Will 2012 be a brighter year for UK retail?

Retail performance is always a favourite topic for journalists. Especially in January. Whether it’s the number of people shopping on the high street versus online orders, the best and worst sales or the latest victor in the grocery trade wars (incidentally it’s hard to say who shone more this year, Waitrose or Sainsbury’s); newspapers love to write copy on retail as the bellwether for the economic state of the nation.

January 2012 produced a mixed bag of headlines and results – with Tesco’s poor performance, and the (all too regular) quarter-end clutch of administrations (this time it’s the turn of La Senza, Peacocks and Hawkin’s Bazaar), one could be forgiven for thinking that the retail sector – and with it the British economy – is in tatters.

Now is not the time for despair, however. It will be a gradual process, but things are on the up. Inflation is abating, which means that the real wage deflation that hit consumers so hard in 2010/11 will flip back into wage growth in real terms this year, meaning consumers will have more pounds in their pockets. The majority of recent retail casualties have shared two main characteristics – too many High Street stores (and the operational leverage that they bring), and over-leveraged balance sheets. It was always going to be these businesses that were most exposed to a downturn and, as expected, they have been the first to topple.

Although it’s always sad to see casualties on the High Street, an increase in retailers closing their doors means that capacity is falling out of the market and competition is disappearing. Those retailers with stronger balance sheets and more flexible (multi-channel) business models can weather the storm and can enjoy a larger market share than before. Enter Waitrose and Primark, and etailers such as ASOS, Feel Unique and The Hut, all of which reported strong Q4 sales. Falling inflation will also serve to ease input price pressure that has squeezed margins so hard.

Even for those companies that did struggle during the Christmas season, mergers and partnerships can prove a lifeline. M&A activity always slows in tough times as, directors focus more on survival than on growth, but a company sale can provide a safe port in the storm for struggling retailers and can been an opportune time for acquirers to expand their market share. For example, JD Sports’ recent purchase of the struggling outdoor retailers, Black’s.

So, whilst we are not out of the woods yet, 2012 looks to be a much brighter year for retail than the last, no matter what you read in the headlines.

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