Food for thought - Bridgepoint Capital

UK RETAILSECTORWATCHWhat’s in store?According to some retailers, the glory daysof the High Street are well and truly over.But, for the discerning private equity buyer,there are still some good businesses outthere. Jonathan Prynn reportsRetailers are a sensitive bunch.Endlessly at the mercy of factors beyondtheir control, they seem to live and die bylast week’s sales figures. One bad week andthey fear imminent ruin. One awkwardChristmas and they predict a completecollapse in consumer confidence.Right now, however, the industry has alot to be sensitive about. As with anymarket, the sector is driven by the basiclaws of supply and demand. And in thecase of the High Street, the balance isshifting on both fronts.Hit by the doublewhammy of reduceddemand andincreased supply,there is a growingdivide betweenwinners and loserson the High StreetShoppers have not completely lostinterest in what the stores have to offerbut consumer demand has begun toslacken. Stock is unlikely to fly off theshelves this year in quite the same way as itdid in the first few months of 2004.16 THE POINTIn addition, there has been an explosionin retail capacity. This has intensifiedcompetition and driven down margins.“Millions of square feet have been addedto the retail space. Competition has forcedmany retailers to cut their prices by twopercentage points,” says Richard Hyman,chairman of Verdict Research.“Wages, rent and electricity have allrisen in the UK too, pushing retail costsup by an average of 4 per cent. What thatmeans is that some retailers are facing a 6per cent margin hit,” he adds.Certain retailers have found the newenvironment harder to live with thanothers. Iconic names such as Boots, Marks& Spencer and Sainsbury’s seemperennially to be in difficulty as their chiefexecutives struggle to regain customers’loyalty. Meanwhile, the British RetailConsortium, which speaks for thousandsof retailers, claims consumers are beingdriven away from the shops by fears aboutspiralling debt, pensions and a housingmarket crash.So where does that leave prospects forinvestment in the sector? Are the glorydays of retailing really coming to an end?Doom-mongers say yes, but some recentstatistics tell a different story. Last year,retail spending in Britain was a shadeunder £250 billion, or around £670 milliona day. Put another way, this was more thanthe entire economy of one of the UK’sbiggest trading partners, Holland.Nor can it be said that Britain’sobsession with shopping has completelyvanished. The extraordinary ‘sofa riot’ atthe opening of Ikea’s new Edmontonbranch in February may not have beenterribly attractive but it was a tellingindication of the central part thatshopping plays in Britain. The store had tobe closed to prevent severe injury or worseas shoppers rushed to claim bargains fromthe Swedish home store.Many commentators believe that theretail sector is undergoing some deepseatedstructural changes. Hit by thedouble whammy of reduced demand andincreased supply, there is a growing dividebetween winners and losers on the HighStreet. Spotting the winners is not madeeasier by the fact that many companies donot want to draw attention to themselvesby bragging of their success.“Take last Christmas,” says Hyman. “Onthe one hand you had companies like M&Swhich did badly and were keen to say howtough the environment was because ithelped to get them off the hook. At theother end of the spectrum you had Tescowhich had a fantastic season, but wantedto play it down because if they were seento be doing really well, people mightnotice and think they must have beenscrewing somebody.”Most economists predict that theoverall outlook is reasonable. Retailgrowth is still expected to reach at least 3.5