During that time, very few of these warnings materialised (except in a couple of minor examples, where the way the company had been positioned was more to blame than the broader market) and generally companies continued to go from strength to strength.
Indeed, the retailers who had a specialist presence on the internet had an extremely successful Christmas in 2006. In fact, most found that the only factor preventing them from even greater profit was the inability to deliver the goods physically – a shortfall they are unlikely to repeat in the future.
Within the last few weeks, many of the retailers have been presenting trading updates or results, and each of them have asserted words to the effect that “we expect the remainder of the year to be challenging, particularly in light of a more difficult consumer environment”.
This time, things have changed somewhat – this time, they
may have a point.
The well reported (and as yet unresolved) fallout from the US sub prime crisis on equity markets has certainly shaken general confidence. The latest offshoot to the saga, in the form of the Northern Rock debacle, will have done little to bolster consumer confidence going forward. In addition, the latest economic figures being released in the UK tend to suggest that the previous interest rate rises have begun to take effect as discretionary spending on the High Street has begun to slow.
All of this could point towards a fairly bleak winter for the retailers, notwithstanding that Christmas would traditionally provide something of a fillip to their fortunes.
Or so it appeared. Then came the latest set of retail sales figures which painted a picture of the strongest growth since 2004. However, these numbers were flattered after a round of heavy price discounting by the retailers, at a time when margins are generally wafer thin in any event.
The jury therefore remains out on the economic picture – one set of figures alone does not reflect the entirety of the economy, and if only in terms of perception, there seems to be more evidence of a consumer flight away from profligacy.
One way in which the retailers are priming themselves to fight for any business available is by the continuing development of their online offerings.
In general, online retailers can be defined into three broad categories.
First of all, there are those whose strategy has become pure Internet. There are a number of examples of smaller, more specialised companies who have grown from the low barriers to entry from which an Internet start-up can benefit. In addition, the likes of Dixons (DSG International) announced last year that it would be abandoning its High Street presence in order to focus on “e-tailing”.
Probably the most obvious category is the second, whose constituents offer a mix of internet and physical delivery.
The “Clicks and Mortar” approach is one where the early adopters are piling the pressure on their rivals. The likes of Tesco, whose online arm took sales of nearly £1 billion in 2006, and Argos (Home Retail Group), whose “click and collect” scheme is a current favourite of consumers are topical examples. The “click and collect” scheme allows customers to buy goods online and then physically collect them in store.
The third category, oddly enough, are those companies who do not have an Internet capability at all. A 2007 Microsoft survey revealed that only 56 of the 100 largest UK retailers have a website which enables the online purchase of their goods. One can only assume that these (largely unreported) findings could yet have a large impact on the inexorable growth of online shopping.
It is probably no coincidence that of the six companies mentioned below, the top two have a significant online presence. Tesco, of course, has the additional advantage of geographical (and indeed product) diversification, and has been the darling of the sector for some time now.
The market consensus for these six companies is as follows – Tesco (strong buy), Next (strong buy), Marks and Spencer (buy), DSG International (hold), Morrisons Supermarkets (hold), and Sainsbury (weak hold).
If survival of the fittest ever applied to the retailers, the next few months could well be the acid test.
Richard J Hunter
Head of UK Equities
Hargreaves Lansdown Stockbrokers