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‘Weather is for wimps,” declared Stuart Rose, saviour of Marks & Spencer, last autumn.
We can sympathise with Mr Rose. He was referring to the tendency of companies (by no means just retailers) which fall on hard times to blame their ailing performance on the weather – be it too much rain (keeping customers at home), too much sun (keeping them outside) or just the wrong type of leaves on the track.
And given that M&S has just posted another reasonably solid set of results – suggesting that all the grim warnings in the press over the past few days have been down to some canny expectation-management by Rose and his team – you can see his point.
Even one of the wettest Junes on record failed to put much of a dent in the company’s sales – growth slowed from its recent pace, but was still better than many analysts had expected.
But the real threat to the retail sector isn’t the weather. The storm that’s heading the consumer’s way is manmade – and far more dangerous…
It’s not entirely fair to dismiss companies that blame poor performance on unseasonal conditions as inept whingers. The typical ice cream van is not going to be enjoying record profits this summer, for example.
Unquestionably, the weather does have an impact on retail sales. It’s just that in most cases, it’s not easy to pinpoint exactly what that impact is.
The British Retail Consortium reported that high street sales (stripping out new shops) were up 3% on last year, despite the soggy weather. DIY chains and garden centres unsurprisingly suffered. But this was more than compensated for by better-than-expected clothing sales and solid demand for home furnishings and other household goods.
It seems that wintry conditions have brought out the nesting instinct in consumers. They’ve also brought out the desire to lay down some fat for the winter – food producer Premier Foods, owner of brands including Hovis, Mr Kipling and Campbell’s Soup, said that the non-appearance of summer has boosted sales of its comfort foods, such as cakes and Bisto gravy granules.
Unfortunately, Premier has some other problems, which are related to the real threat facing retailers. The company is set to hike bread prices for the second time this year. The price of a basic loaf hit £1 this year, according to The Times, and now it’s set to go up again.
The price of wheat has been driven up by 53% since March last year, to £130 a tonne. While we’ve been hit by a deluge in the UK, one of the main factors driving up wheat prices has been a dearth of moisture in Australia, which has seen one of the worst droughts in its history.
Obviously Premier needs to hike prices to compensate – its profit margins are already smarting from the rising input costs. But of course, rising shop prices mean higher inflation – and that’s got the Bank of England worried.
One of the main reasons that the Bank has been hiking rates is because it fears that companies are planning to keep pushing through higher prices. If consumers see prices rising, they may demand higher wages to compensate, and that’s when inflation becomes entrenched. Higher wages mean higher costs for companies, which in turn means higher prices again.
The Bank can’t afford to let this happen. The base rate has already risen three times since the start of this year, and most analysts expect at least one more rise by the end of the year.
And it’s interest rate hikes that are the real threat to the retail sector. Housebuilders are already feeling the pain – upmarket home builder Bovis warned at the start of this week that visits to its properties had dropped off sharply in the past six weeks, down 20% on last year.
With consumers already in debt to the tune of more than £1.3 trillion – the highest ever – further rate rises will only squeeze disposable incomes harder. A weak housing market and weak consumer spending tend to go hand in hand – witness the slowdown of late 2004 and early 2005, also driven by rising interest rates.
So retailers shouldn’t worry about ‘watching the skies’ – it’s Threadneedle Street they should be keeping an eye on.
Turning to the wider markets…
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In London, the FTSE 100 ended yesterday 22 points higher, at 6,712. Sugar company Tate & Lyle topped the FTSE leaders with gains of over 4%, whilst it was also a good day for miners including Kazakhmys and Xstrata. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed almost flat, adding one point to end the day at 6,104. In Frankfurt, the DAX-30 was 29 points higher, at 8,077.
Across the Atlantic, the Dow Jones approached a new record close, having added 38 points to end the day at 13,649. The tech-heavy Nasdaq was 3 points higher, at 2,670. And the S&P 500 added one point to close at 1,531.
In Asia, profit-taking saw the Nikkei fall back from yesterday’s seven-year high to end the session at 18,252, a 9-point fall.
Crude oil was trading at $72.15 this morning, whilst Brent spot was at $77.04 in London.
Spot gold was down to $659.30 from $660.80 in New York late last night, and silver was steady at $12.72.
In the currency markets, the pound was at 2.0156 against the dollar and 1.4766 against the euro. And the dollar was at 0.7324 against the euro and 123.3 against the Japanese yen.
And in London this morning, shares in transport stock Arriva were up by as much as 8.4% after it was announced that the company has been awarded a £1bn cross-country rail franchise. Arriva will take over routes currently operated by Virgin and Central Trains.
And our two recommended articles for today…
How to tell where the market is headed
– If you really want to know where the markets are going, don’t pore over the Federal Reserve’s latest monetary policy statement. Instead, watch the 10yr Treasury. To find out why US government bonds are sending out some very interesting signals for contrarian investors, read:
How to tell where the market is headed
Why gold is fundamentally still good
– You may have expected the gold price to have jumped following recent trouble in the credit markets, but demand remains fairly light. Could the yellow metal have lost its safe haven status? For Adrian Ash’s insights into why gold’s fundamentals remain strong, despite recent events, see: Why gold is fundamentally still good