Walking on the retail volcano

Robert Peston, the BBC’s Business Editor and, judging from his output, a man who never sleeps, has written an interesting piece about the retail recession, which draws on ITEM/EY’s gloomy prognosis of ten fallow years, published a couple of days ago.

Peston’s argument is that the initial financial crash in 2008 caused a few high-profile retail failures (Woolworth etc), but that increases in benefits and tax credits kept households afloat through 2009-10.  All this is now changing, however, as real income falls, inflation rises, the job market tightens, and state payments decrease.  The high street has been through pain, but not real suffering – that is yet to come.

There is certainly no shortage of news on the high street.  Peston’s Premise is borne out by the final collapse of Focus DIY – although there is some good news is that many of its stores are being taken over by more robust competitors.  But companies and brands that aren’t best in sector, and that aren’t the consumer’s first choice, are going to strggle in the years ahead (notwithstanding the inevitable consumer pump-priming that will precede the next election in 2015).  Look at the angst in the electricals sector – Kesa/Comet, DSG and Best Buy all have “issues”, and all are being steadily eroded by their online competitors.  Changes will come.

Elsewhere on the rumbling volcano there are “Icarus” brands, who have experienced massive growth but who are now attracting questions.  Superdry is under the analysts’ microscope, and no surprise, as its huge sales growth has been driven by a breathtaking store roll-out programme.  It’s one of those odd brands, however – like Fat Face, it sells youthful clothes for older people, and the brand is now too ubiquitous to appeal to the genuinely trendy teens and twenties.  I was in St Ives last month, and Superdry had one of the largest retail footprints in the town.  Customers, however, were uniformly in their 30s and 40s, and these are the people whose wallets will be squeezed over the next couple of years.  Building your business on a high level of store openings, trusting that central costs can be mitigated and growth assured, is not a great strategy – I know that from experience, and so do those behind Warner Bros Studio Stores, Dillons, Big W… etc etc.

If we’re going to have tough times ahead, consumers are going to be looking for value, but they’re going to want retailers they can rely on as well.  We’ve moved on from the low-price fixation that benefited Primark so hugely (though pound shops etc will continue to prosper).  The public now wants longer-term value – eg clothes they can wear more than once.  They’re looking for reliability, quality in manufacture, and they’re looking for retailers and products they can trust.

This middle-ground is epitomised by John Lewis, M&S and Next – brands that will never be too exciting, but that have the value/quality/price proposition in balance.  These companies are also viewed as being good corporate citizens – they play by the rules, they look after their staff, they pay their taxes.  I think this last item is going to become a hotter issue in the months ahead – the lava is warming up, ready to break through the crust.  There is a nice, long-running journalistic thread to be built out of companies that avoid UK taxes (note, avoid, not evade).  If “we’re all in this together”, then Boots will have to prove that they are playing the role that the public expects; but as a PE investment, there is inevitably the risk of conflict with their investors’ goals.  This could be profoundly damaging for Boots’ 150-year old credibility and trust – fairly or otherwise.

So, Rip-Off Britain could be back, but this time it’ll be about ripping off all of us (the “Big Society” – is anyone still talking about that?), rather than the individual consumer.  This sort of headline sets the tone – and it’s in the quality press.

Gerald Ratner was on the TV last night, the only company boss so far to have the guts to speak for himself on Evan Davis’s clattery but compelling Business Nightmares show.  20 years on, he is still understandably bemused by the scope of his fall from grace – to have your family name turned into a noun synonymous with “cock-up” is hard to live down.  Ratner today is honest and engaging; the point was made that his price-slashing showmanship was ideal for the go-go 80s, and completely wrong for the more austere early 90s.  As the public mood entrenches and the true cost of the banking crisis comes home to households across the country, other retailers need to take care as they pick their way across the volcano.

Luckily, however, everything is going to be alright, as Mary Portas has been appointed to to carry out a government-backed review aimed at halting the “decline of the High Street” in England.  This looks horribly like an Alan Sugar-type “eye-catching initiative” – doesn’t Stuart Rose have time on his hands at the moment? – and I hope that the review concentrates on accessibility, occupancy costs and online impact, rather than picking up on the horror show aspects of Portas’s C4 series.  The good news is that the problem has been recognised by the government – let us hope that the celeb approach can do some good this time around.