Mince Pies Beat Cardigans As British Retail Gears Up For Another Christmas

Those who’ve either worked or invested in the British retail sector understand the importance of the last quarter of every year. Sales start surging from the end of September, online shoppers splurge during Black Friday, and thrifty shoppers hold on for a Boxing Day bonanza. All this culminates in a critical golden quarter for retailers.

In recent years, this competition during this quarter has intensified. A confluence of rising inflation, stagnant wages, aggressive discounting and a growing number of foreign retailers entering the British market have squeezed profits across the sector (Angela Monaghan, Julia Kollewe and Zoe Wood, The Guardian, 11 Jan 2018).

Last year was particularly bleak, with John Lewis Partners reporting a mediocre rise in sales but lower profits due to its ‘Never Knowingly Undersold’ promise. In the first half of this year, JLP reported a 99% plunge in profits, which makes this upcoming holiday season more critical than ever before (BBC, 13 September 2018).

Forecasts from Global Data Retail (November 8, 2018) suggest this year could be slightly better. Retail sales for the last three months of the year are expected to cross £98.8 billion. That’s 2% higher than last year. However, much of the growth is driven by inflation-adjusted food and groceries. Non-food spending is forecast to grow only 1.6%, driven mostly by beauty and health-related products.

With this in mind, investors have a better chance of picking losers and winners over this holiday season. Tesco (LSE:TSCO), the UK’s largest supermarket chain, beat the competition last year to report 3.4% growth in its food business. Group sales are already up 12.8% to £28.3 billion over the first half of the year,while underlying operating profit is up 24% to £933 million. The company’s "strategic alliance" with French retail giant Carrefour should help it keep costs low as it heads into the holiday season (BBC, 2 July 2018).

Similarly, Sainsbury’s (LON: SBRY) is using mergers and partnerships to survive the retail storm.The company’s merger with Argos managed to deliver a 8.2% surge in sales at the group’s convenience stores and a 7.3% sales boost online last year. A bigger merger with Asda, expected to complete next year, will have even bigger implications, cementing the brand’s position as one of the country’s largest and most successful retailers (Adam Leyland and Ian Quinn, The Grocer, 04 May 2018).

Finally, pure play online retailers like ASOS (LON:ASC) and boohoo (LON:BOO) are likely to be the biggest winners this Christmas given the incredible demand for their mix of discounts, quick service and convenient fulfilment.

With Brexit just months away and consumer confidence at record lows, this upcoming holiday season is especially critical. British retail is working its way through a transition period. Investors need to keep a close eye on the companies striking the right partnerships, cutting costs and modifying their business model to ensure their survival.

The value of investments and income from them may go down as well as up and you may not get back the original amount invested.

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