A crash in China. The Fed finally getting around to raising interest rates. An emerging markets collapse, or the ongoing rout in commodity prices triggering a wave of corporate, or even sovereign, defaults. They are all potential hazards up ahead for the markets. But in fact, the City has something far closer to home to worry about. Another collapse in the retailing industry.
On Monday, the fashion retailer French Connection, which not so long ago was one of the stars of the high street, reported another terrible set of figures. Losses widened to nearly £8m for the half year, compared to £3.9m a year earlier. Revenues were down more than 11% – a shocking performance. Not surprisingly, stores are being closed to try and turn that around. French Connection is far from alone. Austin Reed is closing more than 30 stores in the UK, and Jaeger is restructuring. And it is not just the traditional high street that is suffering. ‘Shed-land’ – the vast out-of-town shopping centres that now ring just about every city – is not looking any healthier. Morrisons is closing stores as its revenues remain under pressure. Argos has reported terrible results.
Tesco is shutting some of its Homeplus shops. B&Q is shrinking its number of outlets. Even Waitrose and the mighty John Lewis, everyone’s favourite company, are coming under pressure – its overall sales are now stagnant, only held up by online performance. Indeed, John Lewis is starting to look like the next Tesco – a decent retailer that overexpanded and paid the price for it.
There will surely be more trouble ahead. More supermarkets will close. WH Smith surely can’t defy gravity forever. Neither can Debenhams. Overall retail sales stalled in August, up by just 0.2% year-on-year. That is a terrible figure for an economy where high levels of immigration mean the population is growing strongly, employment is up, and where real wages are rising by a decent 3% a year. Whatever it is we are doing with our money, we are not spending it in the shops, and show no inclination to do so.
The retail industry was already facing a storm. The rise of internet shopping has received most coverage, and that has been part of the problem. We are using our phones more than ever to order everyday items, and initiatives such as Amazon’s same-day delivery in major cities are only going to accelerate that. But the web has been only one factor. Local councils have pushed up business rates (and car parking charges as well – meaning it is often cheaper to order online than park for two hours) to shockingly high levels as their budgets get squeezed.
Far too much retail space was opened up during the boom of the 1990s and 2000s – the amount of floor space created assumed growth in retail sales of 5% a year, not 0.2%. Deflation is likely to be back soon, with the fall in the oil price this year, and that makes it impossible to raise prices. And the decline in credit means we generally live within our means – not many people are hammering several credit cards in the local mall on a Saturday afternoon any more.
On top of all that, there is a fresh problem – George Osborne’s living wage. That will be set at £7.20 for the over-25s from next year. That will be fine for a few retailers. Ikea has already said it will pay the slightly higher living wages that campaign groups argue for, and so has Lidl. But those are chains that are doing well. Thecompanies that are struggling are going to find it a lot harder. Retail is the industry, along with hospitality, where most of those really low-paid jobs are located. It may well be the final nail in the coffin of some businesses.
The net result? Retailers are nothing if not optimistic and they will throw everything into the Christmas season. That is when most of them make the bulk of their money. But if we all decide to buy our presents online, then it seems inevitable that there will be some bankruptcies and closures. And that will be against the backdrop of a basically solid economy, with rising employment and strong wage growth (and, of course, interest rates close to zero as well). When the economy turns down, as it certainly will one day, then retailing will be in really serious trouble.
With the possible exceptions of the few companies that have perfected the art of selling at rock-bottom prices – Primark, Poundland, Aldi, Lidl and Ikea – it is hard to think of a single player that looks in good shape, or that will necessarily be around in 20 years’ time.
That matters to the City. Retail is still a big part of the FTSE and even more of the FTSE 250. The quoted property companies have invested huge sums in retail parks, but if there are no tenants, then rents are going to fall, and their cash flow is going to get squeezed. And the banks, which are still not in great shape, have massive exposure to the retailers and even more to the property companies that rely on them for their revenue. We have read a lot about the crisis on the high street over the last few years – but the harsh reality is that it is only just getting started. There is a lot more pain ahead – for retailers, and for investors as well.