Ainslie McLennan looks at the challenges facing the UK's retail sector against a backdrop of changing consumer behaviour.
Consumer behaviour is changing rapidly, with a clear shift away from the high street towards online sales. Some businesses have responded well to this change but others have fallen victim to the high street's decline, as shown by the increase in retail administrations of 15 per cent year-on-year in the first quarter of 2012.
On the positive side, strong retail performers include luxury brands such as LVMH, Mulberry and Hugo Boss, helped by their London exposure, where sales are rising sharply given the growing presence of wealthy Russian and Chinese tourists.
Outperformance has also occurred within the discount market as consumers are still driven by value. H&M reported total UK sales growth of 21 per cent over the three months to 29 February 2012.
It would be unfair to completely ridicule the middle segment of the market, which tends to suffer as it cannot be linked directly to price or quality. Next continues to weather the UK retail storm and other retailers that are neither luxury or value, such as the Ted Baker or White Stuff clothing brands, continue to perform.
In challenging conditions, retailers need impactful marketing and a strong brand identity to outperform, but many get lost among their competitors. For example, Argos suffers from strong competition from two main sources that are rapidly expanding – supermarkets and internet rivals such as Amazon.
The identification of strong towns and positive demographics remains key when investors are searching for good UK retail property assets. The issue of polarisation continues, with strong locations getting stronger and weak areas no longer viable as retail destinations. With low levels of speculative development taking place within the UK, many retailers cannot find prime space to expand, which continues to put a premium on the strongest locations.
Central London excels, with the West End's retail availability currently at the lowest point we have seen in a decade and demand from international and luxury players setting strong rents. Outer London and the South East are also in a stronger position than many other parts of the country.
The high street's future
The 'Mary Portas debate' about what will happen to many of Britain's high streets remains unanswered. Retailers need fewer stores, and we will continue to see store consolidation, but retail warehousing outlets remain important. They enable click and collect – buying online and going to a store to collect – and also build awareness of a brand for consumers. Arguably, this is why John Lewis' strongest internet sales take place within a 40-minute radius of its department stores. Retailers want to create a perfect multi-channel approach to shopping.
Staff in Aurora and AllSaints fashion stores can often be found equipped with iPads to help customers who cannot find their item in store, to order it online instantly and get it delivered to the store or at home.
Resilient retailers will continue to invest heavily in their online and mobile phone technology, but will also complement this with a strong store portfolio in attractive locations.
The value of an investment and the income from it may fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
Nothing in this article should be construed as advice. It is not a recommendation to sell or purchase any investment.