Business rates keep rising. The online giants keep on expanding. The living wage has pushed up staff costs in what remains a labour-intensive industry, and consumers who have already maxed out their credit cards don’t have much money to spend. The assertion that the retail industry is in terminal decline is made endlessly, and more shops are closing all the time. In anticipation of a possibly fatal Christmas, the short-sellers and hedge funds are already circling the sector in anticipation of more carnage ahead.
But hold on. Of course retailing has had a terrible few years, and it may never claw its way back to its glory days. But everything touches bottom eventually. In truth, there may be some glimmers of hope ahead. There will always be some things that need to be bought in a shop; the government may be willing to offer the industry a lifeline; the online giants are bringing some of their cash and creativity to the malls and high street; and the very best retailers are inventing their own internet brands. It may be time for smart investors to pick up a few retail shares.
Christmas is the time when the retail industry makes the bulk of its profits but this year is likely to be grim. The daily list of the most-shorted shares published on the ShortTracker website — a ghoulish feast of information on the most hated companies on the London market — is filled with familiar names such as Marks & Spencer and Pets At Home. Department stores look in big trouble, and many of the specialist chains may not be far behind.
With spending likely to be tight ahead of our departure from the EU, and with online retailers ruthlessly cutting into the market, there is little chance that the festive season will keep the cash tills ringing merrily enough to restore any of those companies to health. Early January has turned into the traditional month for retailers to throw in the towel and there is no reason to think this year will be any different.
Against that backdrop, it might seem crazy to argue that there is hope for the sector. And yet, it also seems unlikely that such a huge part of the economy is ever going to be completely wiped out. It is just possible that the sector is now so cheap that there may be some value for investors and that traditional retailing is finished. Here’s why.
First, there will always be some market for buying things in shops. Online fashion retailers such as Asos have made remarkable progress in persuading people they can buy their clothes online (although its own shares have fallen from 7,000p at the beginning of this year to less than 5,000p today). Even so, the ability to try things on is still a trump card for physical shops. Likewise, convenience stores are still a huge industry, and many of us still want to look at new TVs before we buy them.
Next, the government is clearly worried about what remains one of the country’s biggest employers. More than three million people work in retailing. Local councils rely on the rates they collect from the sector to fund local services, and the shops are the lifeblood of most communities. It would be recklessly irresponsible simply to let the industry die, especially when so many of its problems are caused by punitive taxes and rising minimum wages. The retailers can expect more help — possibly in the form of lower business rates — especially now that the government has more money to spend again.
Thirdly, the online giants such as Apple, Amazon and now Google are moving into physical retailing in a big way. Apple has already created some of the most successful shops in the world to showcase its products. Amazon has launched bookshops, acquired the US supermarket chain Whole Foods and started cashier-free convenience stores. Google is setting up its own retail outlets. The most successful companies in the world clearly think physical shops have a future. They are bringing new ideas, new energy and lots of money to their retail launches — and that is going to revitalise the whole sector.
Finally, the best high street retailers are creating powerful online brands, and re-inventing their shops as experiences. Plenty of retailers are starting to create web offers that are among the best in the world, and turning their shops into experiences that can’t be replicated online. Chains such as Lush stage parties that are perfect for 12-year-old girls. People still want to get out and do stuff. They don’t want to spend their lives on their phones, even if it sometimes appears that way.
On Wall Street, there are already some signs that investors have started to notice. Amazon’s shares have been sliding for the past couple of months — down from $2,000 at the end of the summer to $1,500 now. At the same time, some of the retail chains have been performing well: the ProShares Bricks and Mortar index — which tracks the performance of US retailers who earn the majority of their revenue in physical stores — is up 16 per cent since it was launched in June last year. For the first time in years, traditional retailers have been holding their own and even outperforming their online competitors.
So where might the value lie? Next has a formidable online operation as well as its high street chain. Game has a fantastic niche in technology. Fashion chains such as Ted Baker have a strong global following. Tesco is recovering fast. M&S may easily become a takeover target.
True, this Christmas will probably be grim. But in January, investors should pick up some shares — they will be even better value that the stuff in the sales.