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Has Black Friday brightened the retail sector?

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Summary

Millions might have bagged bargains over the weekend but will it fuel bigger profits and benefit investors?

2 min read

Black Friday and Cyber Monday have brought retail back into the spotlight. UK shoppers are expected to spend over £2,000 each online alone this month and next, according to Adobe research.

But big sales aren’t as important as the big picture when it comes to investing. And with major stores struggling and technology taking over, we think retail needs more than a short-term spending spree to get back on track.

Look a little more deeply, however, and you’ll find there are sectors benefitting from the changing face of shopping.

 

Few opportunities in retail

Our analysis shows that retail presents few investment opportunities at the moment – and all the Black Fridays and Cyber Mondays in the world are unlikely to change that.

Richard Way, Coutts UK and European Equity Specialist, explains, “The retail sector is going through a huge period of transformation and will continue to do so for some time. We believe that makes it an unattractive sector for investing, at least for now.

“Just because a retailer may report large seasonal sales volumes, that doesn’t necessarily translate to profits. In many cases competitive pressures force retailers to offer significant discounts just to keep customers loyal, and not just over the Black Friday weekend.

“Promotional activity will continue well into January – good for attracting customers but not necessarily good for the bottom line.”

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“The retail sector is going through a huge period of transformation and will continue to do so for some time. We believe that makes it an unattractive sector for investing, at least for now.”
Richard Way, Coutts UK and European Equity Specialist

Three to watch: Technology, warehouses and luxury

At Coutts, we have hardly any investment in retail and what we do hold is concentrated on the luxury end of the market. But we invest in technology and commercial property, both of which benefit from shifting shopping habits.

Technology – a major disrupter for retail and a key theme of ours – continues to outperform the wider markets. It’s had its share of challenges this year as markets have become more bumpy, but the outlook remains positive. Such is its success, tech-based retailer Amazon and Apple both became $1 trillion companies earlier this year.

As for commercial property, our investments include some exposure to UK warehousing which supports changing consumer behaviour. Greater use of online shopping requires well-located distribution facilities to ensure demands are met for ever tighter delivery deadlines.

Our investment in luxury goods and services has also been working for us as these products generally continue to see resilient growth.

The Coutts Luxury Price Index, our bi-annual publication measuring inflation on high-end goods and services, is out on Wednesday. It will show, among other things, that luxury clothing prices are up more than 5% over the year to the end of October, with some brands raising prices by as much as 11%.

 

Disappointing sales figures

The latest UK retail sales figures disappointed, falling 0.5% in October according to the Office for National Statistics (ONS). For the three months to October, they were up only 0.4% – markedly slower than the 2.3% rise over the previous three months.

This could reflect some deferred spending ahead of the Black Friday buying bonanza and a seasonal shopping spree, but on the whole we still see consumers remaining cautious.

We’ve also seen an ever-lengthening list of major stores being forced to re-think their business models. Marks & Spencer, Debenhams, House of Fraser and Mothercare have all had to shut shops amid falling profits, while Toys R Us and Maplin are among those who went into administration this year.

Over the 12-month period to August, 28 retail companies stopped trading, affecting over 2,000 shops and 39,000 jobs, according to the Centre for Retail Research.

 

Logging on and shutting down – the challenges of retail

The big factors faced by retailers include the trend towards online shopping and squeezed incomes.

More and more people are clicking a mouse instead of hitting the high street to make a purchase. In January 2008 internet sales represented 5% of all retail sales in the UK, according to a House of Commons briefing paper. By August 2018 it was 18%.

The rise of online represents an opportunity for retailers as well as a risk though. After all, it can lead to lower overheads and more sales sorted faster. Stores that are successfully moving with the tide are doing well.

Meanwhile, the squeeze on real wages – as average earnings have been rising more slowly than prices – has led people to spend more carefully.

But this trend is changing. ONS data for the three months to September showed that average weekly earnings were 3.2% higher than the year before – the fastest rise in 10 years – compared to inflation of 2.4%. But the prospect of higher interest rates making mortgages and other loans more expensive continues to cast a cloud over household incomes.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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