Retail sector feels heat of rising prices

Jul 18 2008 By Greig Cameron

Shoppers' faith likely to remain low as inflation keeps on soaring

In the current economic climate it might be hard to know where to begin when pinpointing difficult sectors to be in.

But retail has had a remarkably topsy turvy year from a flat Christmas to a surprisingly resilient spring and the recent gloomy trading updates from giants such as Marks and Spencer and John Lewis.

In Scotland, insolvencies of the Ossian Group, which owned Au Naturale and Internacionale, and Sound Control provide stark reminders of the problems on the high street.

Alan Flower, director in KPMG's restructuring practice and a specialist in helping businesses facing underperformance issues, highlights what has gone wrong and how the lessons learned can be useful for all industries.

He said: "The economy has hardly moved positively in recent months.

"Consumers' disposable income has been under attack from rising prices at the pumps, rising utility costs and even the interest rate cuts by the Bank of England have not fed their way through to the level of mortgage payments.

"The savings rate in the UK is at its lowest level for many years "With oil prices set to remain at record levels, and inflation of four per cent predicted by Mervyn King putting upward pressure on interest rates once again, consumer confidence is likely to remain low."

Yet despite pressures on consumer spending and plummeting confidence some retailers are still managing to perform well. Flower said: "During the first six months food has been the shining light in an otherwise sorry sector.

"A string of depressing stories have been emanating from retailers of clothing and footwear, furniture, floor coverings, electricals and larger homeware products.

"Currys, Dixons, Woolworths, Land of Leather and SCS have all been hitting the headlines for the wrong reasons.

"Although clothing drove the record growth in May as the good weather got us into new shorts and T-shirts, analysts are at best adopting a wait and see attitude as to whether this is the start of a recovery.

"At worst they simply see it as an unexplainable blip - the underlying economics factors are all still adverse.

"Looking at the clothing sector can perhaps give a few small clues as to who is doing well.

"It is the niche retailers, who are focussed on specific markets, which appear to be posting the good news.

"Compare this to the department stores, who continue to disappoint the market with falling share prices."

According to Flower the answer to getting through difficult trading periods can often lie in simple methods - for all types of businesses. He said: "No more than the fundamentals of good business practice need to be employed. Understand your business, and employ appropriate cost management practices to make the organisation mean, lean and in as good a shape as possible for the fight.

"Control the controllables. Employ best practice cash management techniques, though that is difficult for a lot of UK business which are slaves to the profit and loss account.

"Manage your stakeholders. Plan for the unexpected. Focus your resources into all these areas.

"The organisations that do this will come through the expected difficult market conditions in the best health ready to exploit the opportunities at the other side."