How the Grinch stole retailers’ Christmas

UK retailers have struggled all year. Now even the most lucrative time of the year threatens to be spoilt for them.

UK retailers rue the day they first embraced Black Friday.

It all looked very good on paper, a holiday that’s all about shopping. What could retailers possibly have against that?

Eight years on from the UK’s first “Black Friday”, retailers have realised they should never have gone along with it.

Last month I wrote that, contrary to popular belief, these peak shopping days are bad for retailers. Black Friday and Cyber Monday are a curse in disguise.

It simply doesn’t make sense for stores to participate. Basically all they do is sell products at a discount when they probably would have sold them at full retail anyway.

It’s eating into retailers’ profits at a time when they are already struggling. Economic uncertainty and low consumer confidence have caused retailers to hand out big discounts in a desperate attempt to lure customers.

To no avail, it seems. Mike Ashley, owner of Sports Direct and House of Fraser, spoke of an “unbelievably bad” November, calling it “the worst on record”.

The Grinch has stolen retailers’ Christmas. Today investors dumped UK retail stocks after another retailer delivered bad news.

Annus horribilis

The UK retail sector is experiencing an annus horribilis.

In the first part of the year inflation still outpaced wage growth, which left consumers with little extra money to spend on clothes.

Then there was the long, hot summer that put a damper on retail sales. The heatwave torched sales as consumers delayed the purchase of autumn and winter clothes. Stores are now left with too many jumpers and coats.

As the hot weather started to fade, worries about Brexit hit the UK economy. Consumer confidence fell sharply as Brits feared the Brexit process was about to unravel.

Even in the traditionally lucrative festive season at the end of the year, retailers can’t catch a break. Investors are dumping UK retail shares after another retailer issued a profit warning.

After the year UK retailers have had, it shouldn’t come as a big shock that investors have lost patience with this sector.

Various department stores like Debenhams, House of Fraser, and Mark & Spencer find themselves on the brink. They’re forced to close a high number of stores to stay in business.

Department stores, once deemed the cathedrals of modern commerce, appear to be fighting a losing battle. Online competitors, which ship their goods from cheap warehouses, are no match for expensive high-street stores.

Analysts have been composing a swansong for bricks-and-mortar retailers all year long. If retailers can’t even bring out upbeat reports in the fourth quarter, they’re in real trouble.

What’s surprising about today’s retail stock selling parade is that a big online shopping business is leading the losses.

Asos is down 38% today after the online fashion retailer issued a profit warning. Online shopping rival Boohoo.com shares fell more than 14%. It’s a sign that not even online shopping companies can escape the retail slump.

“This goes against the script,” says Stephen Lienert, a credit analyst at Jefferies, in Bloomberg.

“It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today.”

The Asos profit warning sparked a sell-off as UK retail stocks got dumped across the board. At the time of writing Debenhams shares are down 9%, Next has lost 6%, and Marks & Spencer is trading 5% lower.

Catch-22

Retail is finding itself in the middle of a perfect storm.

Consumer confidence is very low due to high personal debt levels and economic uncertainty caused by Brexit.

At the same time competitors desperate for sales are dragging fellow retailers into a discounting war that reduces their profits even further.

Many column inches have been filled with eulogies for the high-street shop, which is threatening to go down on account of fierce online competition…

But the fact that Asos and Boohoo suffered the biggest losses today illustrates that the Grinch is set to spoil Christmas for physical and online retailers alike.

Asos is downgrading its profit expectations after a “significant downturn in November”. It shows that online retailers are also hit hard by a discounting race to the bottom.

Asos admits it has to “recalibrate” its expectations for the year as a result of the “high level of discounting and promotional activity” of rivals, which it sees itself forced to match.

Black Friday sales ensure that products leave their shelves at a discount when a decade ago shoppers paid full retail this time of year.

Shopping holidays have conditioned consumers to wait for deals, which is making it harder for retailers to sell their goods at full price during the festive period.

Retailers are stuck in a catch-22. Either they sell their goods at a discount and put their profit margins under pressure or they resist discounting and risk missing their sales targets.

Swedish clothing retailer H&M reported its fastest quarterly sales growth in three years but investors fear the growth stems too much from discounting.

Zara, on the other hand, decided against lowering its prices but its sales growth now falls short of its targets.

Black Friday is proving to be a Trojan Horse for retailers. What seemed to be a gift to the industry is now threatening to destroy it.

The Christmas period once was the most profitable time of the year for retailers. Now it’s turned into a long period of discounts that is hurting their margins.

The Grinch may forever have stolen retailers’ Christmas.

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