As retailers fight recession, rising jobless rate is threat to recovery

Rosamund Urwin
6 Jul 2009

IT'S a tale of two High Streets. While supermarkets, budget clothes shops and HMV have emerged as recession-winners, most of their rivals remain in the doldrums, praying for the recovery to come.

Since January, retail stocks have rallied sharply, rising 38% and massively outperforming the FTSE 100 index. Sir Stuart Rose at Marks & Spencer and Next's Simon Wolfson have now said that they believe consumer spending may have hit the bottom.

But the bloodbath is not over yet. As we survey the good, the bad and the ugly of the High Street, Allied Carpets is teetering on the brink of collapse, while Focus DIY is considering a company voluntary arrangement. Quarterly rent day on 1 July sparked predictions of another wave of store closures — following the collapses of Woolworths and Zavvi at Christmas.

The spectre of rising unemployment looms over the sector, and is likely to determine which retailers will fare best in the coming months.

“Consumers are still very reluctant to spend,” says Howard Archer, chief UK economist at IHS Global Insight. “Lower mortgage rates and inflation are helping, but rising unemployment — and fears of job losses among those still working — will limit the recovery. Increasing levels of debt, wage freezes or even wage cuts will also hit spending.”

The signs from Middle England are mixed. John Lewis, the High Street bellwether, has seen trade pick up slightly in the last three months, but sales are still down 4.5% this year.

At M&S, Rose may now be spared a lynching at Wednesday's annual shareholder meeting after the sales decline slowed to 1.4%. But — lest we forget — the tills are taking less than they were a year ago against much easier comparatives. Analysts also reckon that the recent good weather has given a temporary boost to its performance.

So what's wrong at M&S? According to Deutsche Bank analyst Rod Whitehead, poor promotions and marketing and customers trading down have hit the store hard. He believes that its self-help plans do not go anywhere like far enough.

Nick Bubb, retail analyst at Pali International, adds that Rose has taken a “sales at all costs approach”, creating long-term problems for the group. “The focus on price-cutting means margins are being squeezed — M&S is throwing away its pricing power for short-term tactical gains,” he says.

Promotions such as the “two dine for £10” have proved popular, but Bubb believes that customers have come to expect the discounts — filling up their freezers when the offers are on — and have stopped buying at other times. “If customers only buy at a discount, it suggests they have lost trust in the original pricing,” he says.

M&S's food sales, down 0.5%, don't look good, given that the supermarkets are continuing to grow. Among them, Sainsbury's has surprised with its strong performance — managing to grab a greater share of the market.

“Its middle-market position — which was for so long considered its weakness — has become its strength,” says Bubb.

Morrisons is the other big winner in the food stakes, poaching customers from Tesco.

While M&S languishes in clothes sales, ethically challenged Primark continues to shine. Citigroup forecasts it will report a 5% jump in sales later this month — the risk that it would lose consumers over allegations of poor treatment of workers seemingly being seen off by shoppers' shrinking wallets.

Meanwhile, music and games retailer HMV's status as the last man left standing — Woolworths and Zavvi having fallen victim to the recession — helped it post a 1.9% increase in sales last week.

Long-term, though, there is cause for concern at HMV. The internet — in the form of Amazon and iTunes — will continue to eat into High Street CD sales while supermarkets are willing to flog the latest albums at no profit to get shoppers through their doors.

Sales continue to slide at HMV's books chain Waterstones, although this Christmas looks promising, with the release of a new Dan Brown novel and the usual swathe of celebrity autobiographies.

Entertainment as a sector is struggling, as computer games retailer Game Group proved last week when it officially lost its recession-resilient status. The chain has seen sales sink in the absence of any big-name games releases or major console launches to get the computer geeks salivating. It is an obvious place for shoppers worried about losing their jobs to cut back. Other retailers yet to see signs of a High Street upturn are Kesa Electricals and DSG International.

Kesa used to be considered the better-managed of the two — DSG earning the moniker the Disappointing Stores Group — but it seems now their positions have reversed.

Both are still suffering, however, as they try to shift pricy electrical goods at a time when consumers are willing to make do with what they have.

There are even signs that the internet boom is ending. Asos, for so long a darling of investors and fashion-lovers alike, disappointed the markets with its first-quarter trading numbers last week.

Admittedly, the figures — sales up “only” 52% — must have made other retail bosses green with envy, but chief executive Nick Robertson spooked analysts with some surprisingly downbeat comments. Sector-watchers reckon the online-only retailer endured a tough May and flag up rising youth unemployment as an obstacle to growth.

Back on the High Street, the green shoots' growth is patchy. Ian Cheshire, chief executive of B&Q owner Kingfisher, warns that it will be a slow recovery as the recession has changed consumers' attitudes: “Conspicuous consumption is going to be out' for some time, replaced by caution and thrift.”