Examining the contrasting fortunes of high street and online retailers.
The retail revolution
The news that Debenhams is to close all of its stores after trading for 242 years on the high street is the latest milestone in the transformation of the retail sector in the UK, but how should investors react to it?
The pandemic and accompanying lockdowns have already brought many changes, but its probably true to say that many of the changes we are seeing would likely have happened anyway at some point fairly soon. The pandemic simply brought them sooner rather than later. The rise of fast online fashion brands such as Boohoo and Asos, has been providing a growing headache for the main high street retailers for some years now and with that trend showing no signs of slowing down, the writing has been on the wall for some time.
Boohoo bought the Debenhams’ brand and alongside rival Asos, is now in the process of scooping up some of the many well-known brands owned by Philip Green’s failed high street giant Arcadia, including Topshop, Dorothy Perkins and Burtons. Both online retailers are looking to expand their product ranges and reach out to new customer groups beyond the younger, more fashion-conscious people it has mainly served until now. The level of ambition was revealed by Boohoo’s recent announcement that it wants to become the largest online marketplace for beauty, sport and homeware products, as well as fashion.
Given the rise in the importance of online clothing sales, the success of Primark, which sells purely through its stores, in recent years has been remarkable although the latest results from the chain, owned by Associated British Foods, clearly showed the damage inflicted by the lockdown with sales down 30%.
It has paid the price of not having the benefit of an online sales channel such as that operated very successfully by its rival Next. Some analysts doubt that Primark’s business model would work well online given the reliance on impulse purchases and high-volume sales. Fortunately for the company it has been shielded from the full impact of the pandemic by being part of a well-diversified conglomerate which has seen other parts of its business performing well.
However, investors should not run away with the idea that it is all doom and gloom on the high street. Some chains have benefited from being classed as “essential” during the pandemic which has enabled them to keep many of their stores open, while others have quickly re-orientated their efforts towards online sales. DIY specialist Kingfisher has done both. Its improved its speed and efficiency by ensuring that online orders are met by local stores rather than by a handful of distant warehouses which has impressed the market and further boosted the reputation of its CEO Thierry Garnier.
Pet care group Pets at Home was also classed as an essential business and has benefited from a surge in pet ownership during the lockdown. Sales in the third quarter rose 18%, continuing the momentum seen in recent years at the company. Sports fashion retailer JD Sports Fashion has geared up its online sales capacity over the past year and continued to make acquisitions in the US which give it access to new growth markets.
Trying to predict how high street retailers will perform when the restrictions come to an end is difficult given that consumer spending has been considerably affected by the fact that many are working from home and are unable to spend their money on other things such as holidays and meals out. However, we can be confident that online sales will continue to see steady growth in the coming years and while giants like Amazon will continue to provide competition in many areas there may still be good investment opportunities as other companies embrace the changes in consumer behavior and adapt their operations in order to benefit.
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