Retail is a sell as customers desert the UK’s high streets

Kathleen Brooks
THE BRITS lived up to their reputation as a nation of spenders and splashed their cash with abandon over the festive period. Major retailers swept up and some, like fashion chain Ted Baker, saw sales rise 20 per cent in the latter part of 2009. John Lewis, Next, Marks & Spencer and J Sainsbury also reported an increase in Christmas sales.

This topped off a fairly strong year for the sector, and retailers’ share prices have sky-rocketed since the financial markets bounced back in March. But is this robust performance actually credible when the economy remains weak, wage growth is stagnant and people are still trying to pay down debt? James Monro, an analyst for S&P Equity Research, says that all the data suggests that Christmas was “stable” for retailers as customers continued to spend. “But now the New Year’s hangover has set in and people are going to need to be more cautious,” he says.
The journey south has already started for some of the retailers including M&S, whose share price fell 50p last week after chairman Sir Stuart Rose warned that 2010 heralds tough trading conditions. This trend should gain momentum during the rest of the year as a number of factors weigh on consumer sentiment.

Once a general election is out of the way the party in power will be able to wield the public spending axe and hike taxes. With less cash in their pockets, people are likely to do less buying. Rising unemployment in the public sector and lower incomes also create perfect conditions to keep people out of the shopping centres.

The household savings rate jumped in the last quarter of 2009 from 0.7 per cent in 2008 to more than 8 per cent. Although this has gone some way to helping households pay off the debt they accumulated over the past decade, there is still more adjusting of the household finances to come. In this environment large purchases are likely to be off the schedule for many people.

Furthermore, cannier shoppers will scour price comparison websites more and more for the best bargains. This shift in consumer behaviour could hurt retailers without an online presence and even those who do sell their goods online could see their profit margins start to erode if price wars erupt in a bid to lure frugal customers.

Vicky Redwood, a consumer and debt specialist for research firm Capital Economics, thinks a more frugal consumer could be a trend that continues beyond 2010 and that retailers could be in trouble in the long-term as more consumers choose to save for a rainy day. “Whereas in the past people relied on their house to appreciate in value and do all of their saving for them, that has changed now and people will want to re-think their more conventional saving patterns like putting money away,” she says.

S&P’s equity anlayst James Monro says M&S will especially suffer this year, because it is considered to be expensive. Its food sales have also looked weak recently. Debenhams’ share price (see chart) collapsed in 2008 when the financial crisis hit, however, it rapidly increased in April 2009 and now looks like it could be close to its peak. Likewise, M&S, which is a fairly volatile stock, had a bumpier ride than Debenhams did last year but it too could see its price fall as consumers top up their savings accounts rather than splashing out on knickers.

As millions of people receive their credit card bills in the coming weeks and get real about how much they can afford to spend, consumer sentiment is likely to nose dive. This could be a good opportunity for spread betters to make a profit.

Due to the run up in the share price of some of the retailers in the last 12 months, spread betters can take advantage of a weakening retail sector at a good price. Spread betting on the FTSE 350 retail index gives you a broad-based exposure to the UK retail sector. The index includes 16 of the UK’s largest high street names including M&S, Next, Debenhams, Mothercare and Dixons and has risen by a whopping 70 per cent in the past 12 months. The index is currently trading at 1,700, and you can sell it at 1,698 with IG Index.