Advertisement
Features

This is no high street horror show – it’s just capitalism at work

There’s talk of a “bloodbath” on the high street as retail chains go bust. But those going under are failing to adapt, says John Stepek. Those that do will thrive.

180612-retailers
Poundworld: the latest in a series of retail failures

There's a lot of geopolitical excitement and central bank chicanery happening later this week, which will no doubt grab our attention on Thursday and Friday.

So, while we have the opportunity, let's take a step back from the world stage, and focus back on our humble British high street.

Because, you know, it's hell out there. A "bloodbath", even. Indeed, reading some of the headlines, it feels as if you should be donning a flak jacket, even if you're just walking down to your pedestrian precinct to grab a pint of milk.

Advertisement - Article continues below

So what's going wrong?

Well, horror of horrors, it appears that capitalism is at work.

People are buying more stuff online, which is bad news for physical shops

The latest high street casualty is Poundworld, which, according to City AM, "crashed into administration" yesterday, rather than ambling there gently, as I'm sure most of us would prefer.

Poundworld isn't the only casualty we've seen this year. Toys R Us and Maplin have been two high-profile busts. And there are plenty of walking wounded out there too.

Advertisement
Advertisement - Article continues below

House of Fraser plans to close more than half of its department stores. New Look, Mothercare and Carpetright have shut shops in similar circumstances, notes City AM.

In fact, according to the Centre for Retail Research, reports the paper, this is looking like it'll be the worst year for retailers since the financial crisis.

What's all this about?

There are a lot of factors involved. Consumer spending power is one aspect that I'd nod to. After the financial crisis, although wages stagnated, consumers or some of them, at least received a number of pretty hefty windfalls. As a group which is what matters at this level those windfalls made a big difference to spending power.

Advertisement - Article continues below

First, there was the plunge in mortgage payments that resulted from the Bank of England slashing interest rates. That made a lot of people's mortgages an awful lot cheaper on a monthly basis. Clearly, that's a spent force by now and with most people now on fixed-rate mortgages, future interest-rate changes won't have as much of an effect on existing homeowners.

Second, there was the PPI bonanza. This windfall essentially payback from the banks for the massive government bailout they got after the 2008 debacle kept consumers (and the car industry in particular) going over the last decade or more. Again, this is coming to an end now.

Of course, we now have very low unemployment, and signs that real wages (wages after inflation) are improving. So for now, I don't think that consumer spending is something to desperately worry about. But a slightly higher wage certainly doesn't enjoy the same "splurge" factor as bagging an unexpected few grand from a dodgy insurance salesman.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

All of that said, this isn't about consumer spending drying up. As Professor Joshua Bamfield of the aforementionedCentre for Retail Research puts it, it's more about "new consumer behaviour buying online, but also spending more on experiences, travel and eating out higher labour costs, uneconomic rents and business rates".

Given all that, as retail analyst Richard Hyman puts it: "there are too many retailers with too many stores for the market to feed".

A lot of these companies have been on death's door for ages

In short, we're buying a lot more stuff online because it's more convenient, there's a lot less friction in the transaction process, and because we don't have to talk to our fellow human beings in the process (it's terrible to say, but it's true it's not that we're anti-social, we just want to get the job done quickly).

As Merryn and I discussed on the podcast yesterday, there are now lots of calls for Amazon to be broken up, or for the digital sector to be taxed more heavily.

Advertisement - Article continues below

On the one hand, I get this. I think most people want to see a thriving high street in their own areas. You want somewhere, ideally picturesque, where you can browse interesting shops, easily get a coffee or a drink or lunch, and catch up with friends. Call it recreational shopping.

So calls to defend or reinvigorate the high street will always appeal just as they appealed when out-of-town centres were being blamed for tearing the guts out of communities when I was growing up, or when the first supermarkets were being blamed, a generation before that.

Advertisement
Advertisement - Article continues below

Equally, though, this is just the usual special interest pleading. Retail lobby groups can no longer cry out for interest-rate cuts every week as they did back in the day (although they might be able to start that up again relatively soon). So now they cry out for action against their online competitors.

Advertisement - Article continues below

I struggle to feel sympathy (although to be clear, this does not include the people who end up losing their jobs that's just miserable). Look at the casualty list. There are no real surprises there. For example, House of Fraser has been on the retail "dead pool" list for most of my career as a financial journalist.

The truth is that retail is a savage business. Consumers are fickle, margins are generally tight, and barriers to entry are low (particularly now that you really don't need a physical shopfront to sell stuff).

In that sort of environment, you'd expect constant revolution. That's capitalism at work.

What does it mean as an investor? If you invest in retail, make sure you know what the company's "edge" is, and how its business model really functions. Some are more vulnerable than others. Pay attention to online capacity one big reason for Marks & Spencer's current woes is a pitiful online offering.

Oh and keep an eye on landlords with a lot of exposure to retail property. Probably not a great place to be, although markets have priced a lot of this in already.

In the current issue of MoneyWeek, regular contributor Richard Beddard has written a detailed analysis of a particularly interesting retailer, Games Workshop. If you're not already a subscriber, sign up here.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020
We're all going to have to be a lot more flexible
UK Economy

We're all going to have to be a lot more flexible

As the world gets older, we'll all have to retire later and finance it for longer. That's going to take a major rethink about an awful lot of things, …
6 Aug 2020

Most Popular

Don’t despair on dividends – these companies could be set to bring them back
Income investing

Don’t despair on dividends – these companies could be set to bring them back

The value of dividends paid out by UK stocks has plummeted this year as companies “rebase” their payment policies. But things could soon start to look…
6 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020