If you’re anything like me, you’ve swapped the January sales for Black Friday, the take-away menu drawer for an app, and the Sunday trip round the supermarket for a Tuesday evening chat with the delivery man. I couldn’t tell you the last time I pushed a wonky trolley.
Take a second to think about how your own spending habits have changed over the past few years. Your routines, preferences and the weight of your piggy bank all inform where you spend your money, how you do it and how much of it you hand over.
The retailers on the other end of the deal are part of our daily lives and, as you experience their business models and product lines first-hand, you might know more about the sector than you think. Chances are, if you have a trend in your own habits, there will be others out there with similar ones.
As an investor, if you can identify supply channels, spot technological change and keep your finger on the pulse of consumer tastes, retail can offer up some interesting opportunities.
What drives the sector?
On the face of it, the high street is a complex web of trends and counter trends. Whether we’re looking at supermarkets, clothes stores or pet shops, retailers are all exposed to changing consumer attitudes. But taste alone doesn’t get the tills ringing. For these businesses to grow, the overall economic environment needs to support consumer spending.
Rising real wages and low interest rates give consumers a few more pounds in their pockets for a night out or some retail therapy but the inverse is just as true. When wage growth is slow and the currency is weak, shoppers are forced to tighten their belts and rein in the discretionary spending. Rising rates also force us to think more carefully about our budgets, which can have a huge effect on business models based on indulgence rather than necessity.
What to keep an eye on
There’s always been a focus on what we’re buying and where we’re buying it from but now more than ever the important aspect is how we’re buying it.
The internet is reshaping the way we consume as well as the sales strategies used to lure us in. While new retailers can often set up capital-light propositions with little to no need for retail space (online shoppers need screens, not showrooms), existing businesses often have expansive store space to contend with - think business parks. New entrants can leapfrog the problems caused by trying to offload non-performing real estate and offer cheaper products or enhanced delivery service and quality after care instead.
Declines in footfall can really hurt traditional high street retailers who don’t have a functioning online alternative. It’s about identifying the companies willing and able to adapt rather than those caught in the headlights. A good example is the emergence of Black Friday forcing retailers to bring their new year sales forward - those who held off until January saw massive falls in sales, with profit warnings following soon after.
Beyond the obvious
Away from the headline retail names, it’s good to examine second-order investment opportunities in the space - those auxiliary companies set to benefit from the evolution of the sector. A world online has knock-on effects in the commercial property market. As demand for bulk storage and warehousing grows to satisfy online orders, what does this mean for real estate values?
Distribution and delivery comes in here too. It’s amazing how quickly we get used to next day delivery, and of course our heightened expectations mean a greater focus on efficient networks. Companies working with retailers to provide low cost, quick delivery and returns through their own delivery fleets add value to shoppers’ online experience.
Don’t forget to look under the bonnet to see what steps retailers are taking to evolve. Many clothing retailers are happier now to sell sub-brands or partner brands and concession stands are now more widely visible on the high street and in supermarkets - just a few ways to maximise floor space and reach a wider audience.
What’s a good way to invest in retail?
For investors looking for direct access to the sector, The FTSE 100 is home to some of the biggest names in British retail. Companies like Primark owner Associated British Foods, and Whitbread, owner of Premier Inn, sit alongside the likes of Next and Sainsbury’s.
For a diversified approach, a mutual fund could be a more suitable option.
The Majedie UK Equity Fund, part of the Fidelity Select 50, has both Tesco and Wm Morrison in its top holdings, for investors looking to invest where they shop. Online giant Amazon features in both the JPM US Select Fund and James Thomson’s Rathbone Global Opportunities Fund, for those with an eye on the growth of online sales.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.