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01 August 2018

Eye of the storm: Retailers remain under pressure

FTSE General Retailers have issued double the number of profit warnings in the first half of 2018 as they did in the same period last year. In stark contrast, Amazon’s second-quarter results saw revenue jump by 39% and a nearly five-fold increase in year-on-year operating income, to close to USD$3bn, was achieved in the quarter.

High street retailers face a fight on multiple fronts, which is proving difficult to overcome. Firstly, UK wage growth has proved sluggish. Having recently overtaken inflation following a brief spurt in growth earlier this year, average annual pay growth has begun to pull back. This has held back consumer spending and means retailers are finding it incredibly difficult to pass on any price increases as shown by the number of summer sales currently underway.

Secondly, post-Brexit vote, we saw a big fall in the Pound. That meant that the next order of goods from abroad by retailers cost more in Pounds. Some had forward orders in place at the previous exchange rate, so this has taken some time to wash through, but we are now seeing import prices rise and inflating cost bases.

The third front on which the high street retailers find themselves battling is what can be described as the ‘Amazon effect’. Traditional high street retailers, encumbered with high rental costs and overcapacity, face fierce competition against online retailers which have none of the legacy physical cost bases, are lean, efficient, have been built to facilitate quick delivery into ever more fast-paced changes in consumer tastes and are therefore able to come in at a lower price point.

Given this backdrop, it is perhaps unsurprising, therefore, that almost a quarter of FTSE General Retailers issued profit warnings in the first half of this year. Pay growth is not expected to rise materially from here, given the uncertain backdrop that Brexit has provided, which will likely mean only a very slight uplift in real (inflation-adjusted) pay by the end of the year.

With savings rates at the lowest level since records began (1963), credit is left as the only way to see a material uplift in consumer spending. However, according to the Office for National Statistics, household debt levels are now at levels not seen since the 1980s. In fact, the £25bn of personal debt in the UK makes Britons net borrowers for the first time since 1988. Recently, just one of the major debt charities estimated that someone new contacts them every 51 seconds because they are unable to meet repayment demands and are in crisis.

Given the lack of respite in political uncertainty, and the likely effects on pay decisions and the Pound going forward, it is very difficult to not envisage these difficult conditions prevailing. It once again highlights the advantages of taking an active approach to your investment exposure, rather than tracking an index which leaves you exposed to perhaps unwanted sector risk in the current environment.

If you would like to discuss how we can help you with your investments and the suitability of our services, please call us on 0113 200 6560.

Eye of the storm: Retailers remain under pressure
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