This article is taken from our FREE daily investment email Money Morning.
Every day, MoneyWeek’s executive editor John Stepek and guest contributors explain how current economic and political developments are affecting the markets and your wealth, and give you pointers on how you can profit.
.
In this week’s issue of MoneyWeek magazine
● Why real change is finally coming to Africa
● How the world’s wealthiest keep it in the family
● Don’t dismiss the Cape ratio
● Alliance’s reinvention pays off
● Buy warehouses, not Amazon
● Share tips of the week
We’re seeing a lot of headlines about a crisis on the UK high street at the moment.
Type the words “UK high street” into Google, and you’ll get a slew of grim headlines.
“More clouds gather over UK retail” is a headline from the FT’s website this morning. “6,000 shops close in tough year for UK’s high streets”, notes The Guardian. “UK retail High Street NIGHTMARE”, declares the Daily Star.
But I have to say, looking at the companies in trouble, the question is not: “How did this happen?”
It’s “why hasn’t this happened already?”
The brutally competitive world of the UK high street
Last year in the UK, reports The Guardian, nearly 6,000 shops shut, more than in any year since 2010. That’s according to a report for PricewaterhouseCoopers by the Local Data Company. Meanwhile, the first quarter of this year has been the hardest since the recession in 2009/10.
That all sounds pretty grim. And it’s certainly not good for the people involved in these companies.
However, while it’s easy to try to paint a “big picture” story of falling consumer confidence, weak wage growth, or Brexit, or a combination of all three, I’m not so sure that this makes a lot of sense.
Take a look at the list of out-and-out casualties. Toys R Us. Maplin. Multiyork (a furniture chain). Or the companies that are struggling: Mothercare (in talks with its bankers), Carpetright (shutting a quarter of its branches), New Look (restructuring).
There are no shockers on that list. Mothercare has been struggling for years, left behind by growing and more effective competition in its core market, as well as online rivals. It’s a similar story for Carpetright, compounded by the slowdown in UK housing transactions.
Put simply, these are companies that have either been struggling to keep up with the times; or chains that were loaded up with debt and flipped by private equity. Their problems should come as no surprise.
Retail is a brutally competitive business, particularly in a highly-developed consumer economy like Britain’s. If you can’t offer people what they want at a price they can afford, then someone else will come along and do it.
Over and above that, of course, you have the relentless structural changes going on. The rise of online shopping is the obvious one. Why spend your weekend traipsing around a grim out-of-town shopping centre when you can get what you need delivered to your doorstep?
There are just too many shops and restaurants
And then there’s the question of sheer overcapacity. How many fashion chains do you need? How many furniture shops have got what it takes to compete with the likes of Ikea or even John Lewis over the long term?
The perfect example of this is the upheaval in the “casual dining” sector. Restaurant chains of various stripes are having to downsize, shut various branches, or simply go to the wall. (My colleague Simon Wilson looked at this in MoneyWeek a few weeks ago.)
But how many middle-of-the-road pizza outlets does Britain need? Pizza Express created a smart template that a lot of restaurateurs then copied with varying degrees of success. As with any successful business model, a lot of copycat businesses sprang up.
As a result, you ended up with too much capacity, and by and large, when you look at the casualty list, the chains that are failing are those that simply were surplus to requirements – it’s as simple as that.
Does this mean that the UK economy has no problems? Not at all. Real wages need to rise more rapidly, and when that happens, it’s also likely to take a toll on the less competitive businesses. Rising interest rates are also going to make for a tougher environment.
But overall, the current “gloom” on the high street is a simple function of capitalism doing what it’s meant to do – winnowing out the companies that aren’t doing the job and enabling the resources to be recycled elsewhere.
If anything, this is a sign that we’re slowly getting back to something approaching “business as usual”. The overcapacity on the high street and rapid expansion that’s now coming back to haunt certain companies has almost certainly been part-driven by the zero interest-rate environment we’ve seen since the financial crisis.
It’s little wonder that short sellers are loading up on other vulnerable-looking companies. And if you were planning to invest in retail, you have to be extremely selective – a strong brand means very little if you can’t move with the times (Marks & Spencer is one key repeat offender here).
However, if you’re interested in profiting from the rise of online retail, my colleague Sarah Moore looks at one option in the latest issue of MoneyWeek magazine – and it doesn’t involve buying a single Amazon share. If you’re not already a subscriber, sign up here.