8 June 2017
Week in Brief: BUSINESS AND THE CITY
FASHIONING A NEW FUTURE: These are difficult times for fashion retailers, especially those dealing with the mass market. The old favourites are slowly slipping away – BHS, British Home Stores as was, the staple of many high streets for much of the second half of the twentieth century, has perhaps been the most high profile casualty of recent years. It was sold (for £1) by Philip Green’s group of companies to a new owner. That new ownership failed to make any impact on its ever diminishing customer support and lasted just over a year, the business sliding into bankruptcy, its pension scheme in major deficit, and its many store leases creating a problem for landlords who found themselves taking back premises that were of a size and presentation no longer attractive to potential new tenants. But BHS had been a troubled case for many years – Green bought it as a bargain believing that he could turn it round and fashion (pardon the pun) a modern business out of it, as he had done with Top Shop, formerly Burton. But, as we know, his magic did not work, and BHS is now a sad footnote to retailing history.
Green has made Top Shop a major success by that old Tesco policy of “piling it high and selling it cheap”. His shops are by conventional measures over stocked and over crowded, creating an air of excitement among its teenies and twenties customer base, a sort of disco for cheap clothing, in which the prices are so low that the average customer will leave not with one item but with bags full – all bought so cheaply that they may well be worn once and thrown away. Most stock is sourced from the Far East, made by fast manufacturing techniques, shipped in and put straight onto shopfloor racks, and then sold as fast to the customers. It looks a simple model but requires close attention to trends and shifts in customer taste; a late spring or a pop idol wearing the wrong thing can mean jettisoning a lot of stock. Top Shop has survived this; many of its rivals have not. The rise and fall of hip fashion chains would make a book (in several volumes). It would also be out of date before it even reached the shops…
Moving a little up market the customers may not be quite so fickle and (arguably) not so obsessed with what is in or out. But trading conditions can be equally hard. Marks and Spencer knows all about that, having spent more than twenty years in slow decline from being the nation’s favourite middle market clothes shop to become …a posh grocery store with a clothing shop tacked on. Well, not quite, but almost; numerous chief executives have failed to find a way to keep fashion customers enthused; many drifted away to Next, and to smaller but smarter chains such as Jacques Vert and Jaeger. But even they could not survive the treacherous shoals of shifting taste and price conscious shoppers. Both Jaeger and Jacques Vert went into administration last month (and Store Twenty One, a Top Shop rival, is currently fighting off administration) . All three are likely to survive, sold into new hopeful hands for nothing much, giving their shareholders a cold bath and enforcing discounts on their creditors and big rental concessions on their landlords. Jacques Vert is rumoured to be going to three Asian investors who say most of the outlets will survive, which include concessions in several department store chains, as will 1,500 jobs (out of the current 1,900 employees).
But there is no evidence that conditions will get any easier. Competition, including the increasing proportion of sales made on‑line, and ever more fickle customer tastes will continue to produce turmoil in retailing, which, like the clothes it sells, looks ever more like a throwaway business.
SHOPPERS TUCK IN: The Brits still lead the world in at least one thing – food shopping. Not only do we have one of the most competitive food supermarket arenas with at least eight national chains fighting for market share – ranging from the enormous (Tesco) to the quality (Waitrose) to the discounters (Aldi), nearly all of which are still expanding their network of shops and stores, we also have the biggest proportion of groceries bought on‑line. Recent data from Kantar Worldpanel which monitors spending in the grocery industry, says that we shop more frequently on‑line (15 times per year) and spend more – £65 a go – than any in other country when we do. In fact our average spend is higher than our average supermarket spend – though that reflects the large number of quick purchases, a trend which is increasing as we pop into our local mini supermarket for a quick ready meal or casual item.
BUILDERS TUCK IN: After a wobble in late 2015 and in 2016, construction activity in the UK is increasing again. This reflects more housing starts as residential buyers seem to have recovered confidence after the 2105 election and the 2016 Referendum (although it remains to be seen what effect the 2017 election will have) but also in the commercial sector. London office construction has slowed, reflecting a market where demand and supply seems to be more finely balanced, but new starts in the regions, especially in regional cities such as Manchester and Birmingham, are increasing; and shopping centre owners seem to be increasing spending on refurbishment and extensions. Indeed, such is the pace of recovery that builders are starting to see signs of bottlenecks in supply and a shortage of skilled workers – caused by the return of a number of skilled eastern European immigrants to their home countries, reflecting growing economies there and Brexit related concerns here.
BANKERS TUCK IN: The residential buy‑to‑let sector may be going into reverse as the changes in tax treatment of external debt make the economics less attractive to private owners, but some banks are still happy that the sector makes an attractive and low risk lending business. Metro Bank, one of the most successful challenger banks, has just bought a large mortgage loan book from Cerberus, a US investment firm, which has in the past been a buyer of such books. The book is of a face value of £597m, which will increase Metro Bank’s residential mortgage loan book to about £4.5bn. Over 92% of the book being bought is in buy‑to‑let mortgages.
FASHIONING A DIFFERENT FUTURE: Christopher Bailey, brought into Burberry in 2013 to turn around the faltering fashion business, but on a reward structure which has proved very controversial, recently announced he would give up the Chief Executive’s chair – to become Chief Designer. It is an unusual step but one that Mr Bailey said reflected his ambitions and his core talents. His move of offices will be softened by the vesting of the loyalty share bonus he received when he joined, which becomes his next month – and will give Mr Bailey shares worth around £10m. As the share price has risen a third in the last 18 months, shareholders may feel that his tenure has been worth it.
KEY MARKET INDICES:
(as at 6th June 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.66% (slight rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.05% (steady)
US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.77% (falling)
Currency Exchanges:
£/Euro: 1.15, £ steady
£/$: 1.29, £ steady
Euro/$: 1.12, € steady
Commodities:
Gold, oz: $1,293, modest rise
Aluminium, tonne: $1,892, slight fall
Copper, tonne: $5,540, slight fall
Iron Ore, tonne: $54.49, fall
Oil, Brent Crude barrel: $49.85 fall
Wheat, tonne: £141 fall
London Stock Exchange: FTSE 100: 7,540 (slight rise). FTSE Allshare: 4,116 (slight fall)
Briefly:
Our commodities basket seems to have ceased its slow upward movement and eased into a reverse, with further steep falls in iron ore, and with oil going below the US$50 level for the first time for several months. No sign of election jitters in the UK stock market – the FTSE100 was up, though the Allshare was slightly down.
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