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Is the high street worth your money?

The lure of the UK high street is losing out to the popularity of online shopping. Is it still worth investing in?
January 22, 2016

The latest figures from the British Retail Consortium (BRC) show that the number of visitors to the UK high street was 2.2 per cent lower in December 2015 than a year earlier. That followed on from a comparable decline in November, and came despite heavy promotional activity in the run-up to Christmas, including the somewhat spurious US import - the Black Friday sale - which has traditionally followed Thanksgiving. Splitting these figures out in detail makes for even more telling reading. Footfall in retail park locations actually increased in both months, but shoppers chose to eschew the delights of UK high streets and shopping centres, which recorded a fall-away in footfall equivalent to 4 per cent and 2 per cent, respectively. That was the high street's sharpest decline since November 2014.

At face value, these figures don't paint a healthy picture of the UK high street. But according to the BRC, total year-on-year retail sales actually rose slightly in December. That begs the question: where are customers spending their money? The answer, in short, is online. It's hardly a new phenomenon for UK retailers, but the consumer switch to online retail becomes more entrenched with every passing sales season. The industry has been left fighting on two fronts for the past few years, but many traditional high-street vendors have already transitioned to an online offering to complement their existing businesses - and more are sure to follow.

The online figures are staggering compared with the high street. Online sales of non-food products in December were up 15.1 per cent from a year earlier; the rate of annual increase more than double that of the comparable period in 2014. December's performance was also ahead of both the average rates of increase for three-month and 12-month periods, suggesting that online sales are accelerating. BRC also estimates that one in every five pounds was spent online during December. How long before that figure moves into equilibrium is still cause for conjecture, but you would imagine that the horizon has drawn in appreciably.

 

Click-and-collect and Black Friday

The online side of retail shopping has been helped in the past year by the growing popularity of click-and-collect services. The concept of picking up goods in person, but at the customer's convenience, has grown so quickly that it has given rise to specialist collection-service companies, such as Doddle. Traditional bricks-and-mortar retailers have also committed to the system to encourage customers to shop online. That said, a number of retailers, including high-street stalwart John Lewis and Tesco (TSCO), are curtailing click-and-collect policies by setting minimum spend thresholds to keep distribution costs in check and margins robust - online retail, after all, is still essentially a work-in-progress.

 

 

But the convenience of online shopping isn't the only thing deterring shoppers from heading to the high street. Customers are browsing and researching goods online in search of the best price, particularly around heavy promotional periods such as Black Friday and the Boxing Day sales (which, ironically, actually start pre-Christmas these days). Black Friday was described as an "online phenomenon" in the UK last year as consumers chose to browse deals from the comfort of their own homes. Unlike the US, where the bonanza originated, Black Friday isn't a public holiday in the UK. Instead, customers are logging on from work rather than pounding the streets.

 

Some retailers that don't offer multichannel access to products also suffered at the hands of Black Friday. Discount retailers such as Poundland (PLND) and B&M European Value Retail (BM.) fared particularly badly. This shouldn't come as a huge surprise. Selling items for £1 or less doesn't offer much room for manoeuvre when sales time comes around.

Blame it on the weather

For traditional retailers, click-and-collect and widespread promotions still aren't luring customers back in to stores. One factor not to be dismissed is the ever-fickle UK weather. While some companies like using the weather as a scapegoat for volatile sales patterns, there's an element of truth for high-street retailers. Drastic weather, such as 2014's storms or 2012's unusual snowfall, can prevent shoppers from leaving the house. Last year, between September and December, temperatures remained unseasonably mild. This meant Autumn/Winter collections full of coats and thick sweaters lay motionless on clothing retailers' shelves. Middle-market retailer Next (NXT) fell victim to this over the festive period. While the weather in December was partly to blame for sluggish sales, management cited other issues, too. This included poor stock availability from October onwards, which hit its Directory revenue. Bosses also reckon the "online competitive environment is getting tougher as industry-wide service propositions catch up with the Next Directory".

 

Stalwarts remain in the game... for now

That said, it's not all doom and gloom. Some traditional high-street retailers are doing well, harnessing their growing online operation and keeping customers in stores, too. Baby supplies specialist Mothercare (MTC) reported a 4 per cent improvement in UK like-for-like sales recently, while online sales are up 12 per cent. Sporting goods retailer JD Sports Fashion (JD.) has been nothing short of a market darling of late. Christmas was a merry affair, with like-for-like sales up 10.6 per cent during the five weeks ended 2 January 2016. As a result, pre-tax profits for the full financial year are expected to outperform the existing market forecasts of £136m by around 10 per cent. JD Sports has been well-rewarded for keeping its eye on the ball; its share price has more than doubled in the past year. High-street stalwart Debenhams (DEB) also served investors a surprisingly good update at the beginning of the year. Like-for-like sales have grown a solid 3.5 per cent over the 19 weeks ended 9 January 2016 despite fewer price cuts. The retailer's performance was supported by planned stock reductions in line with the mild weather and record sales over the Christmas week.

Separate to this, it's also worth analysing the performance of grocery retailers. Overall, the picture from the Christmas trading period was not as bad as analysts had feared. Even beleaguered chain Morrison (MRW) reported a marginal improvement in like-for-like sales (excluding fuel) for the nine weeks ended 3 January 2016 - quite an achievement given the wider deflationary environment. This is likely to be down to the fact that superstores and retail parks based outside of city centres are faring better than traditional high-street stores. Much of this, in our opinion, is down to the 'death of browsing' or 'impulse spending', which was common when customers made trips to the high street and found themselves confronted with multiple options and temptations. That now happens from the comfort of customers' living rooms, leaving them savvier and less likely to splurge.

 

IC VIEW: The state of the UK high street is not pretty. But those invested in traditional bricks-and-mortar retailers don't face losing everything. Some retailers, even grocery chains, are proving they can weather the storm. From the parapet, it seems effective management coupled with tight cost control and strong willpower to avoid excessive discounting will help protect sales. Equally, a focus on online growth has to be a given in the modern age. As to what extent margins will hold up against the rising costs associated with distributing click-and-collect orders, well that remains to be seen.