What we’ve learnt from 2010

1. Private equity loves specialist retailers

Most of the corporate activity in retail this year centred on specialist retailers with private equity making a strong return to the market.

The landmark deal was the sale of Pets at Home, which was bought for £955m after a fierce bidding war in January. Its price increased from £700m to the final valuation of £955m after a strong Christmas. In the end, Kohlberg Kravis Roberts added the retailer to its portfolio, which includes Boots and Toys R Us, and in March the private equity house installed former Asda chief executive Tony DeNunzio as non-executive chairman.

Pets at Home set the tone for the year and specialist businesses continued to be snapped up as the year went on. Two deals took place in April - arts and crafts store HobbyCraft went to Bridgepoint Capital for about £100m, while sofa retailer DFS went for £500m to Advent International. Founder Lord Kirkham managed to increase interest in the sale after insisting weeks beforehand that he wouldn’t be selling the business. He completed on the phone at the North Pole while on a trip with Iceland founder Malcolm Walker. The subsequent image of the two snow-gear-clad retail entrepreneurs - standing triumphantly by their Arctic Circle flag - made for one of the most memorable photographs of Retail Week’s year.

In May, another specialist retailer - this time discounter Poundland - went for £200m to Warburg Pincus. Card Factory and Cath Kidston were also sold, typifying the type of retailers that were held in favour.

The one exception to the private equity trend was the unique sale of Harrods, which provided the business pages with one of their more striking stories of the year.

Seemingly out of nowhere in April, and after 25 years of sitting at the helm of the department store, Mohamed Al Fayed sold the business for a reported £1.5bn to Qatar Holdings, the sovereign wealth fund of the Qatari royal family. The country’s prime minister is now its chairman - making 2010 the year Qatar got control of both Harrods and landed the 2022 World Cup.

2. The UK shopper is a resilient creature

2010 was supposed to be a difficult year economically - and while in many ways it was challenging, spending pretty much managed to hold up. The general election temporarily spooked shoppers, with the hung parliament and resulting coalition a far cry from the jubilant scenes which greeted Tony Blair’s new government more than 10 years before.

This was swiftly followed by an emergency Budget that was heavy with cuts and included a VAT rise that will come into effect on January 4. Not only that, but up to 500,000 job cuts were announced across the public sector in October, leading to further fears that the recovery would lose all momentum.

But despite every indicator pointing to what should be a downward pressure on sales, spending generally held up pretty well and there were no major disasters. There’s no guarantee that things won’t go wrong next year - it does promise to be difficult - but 2010’s consumer resilience does inspire some confidence.

The spirit of optimism has been helped by pronouncements from some big names, including Next chief executive Lord Wolfson, who said in

September he doesn’t expect a double-dip recession or a “meltdown in consumer spending”. His positive comments were backed up by both Sainsbury’s boss Justin King and Tesco chief Sir Terry Leahy, who agreed in October that consumer confidence is showing signs of returning andshoppers were starting to “treat themselves” again.

Some sectors performed better than others - there will be continuing concern for retailers selling big-ticket items like furniture, with consumers potentially tempted to continue putting larger purchases off as the VAT rise hits. But few retailers failed this year, and the hope is that this will carry on into next.

3. Clarke is a handy name to have in retail

OK, so you don’t have to be called Clarke to be appointed to run a major UK supermarket. In January, Retail Week exclusively broke the news that the largely unknown Dalton Philips, then chief operating officer at Canadian grocer Loblaws, was joining Morrisons as chief executive to replace Marc Bolland who took up his new role as chief executive of Marks & Spencer in May.

But while new faces were expected at both Morrisons and M&S this year, there were surprise changes at the top of the UK’s two biggest supermarkets. The first was in April, when Andy Bond announced he was stepping down as chief executive of Asda.

His replacement came from within Asda in the shape of chief operating officer Andy Clarke. It was a baptism of fire for Clarke though, as his first few months in the hot-seat coincided with a marked downturn in Asda’s fortunes, which Clarke attributed in part to the quality of its product. The ship appears to have been steadied with the launch of Asda’s Chosen by You range, but next year Clarke faces the challenge of integrating Netto into the business.

The shock of Bond’s departure was nothing compared with the surprise news of Sir Terry Leahy’s retirement, which was announced in June. The most successful UK retailer of his generation, Leahy built the modern Tesco with the development of Clubcard, its international business, its move into non-food and its Finest and Value sub-brands.

When it came to his replacement, Tesco also turned to an internal candidate called Clarke, in this case international director Philip. The succession was pure Tesco - Clarke has been at Tesco 36 years, starting in the stores, and like Leahy is an understated Liverpudlian.

Leahy will certainly be a hard act to follow and Clarke’s direct style is in contrast to his thoughtful predecessor. But he will benefit from a stable board and inherit a dominant position in UK retailing. His challenge will be to keep it there, while growing profitably overseas.

4. It’s about value, not price

For a while it was discount retailers that reigned on the British high street, with stores like Aldi and Lidl raking up grocery market share and Primark storming into the fashion sector. But in the last year, the focus has swung from pure price to quality and value. John Lewis and Waitrose have been this year’s success stories, and low-price shops have had to battle to stay relevant. Aldi in particular had a spectacular fall from grace, going from a £88.9m profit in the UK in 2008 to losing £54m last year. The German retailer wasn’t the only one to encounter problems - Asda’s market share continued to decline with its new chief executive Andy Clarke even admitting in August that its food offer needs to improve, while New Look failed in its second attempt to float on the stock market.

While some low-price stores have been struggling, those higher up the price ladder but still perceived as offering value have done well. Sainsbury’s, John Lewis, Waitrose and Selfridges, for instance, have all enjoyed very strong sales this year. Primark, though, remained the standout discount retailer. It continues to report soaring sales and profits, proving it’s certainly not a bad thing to be cheap as long as you’re the best at what you do - which is in Primark’s case providing consistently on-trend clothing.

But throughout the industry Sir Stuart Rose’s catchphrase of “value is a function of price times quality” seemed to ring true. Customers didn’t mind spending a bit extra as long as they got good quality in return, and it was the retailers that were able to take advantage of this that did well in 2010.

5. It was the year multichannel came of age

It’s been talked about for years, but 2010 was the year that multichannel really started to take off. Of course, retailers such as Tesco, John Lewis and Argos had all embraced it before now, but this was the year an increasing number of the major retailers started to invest more time and energy into it.

The giants of pure-play etailing had another good year - in fashion, Asos posted more phenomenal results fuelled by strong international growth and Amazon continued to perform well. But this year, the well-established retailers woke up and really started to understand the potential of multichannel retail. They started making the most of their stores and brands to boost their portfolios and to realise the advantages a multichannel offer can give them. It has even started to impact retailers’ use of property - Retail Week revealed Halfords would reduce selling space by 10% to 15% this year after multichannel sales grew 60%, and it has just made its mobile site transactional.

The trend was evident everywhere - in his strategy announcement in October, M&S’s new chief executive Marc Bolland revealed his intentions for the retail bellwether to become the UK’s biggest multichannel retailer. John Lewis’ strong performance this year was driven by its online offering, with sales on JohnLewis.com rising 30% in the period to August 28.

The department store also extended its ‘Never knowingly undersold’ principle to its online channel, indicating how crucial its online business will be to the company in the future. There may be a long way to go, but 2010 was the year retail started to take multichannel seriously.

6. The world might be shrinking but it’s still a really big place

UK retail is more cosmopolitan and internationally focused than it used to be and the best global retailers are prospering - Apple is thriving and Hollister is doing well - but it’s still a competitive market and there are still problems surrounding the restrictive planning system and high rents. And lest UK retailers think they’ll have it easy, there were plenty of challenges for home-grown retailers in international markets as well.

There were some big moves in 2010 - it was the year American electronics giant Best Buy came to the UK, which was expected to be a threat to both Dixons and Comet. But progress so far has been slower than expected. The retailer has opened six stores and is still ambitious, but it’s been a much tougher start in the UK than many expected it to be. The jury remains out and Retail Week’s revelation of the launch chief Paul Antoniadis’s departure did nothing to quell concerns that all wasn’t going to plan.

UK retailers can’t get too smug though, with many British companies finding international markets tough this year. Tesco’s Fresh and Easy stores found America notoriously hard, Kingfisher is finding China tough, and it was lower than anticipated international growth that led in part to New Look’s IPO failing.

There are also wider global challenges facing all retailers, especially in fashion. These include the costs of raw materials like cotton and the rising price of labour. Retailers might want the fledging Chinese consumer to fuel their international growth - but it’s the resultant boost in wages that is increasing their costs. 2010 taught us that the global markets work in lots of different ways, and they’re not always helpful.

7. The City either loves you or hates you

There were both successes and failures in the City for retail this year. New Look was forced to postpone its IPO in February amid difficult market conditions - the second time the value fashion retailer has abandoned a flotation attempt. Chief executive Carl McPhail put it down to bad timing - and it’s true the market was volatile at the time - but investors were also put off by everything from its £1bn debt - and its controversial payment

in-kind notes in particular - to its less impressive than expected international performance. It also suffered from a degree of anti-private equity sentiment in the City at the time, with investors suspicious of private equity exits.

Online grocery retailer Ocado did manage to go through with its IPO, but had to reduce its share price from 180p to 200p to do so after prevailing sentiment in the City labelled its original price of 200p to 275p as too ambitious. The retailer’s lack of profit before flotation put investors off, and it has struggled to convince them since then. Despite sales growth of 30% this year and plans for expansion, shares fell as low as 142p in September. Amid the difficulties this year, however, the online grocer is planning for further growth and expects to make a profit in 2011.

It wasn’t all bad news though. One of the most phenomenal stories of the year has been the successful float of fashion retailer SuperGroup. Its share price has leapt from 500p to well over 1500p since. In July, it posted a £22.5m pre-tax profit in its first set of annual results since joining the stock exchange and the retailer’s market cap is £1.25bn - more than high street stalwarts Debenhams and Halfords.

8. Retailers love the Tories… but do the Tories love them?

Retailers have had a good year politically. It may not have been a decisive victory, but it was the news most wanted to hear when David Cameron became Prime Minister in May. His job since then has been eased by a sprinkling of high profile and often vocal fans in the business world.

Arcadia Group owner Sir Philip Green announced his support of the Tories during the election campaign and was rewarded with the job of reviewing how efficiently Whitehall departments spent their money. He announced the public sector could save billions of pounds a year if it changed its processes, and the Government responded by adopting his proposals.

Former M&S chairman Sir Stuart Rose has been tipped for the House of Lords when he retires, while Next chief executive Simon Wolfson was made a Conservative life peer. DFS founder Lord Kirkham is one of the most active Tory party supporters in business, being a former party Treasurer and a current financial supporter.

The support is not lacking - but what remains to be seen is whether it will be mutual. In 2011, retailers face the pain of a VAT increase - despite promises to the contrary - and the worry of the effect of the spending cuts on consumer spending. There was also controversy over plans to make it easier for local councils to veto the development of more shopping centres. There might be plenty of pro-Tory sentiment in the retail industry, but it remains to be seen whether the Government will do much to help the sector in the coming year.