Graham Ruddick uncovers the vital challenges for the industry in 2013.
When Philip Clarke presented Tesco’s Christmas trading figures in the second week of 2012, his words went on to define the entire year for the retail industry.
The Tesco chief executive conceded that Christmas sales had been disappointing and was forced to issue the retailer’s first profits warning in more than 20 years. “This isn’t going to kill us,” said a visibly downbeat Clarke (Toronto: CKI.TO - news) . “It’s hard to take on the day, but it will make us stronger.”
Those contrite words from Britain’s biggest retailer, renowned for its bullishness, shocked the industry.
The fact that mighty Tesco could struggle during the vital pre-Christmas period sent alarm bells ringing and, sure enough, 2012 turned out to be a brutal year.
According to Deloitte, 194 retailers collapsed into administration during the year. Not only did this cost tens of thousands of jobs, but the high street lost some of its most famous names, including JJB Sports and Comet.
The legacy of last Christmas, and the difficult months that followed, will still be evident in the trading updates for the key 2012 festive season. Just as Clarke’s words a year ago defined 2012, the comments from retail CEOs over the next few days could set the tone for the next 12 months.
Some of the early signs are promising. Next (Other OTC: NXGPF - news) and John Lewis, the biggest retailers to have reported results so far, have suggested that sales rose compared with last year as consumers protected spending.
In the words of Next chief executive, Lord Wolfson, there was also “less panic discounting”. This was because most retailers, cautious about the challenges of last Christmas, cut the amount of stock they bought.
However, while Next and John Lewis are useful barometers for the high street, they are among its most resilient operators. Their success is unlikely to be replicated across the sector, particularly when, again in the words of Lord Wolfson, “the economy has not changed much”.
These are likely to provide the main themes of January 2013:
= The struggles of Morrisons =
If there is to be a repeat of Tesco’s shock profits warning in 2012, then it could be from Bradford-based Morrisons.
Analysts are forecasting that Britain’s fourth-largest supermarket could post a decline in like-for-like sales of as much as 2.8pc for the six weeks to January 1. Such a decline could lead to Dalton Philips, chief executive, warning that profits for the full-year will be below expectations.
The City is split over Morrisons. One camp believes the company is suffering from not having a presence in the fastest growing online and convenience-store sectors, but is at least on the right path with its focus on fresh food.
The rival camp believes the retailer is alienating its core northern customers by pushing up-market, rather than focusing on price. This criticism is characterised by its “misty vegetables” (chiller cabinets complete with moisture clouds) and cold meats hanging Italian-deli style. “I will never need lemongrass,” one irritated customer was reported as saying about the refurbishment of the stores.
Either way, Morrisons is under pressure and its update will be a marked contrast to last year, when it was one of the best performers at Christmas.
Philip Dorgan, an analyst at Panmure Gordon, said the company should “realign expectations” given the difficult trading it has suffered in the past six months. “While painful, we think that management needs to escape from death by a thousand cuts and take one big hit. Acknowledging that you have a problem is a big step towards solving the problem and it would then allow management to focus on putting things right, rather than fire-fighting to protect an unsustainable level of profit. This, after some delay, was the route that Tesco took,” he said.
= Tesco v Sainsbury’s =
If Morrisons is the new Tesco this Christmas, then it could take heart from the recovery beginning at Britain’s biggest retailer. Last year’s profit warning from Tesco forced Philip Clarke to launch a £1bn turnaround plan, involving hiring more staff, relaunching Tesco Value as Everyday Value and revamping stores with a greater focus on food.
The impact of this plan, and the weak comparative data from last year caused by the profits warning, mean that Tesco could outperform Sainsbury’s in terms of like-for-like sales for the first time in three years.
This month, therefore, could spark a new phase in the battle between the giant supermarket rivals.
Clive Black, analyst at Shore Capital, forecast sales growth of between 0.5pc and 1.25pc for both companies, but with Tesco ahead in food sales: “The big change year on year is that Tesco is not shipping out the volumes it was this time last year. Therefore, there was no free lunch for the opposition, something that we feel will have particularly taken the edge off Sainsbury’s performance.”
After 31 consecutive quarters of like-for-like growth for Sainsbury’s and chief executive Justin King, the London-based supermarket could be poised for one of its more disappointing quarters. Sales growth is almost certain to be well below the 1.9pc reported in the previous three months.
When the recession began, analysts predicted that Sainsbury’s would be squeezed by Tesco, Aldi and Lidl on one side, and Waitrose on the other.
King and his team have confounded those expectations, but there were signs that Sainsbury’s was under pressure in the run up to Christmas. For example, from December 27 to January 2 the company offered a 10p discount on a litre of fuel for customers who spent more than £60 in their stores which some said smacked of a last-minute measure to boost sales.
“There is no doubt we are winning a lot of customers out of Sainsbury’s,” said Mark Price, managing director of Waitrose, which enjoyed a 5.4pc rise in like-for-like sales over Christmas.
According to Dave McCarthy, analyst at Investec (LSE: INVP.L - news) , after stripping out inflation, new space that is still maturing in terms of adding sales, the internet, extensions and convenience, like-for-like sales in Sainsbury’s core stores could be down more than 4pc.
He added: “Sainsbury (LSE: SBRY.L - news) is suffering as it transitions sales from highly profitable large stores to less profitable convenience stores and the internet. This is part of the structural problem facing the industry and is one reason why industry returns and profits are falling.”
= Marks & Spencer in limbo =
As arguably the most famous British name on the high street and the country’s biggest fashion retailer, rumours have been swirling around in the industry about Marks & Spencer’s pre-Christmas performance. Did (KOSDAQ: 074130.KQ - news) it buy too much stock? Was it forced into heavily discounting?
The most bearish predictions are from Nomura, whose note on M&S sent shares in the 128-year-old company down 3pc on Friday. Analysts at the Japanese bank forecast that food sales will rise 0.5pc for M&S in its third quarter, but general merchandise sales, including clothing, will be down 3.5pc on a like-for-like basis.
Following a 4.3pc drop in general merchandise sales in the first half, this could increase the pressure on the chief executive, Marc Bolland. But the M&S boss has bought time by clearing out the clothing management team, bringing in the former Debenhams’ boss, Belinda Earl, as style director, and moving John Dixon from head of food to head of general merchandise.
Jean Roche, analyst at Panmure Gordon, is “warming” to M&S in anticipation of im-provements in its womenswear, which Bolland said will not be visible until the autumn. Meanwhile, Roche believes Christmas trading was challenging: “We are very cautious on margins given the broad swathes of discounting activity observed, online in particular, pre-Christmas.”
= The rise of online =
Online shopping reached new levels of importance for retailers at Christmas thanks to developing mobile phone technology and the widespread launch of click-and-collect.
Next says online now accounts for more than a quarter of its sales, while Kantar data show online fashion sales grew by 18pc in November, compared to 7pc in 2011.
Christine Cross, chief retail and consumer advisor to PricewaterhouseCoopers and a non-executive director at Next, said: “Christmas results are showing a robust performance for retailers with an online presence, but in particular those who could use their stores to leverage this through click and collect. This will be the Christmas defined as one where consumers became truly 'omnichannel’ and the winners responded to this need. Online has been the main non-food battleground.”
However, the rise of online sales is causing structural dilemmas. In non-food, these challenges are well documented, with retailers such as HMV, Argos and Dixons battling to adapt to the new world and survive. But in food, figures for this Christmas could also clearly demonstrate that the internet is sucking sales out of traditional stores, where margins are stronger.
So, while Morrisons may turn out to be the loser this Christmas in terms of sales, this may not necessarily be reflected in terms of profits.
Dave McCarthy at Investec said: “Tesco and Sainsbury’s are likely to report strong internet and convenience growth, but the more these grow, the more sales from large stores fall. We estimate that Tesco and Sainsbury’s have underlying 3pc to 5pc volume declines in core stores closer to Morrisons than first appears.
“The market may take solace from fewer openings, but the problem of blurred channels and excess capacity growth, including virtual capacity, is growing.”
That is true for all retailers.