this therefore suggest that it was good news for everybody plying their trade on the high street? Not so.
UK climate change: the companies losing out
Although chocolate retailer and manufacturer Thorntons recently managed to deliver results in-line with market expectations the weather had clearly melted away some enthusiasm for its products and analysts were suggesting that any continuation of the warmer weather would likely lead to profit forecasts slipping.
The warmer weather also resulted in a like-for-like sales decline at Georgica an operator of snooker club and ten-pin bowling halls and the same can be expected at other leisure operators such as bingo halls and cinema chains whose offers keep consumers out of the sun.
It has certainly taken its toll on DVD retailer and rental group ChoicesUK, which has had a torrid time. It issued a profits warning on the back of trading over the four weeks to April 7 during which time it said the warm weather had resulted in soft trading.
Bakery chain Greggs also cited the weather as a key factor in its poor trading earlier this year with profits falling by 20% - as consumers turned away from its sausage rolls and pastry products in favour of lighter foodstuffs.
Jeremy Hamer, non-executive chairman of cake maker Inter Link Foods, says his company is affected to some extent by the weather but suggests that it is companies dealing in chocolate products that are most impacted. However, he believes this manifests itself in the goods being more difficult to handle than in people being turned off eating them.
"It's a matter of getting used to the fact that it is getting warmer which is not forcing a change in eating habits but does mean companies will have to consider how to manage it. Factories are spending more on air handling and temperature control," he says.
Are retailers using the weather as an excuse?
While some retailers will undoubtedly have full justification for blaming their poor performance on the weather, there is also the belief in some quarters that it can be used as an excuse for other mistakes that have been made. Hamer himself admits to having previously used the warmer weather as part of the reason for Inter Link's sales being slightly lower than expected and he jokes: "We might use it again."
Robert Clark, director of Retail Knowledge Bank, suggests it is all too frequently trotted out as the reason for a multitude of failures: "It is used as an excuse to varying degrees and sometimes it is laughable. It's quite regularly used to cover the failings of management whether that is related to buying or stock control. They'd rather blame the weather than admit that it was the range."
Among the possible culprits of such an activity is sofa retailer ScS Upholstery where management blamed the climate on its poor performance when it delivered a trading update recently that showed like-for-like sales down 9%.
That it is now pinning its hopes on the two May bank holidays not being as warm as the Easter holiday suggests it could well be over-emphasising the impact that the weather has on its business.
It could be the same story at Debenhams, which has been trading poorly recently, and whose management pointed the finger at the weather as being the cause. Its chief executive Rob Templeman recently stated: "We didn't get all the products right and we have a stronger reliance on outerwear, coats and knitwear and sales are inevitably going to be affected by warmer weather."
This might well be true and it highlights just how susceptible clothing retailers are to the vagaries of the weather. But this needn't be the case and the ability to factor in climate changes is increasingly proving to be a factor in determining who the winners and losers are among retailers.
UK climate change: the importance of flexibility
Consider that although the warm weather might simply delay the buying of a winter coat if just one in 10 people ultimately then decides to forego such a
purchase then this can have a dramatic impact on the bottom line of a retailer. So competitive is the clothing market that margins are very tight and rising fixed costs including fuel, energy, wages and shop rentals do not help matters.
However, for savvy retailers the weather can play into their hands provided they have sufficiently flexible stock control and supply chain systems in place. If their IT solutions have complex merchandise forecasting capabilities then it should be possible to plug in a weather forecast module to allow retailers to take advantage of the climate by introducing seasonal items at very short notice.
The supermarkets are particularly skilled at this and are able to quickly introduce ranges of barbecue kits and garden products when the weather takes an unexpected turn for the better. Clark says: "By being flexible you can work the weather to your advantage compared to rivals who might interpret it wrongly or who are too overly dependent on it."
John Lewis is also proving to be a master of this. In the same week that Debenhams was moaning about having too much winter-focused gear in its stores John Lewis was reaping the rewards of having plentiful supplies of summer wear and seasonal assortments such as gift food and barbecues in its stores.
Rob Collins, director of selling support at John Lewis, says: "The warm weather is set to continue and there was some great evidence [over Easter] of our shops, buying teams and supply chain teams combining to really capitalise on the seasonal opportunities that this warm weather presents."
In addition to those stores that are particularly good at adapting their product mix to short bursts of warm weather there are some operators that are fortunate to be in the sweet spot when it comes to trading through sustained periods of hot weather.
Magners maker C&C cashes in on warmer weather
Ice cream is an obvious one and so are cold drinks manufacturers. It is also greatly beneficial to those pub operators that have a high percentage of outlets with outside space to house beer gardens.
One of the major beneficiaries among the drinks companies during last year's hot summer was AIM-listed C&C whose Magners branded bottled cider took the UK market by storm with its unique cider-over-ice delivery. Such was its impact that it effectively sparked a renaissance in the cider market especially the bottled variety.
According to research house Nielsen total cider sales in the UK increased by 32% for the year to end-January 2007.
While draught sales were up by a modest 5% bottled cider increased by a massive 218%.
Although the cider market has proved sufficiently attractive for a number of big name manufacturers to launch a whole host of me-too products that are also served over-ice it is our belief that Magners still has enough brand authority to hold its own in what is becoming an increasingly competitive marketplace.
Sensibly C&C has not stood still over the winter period and is set to launch an innovative new product initially in Ireland through its Bulmers brand that delivers draught cider through a dispensing device that freezes part of the pint as it passes through the equipment before it is then mixed with the rest of the liquid as it enters the glass.
The company is also planning to introduce Magners into Spain, which has a serious cider market. So much so in fact that in May the world's first international exhibition of quality cider was held in the Asturias region.
Although C&C shares hit a high point of Euros 13.85 earlier this year on the back of last year's hot weather they then fell back to less than Euros 10 in March. This was the level at which FSL readers were advised to sell out after we tipped the shares at Euros 5.30 back in October 2005.
When the prospects of another hot summer period are combined with the potential of Magners in new markets overseas and its planned innovations in dispense it is worth taking another look at the shares even though they have recently climbed back up to the Euros 12.50 level.
While Magners looks forward to benefiting from another hot period this year the UK's wine industry is plotting a successful future on the back of the predicted long-term increases in global temperatures.
As the average UK temperature is predicted to increase by up to four degrees Celsius by 2080 (taking a high carbon emissions scenario), according to the UK's official climate change organisation the Hadley Centre, the quality of grapes in the UK are already benefiting from the milder climate.
Such is the improvement in the crops that international awards have been won by leading UK producers Nyetimber and PLUS markets-listed English Wines Group (which produces the Chapel Down branded sparkling wine). This has led to rumours that the French Champagne houses are considering buying up wine-growing acreage in the south east of England.
Whereas this might be more gossip than reality at the present time there is no disputing the fact that the increasingly warmer climate in the UK will continue to have a serious impact on the way many businesses operate and how investors evaluate potential opportunities.
By Glynn Davis for The Daily Reckoning. You can read more from Glynn and many others at www.dailyreckoning.co.uk
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