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. “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.
On January 12, 2012 – which would become known among retailers as “Black
Thursday” – shares in Tesco collapsed by 16pc, J Sainsbury by 5.4pc, and Wm
Morrison by 6pc.
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 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”.
This week, a fuller picture will emerge when Morrisons, Sainsbury’s, Tesco,
Marks & Spencer and Deben-hams update the stock market on trading.
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, 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 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 it buy too much
stock? Was it forced into heavily discounting?
In reality, this week’s update is likely to be little different from M&S’s
interim results in November. The clothing division is struggling, but food
is growing.
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.
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