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Bleak midwinter for retailers unless crucial Christmas period delivers gifts

According to hedge fund manager Crispin Odey, who is bearish on the sector, it is a crucial Christmas for Debenhams, House of Fraser and embattled New Look
High street
Britain’s big shopkeepers will routinely book as much as a quarter of their total sales in the run up to and just after Christmas

The outlook for High Street retailers is bleak moving into 2018 with the traditional bricks and mortar chains really starting to bleed from the wounds inflicted by online giants such as Amazon, ASOS and Boohoo.

According to hedge fund manager Crispin Odey, who is bearish on the sector, it is a crucial Christmas for Debenhams, House of Fraser and embattled New Look.

The two department store groups (Debs and HoF) are most at risk from web-based competition as they have the highest fixed costs.

Reflecting this, Debenhams shares have hit levels not seen since the end of 2008 when the financial crisis was in full flow.

Credit rating agency Moody’s, meanwhile, recently downgraded HoF’s bonds to junk status.

Both will no doubt be cutting costs to shore up profit margins.

Up the down escalator

But as veteran retail analyst and consultant, Nick Bubb, pointed out: “They are running up the down the escalator.”

The festive period is a crucial one for Britain’s big shopkeepers, who will routinely book as much as a quarter of their total sales in the run up to and just after Christmas.

We have been provided a preview of just how the retailers are faring by that bellwether John Lewis, which also owns the Waitrose grocery chain.

Down 0.3% year on year for the week ended December 16, the partnership’s sales were described as “less bad” than expected given they covered a week when the UK was in the grip of a cold snap and blanketed in snow.

The latest CBI distributive trades survey, however, revealed the sector was performing slightly below par.

Major chains to limp over the line

Retail guru Bubb believes the major chains will just about limp over the line after another tumultuous end to the year.

The worry is the rumour circulating that Marks & Spencer is ready start discounting before Christmas, which would be a massive sign of distress.

Marks will struggle to register growth in either clothing sales or food, according to Bubb.

First to report in the New Year will be Next, which updates the market on its performance on January 3.

The story will be a familiar one with the mainstream Next shops struggling and the Directory (its catalogue and online offering), picking up the slack, experts said.

Chief Simon Wolfson has already spoken about the “changing centre of gravity” in the industry towards the internet.

That threat from the internet to Next et al is unlikely to ease in the foreseeable future, according research by Liberum.

The City broker said online sales are now around £51bn, a figure that will hit almost £70bn by 2022, or almost 20% of total spend.

Consumers under pressure

But analysts expect retail bosses to be preoccupied by things other than the march of ASOS, Amazon et al as we move into 2018.

“The consumer is under pressure and wants to start saving for a rainy day and isn’t quite sure what is going to happen with Brexit,” said retail analyst Bubb.

“In London, the housing market is weakening as is the job market.”

And of course there is inflation, which is fine if you can pass on the price rises to shoppers, less so if you can’t. It leads to further margin pressure. 

Although the outlook is bleak, there are some potential winners. Discounters such as B&M, Games Workshop (on the coat tails of Game of Thrones) and WH Smith, an airport and train station concourse staple, should prosper, analysts said.

Food retail comeback

And the food retailers, who have been fighting a rearguard action against low cost rivals Aldi and Lidl, may make a comeback next year.

The CBI study showed the grocers holding up the sector, while the latest industry figures by Kantar Worldpanel suggested they had been able to pass on inflationary pressures to the consumer, unlike their mainline rivals.

Tesco appears to have been most successful at this. The heavyweight Goldman Sachs is a fan and earlier this month upgraded shares in the UK’s biggest retailer to ‘buy’.

“Scale and a superior cost savings programme mean we forecast Tesco can continue taking share from the big four, supporting like-for-like growth, while reinvesting cost savings at a lower level than in the first half of 2018,” Goldman said.

But while there will be some bright spots, ultimately Christmas is going to be pretty tricky for the majority of Britain’s shopkeepers.

“The big hope going into 2018 is that inflation starts to come down in the second half of the year,” said Bubb.

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