How are British consumers feeling?
Terrible. Against a backdrop of plunging house prices, high-profile banking sector problems and a £1.4trn debt mountain, British consumer confidence is at its lowest point since 1990, according to the GfK NOP barometer. The willingness of British consumers to commit to a major purchase in the next 12 months is at its lowest point since records began in 1983. And the situation is only likely to get worse. Household bad debts could soon become a much more widespread problem, says Capital Economics, as the supply of credit continues to dry up. “Rising defaults are likely to make lenders more cautious about extending new credit, prolonging and even exacerbating the current tightening in credit conditions.” In short, less and less money will be available for spending in the shops.
So there are tougher times ahead for the high street?
It certainly looks that way. Those consumer confidence gauges and the state of the housing market are a good guide to what happens in the shops. Official retail sales data suggest that sales are still rising, but surveys from the likes of the CBI and the British Retail Consortium are more downbeat. If consumers finally crack, the current growth slowdown in household spending will move into the next phase – spending in the shops actually falling. Indeed, even without official sales falls, the high-street casualties have already started to appear. Nearly a dozen retailers have collapsed into administration since the turn of the year – including Dolcis, Ethel Austin, The Sleep Depot and Toyzone – and they won’t be the last. It’s not just the credit crunch – the internet is stealing business from the high street too. Web-based shopping boomed by 35% in 2007, according to retail analyst Verdict, while music and electrical goods retailers in particular are under pressure from the move online.
Why are so many shopping centres being built?
Very good question. Despite the grim outlook for the high street, there’s a big increase in retail space in the pipeline. Like most other property-related businesses, developers of retail property have enjoyed access to easy money and huge investor demand during the credit bubble of recent years. That has seen them embark on a building spree, which means a huge chunk of extra capacity is set to hit the market just as the downturn kicks in. Shopping centres equivalent to eight more Bluewaters – the north Kent mall, one of the largest in Europe – are due to open over the course of 2008 and 2009, reported The Times this week. The ball starts rolling with the Liverpool One development, which will contain a new John Lewis store and the largest Debenhams in Britain, followed by Bristol’s Cabot Circus and Westfield London.
Can’t these plans be shelved?
Unfortunately it’s not that easy. Some smaller developments, including regeneration schemes in Dumfries and Chester, have been postponed as the credit crunch takes its toll both on funding and the number of potential tenants. A £100m retail-led development in Hatfield has also been deferred because of the economic climate. But by and large, because they are so costly, take years of planning, and can take a decade or more to deliver the goods, once started the monster malls are almost impossible to stop. “They’re like oil tankers,” says Alistair Parker, head of development consultancy Cushman & Wakefield.
What will happen to all those spare shops?
Shopping malls make their money by letting as many units as possible to viable retail operations. The trouble is, adding loads more shops doesn’t magically multiply the number of customers. Nor do tenants suddenly become more financially secure, rather the opposite as their rent liabilities rise. So during the downturn, when spending hits the skids, the last thing retailers will be looking for is extra shopping space – if anything, they’ll be looking to cut back. And when both retailers and landlords, unable to cut their high fixed costs, find their revenues squeezed and profits crushed, lenders and shareholders could also begin to suffer.
Shopping centre fund Capital & Regional has just announced an emergency £286m rights issue to avoid breaking banking covenants. If the group succeeds in raising the cash, it should survive for another day. Others may not be so lucky. “The amount of space coming on is potentially massive and, with the trading conditions we have and the ongoing shift towards online, it’s going to mean more empty shops in market towns. More marginal sites will become unprofitable and more firms will go bust,” says Mark Hudson at PricewaterhouseCoopers. With the downturn just beginning, expect a lot more retailers – and perhaps one or two landlords – to shut up shop over the next couple of years.
Is it time to buy retail shares?
The FTSE 350 General Retail index has underperformed the wider market by more than 33% in the past year. But one once-bearish analyst reckons it’s time to buy. Graham Secker of Morgan Stanley has had a “big change” of heart. He says that in the last recession, retail’s relative performance bottomed out with consumer confidence. This “could easily happen in the next quarter, given the cacophony of bad news in the last few weeks.” Perhaps he’s right. But that news won’t end soon. We could be in for a long period of retail woe, bringing serious restructuring and consolidation. Investors in bid-for-firms could profit; any survivors will eventually prosper. The tough thing is knowing who that will be. We’d still avoid the sector for now.