By Adam Avigdori, co-manager of the BlackRock UK Income Fund
The pace of change in UK retail is unprecedented – and this has caught many off guard. It’s nearly all down to the internet, which has given consumers transparency regarding prices and products, and – most of all – convenience.
Consumers can now satisfy their immediate impulses at the lowest possible price. It is clear that a number of high-street giants have struggled to adapt their models quickly enough to the pace of change.
In our opinion, the fate of retailers is likely to come down to four factors:
- whether their product is replicable
- how it is priced
- the strength and relevance of their brand for consumers
- the service proposition
As these factors are connected, management teams need an effective strategy across all of these aspects to ensure future success. We think it is difficult to only compete on price in the hope that someone is not going to sell a product for cheaper – because eventually this is extremely likely to happen anyway.
The good news is that a number of companies have changed their business models to compete successfully. But in the age of Amazon and Primark, it is crucial to remain on the front foot. Whether you are a retailer at the luxury or value end of the market, there are challenges on both sides.
The luxury retailers have higher barriers to entry because they have historically enjoyed pricing power and hope to sustain it. But the consumer experience is imperative, given that visitors to these stores will not be looking for the lowest price, but will expect to receive excellent service.
Luxury brands are less affected by product transparency and more so by affordability, or rather the number of people across the world who can afford their high-end products. Likewise, these retailers must ensure their presence in countries where consumers are likely to buy their products.
On the value side, the likes of Poundland and Primark continue to play an important role on the high street. As consumers’ financial situation has improved, they are more willing to change their wardrobe, shop and enjoy leisure activities. There are more products in these areas than ever before and we have seen a proliferation of growth at the value end of the market as a result.
Primark has been at the forefront of this development. The company is able to take current trends and turn them around quickly on the high street, shortening lead times across the fashion industry.
One challenge high-street retailers face is having less flexibility than pure online retailers. For companies with products at a lower price point and gross margin, selling on the high street proves expensive due to the overheads.
The value side has a lot of interesting players in it, but is it a very fast-moving market with low barriers to entry. For this reason, we think it is dangerous to prescribe high multiples to these businesses as things can change incredibly quickly.
We don’t have any exposure at the value end of the market. If we were to invest, we would want to see a successful format on and off the high street, a management team with a solid track record, with a medium and long-term strategy in place to ensure the strength of the brand.
Much depends also on the macro environment. Ultimately, a retailer that is only present in the UK is going to struggle because the UK is a well-served and competitive market. If you can buy brands that are able to travel and establish an international presence, there is potential to make real money.
At the luxury end, we don’t like to see significant discrepancies in pricing around the world because this creates challenges. We also focus on the strength and relevance of the brand. After all, the intrinsic value of a luxury retailer is closely associated with its brand, so we need to understand how this is being managed.
The BlackRock UK Income fund has exposure to a luxury retailer, which is not listed in the UK and forms part of our allowance to invest in international stocks. The business has thought about how it will manage price points over the long term and there is a large family ownership, which hopefully means an alignment of interest with shareholders.
We continue to monitor opportunities across the whole of the UK retail sector, as the market tends to overreact to bad news. For example, some retailers that have good strategies in place are still penalised for having bad quarters.
In our view, UK retail is a sector of opportunity – just don’t forget to do your homework.
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