10 big questions for 2010 in retail

1 - Will more retailers go bust?

2009 didn’t bring as many retail casualties as feared, but the demise of Borders just before Christmas and D2 just after was a reminder that there are still multiple retailers limping along, and while many of the more obvious candidates to collapse have already fallen by the wayside, there are plenty still on the watch list.

Some parts of the sector have suffered greater fallout than others, and while it’s largely only the dominant players left, sub-scale businesses in sectors such as entertainment and furniture will continue to find the going hard, while the fashion market remains crowded.

Other areas of concern centre around those companies backed by Icelandic owners - many of which are still wrestling with substantial debts - and, inevitably given its track record of break-ups, those owned by Hilco, which include Allied Carpets and Habitat following takeovers last year.

However, the growing use of CVAs has provided opportunity for businesses that might otherwise have fallen into administration to restructure, a trend that is likely to grow further in 2010.

2 - Will VAT go up post-election?

Last week VAT returned to 17.5% after the temporary cut in December 2008, but the bigger worry among retailers is what happens after the general election. Whether it’s prime minister Cameron or Brown, whoever is in number 10 will inherit public finances in an awful condition.

Difficult decisions will need to be made and, as VAT is a less politically sensitive tax than income tax, for example, there’s no question that an increase is under debate. The Tories, considered most likely to form the next government, have repeatedly refused to rule out a rise, most recently and pointedly in comments from shadow business secretary Ken Clarke at the weekend.

The interesting question is what form such an increase would take. Upping the rate on existing VAT-liable goods to 20% is an obvious option, but introducing a new rate of 5% on products currently exempt - which include most grocery products, plus books and children’s clothing - is rumoured to be an option under consideration, one that would have profound implications for the sector and for consumer spending.

3 - Will economic recovery grind to a halt or continue?

The UK is one of the few major economies to remain in recession, yet there was more optimism around in late 2009 than expected, with positive signs of recovery emerging after six successive quarters of falling activity, the longest and deepest recession on record.

However, there are still concerns that the economy is far from being out of the woods. The Bank of England remains unsure, with interest rates being kept at a historically low 0.5% and the Monetary Policy Committee’s December minutes revealing that the option of extending quantitative easing, which is scheduled to end next month, is still being considered.

Unemployment continues to rise and analysts fear house prices have further to fall this year - Capital Economics predicts a 10% decrease. The impact of post-election tax increases on the economy are also a big concern, with the country’s enormous debt meaning that rises are inevitable.

4 - What will Marc Bolland do at Marks & Spencer?

Bolland has some breathing space to formulate plans for Marks & Spencer, because it could be May before he starts as chief executive.

M&S has an established strategy to expand internationally and claim a bigger share of growing online spend, while it has also been improving logistics to bring efficiencies. It is unlikely that Bolland will change those objectives. He will probably focus on excellence of execution and perhaps accelerate elements of the programme. That was his approach at Morrisons, where he refocused around the grocer’s traditional strengths and created a unified operation from the mess of the Safeway merger.

But Bolland’s international and marketing background suggests that overseas operations will increasingly come to the fore and that the M&S brand could be stretched into new fields. When Bolland was hired, M&S executive chairman Sir Stuart Rose said: “We have a brand which can translate into almost any goods and services. Marc will want to say what it’s capable of being translated into.” Rose also said Bolland would bring “original thinking”.

Bolland’s job at Morrisons necessitated sharp political and leadership skills to keep founder Sir Ken Morrison on side and restore morale. Similar will be needed at M&S, where Rose will remain as chairman and the best will need to be drawn out of internal candidates Bolland beat to the job.

5 - Who will take over at Morrisons?

Bolland will be a tough act to follow, but whoever succeeds him still has plenty of growth to go for, with limited penetration in the south and no presence yet online or in non-food. Unsurprisingly a list of senior figures from rival supermarkets have been linked with the role, including Asda’s Darren Blackhurst, Sainsbury’s Mike Coupe and Tesco’s Tim Mason and Richard Brasher, as well as former Asda man Dave Cheesewright, currently running Walmart in Canada. Waitrose boss Mark Price has been linked with the job but as a John Lewis partnership lifer it’s unlikely he’d walk away from his current role.

But it’s a big job and contenders from the FMCG sector - where Bolland himself came from - are bound to be considered, with Stefan Barden of Northern Foods one name mentioned, while Steve Easterbrook of McDonald’s is an interesting outside bet.

And don’t discount the internal candidate, finance director Richard Pennycook. He has been a key player in Morrisons stunning revival, putting the detail in place to complement the Dutchman’s big-picture thinking.

6 - Will retail shares continue to outperform?

It will be hard for retail stocks to maintain the momentum of 2009, when FTSE 350 general retailers rose 75%.

The leaden mood at the start of last year evaporated as many retailers proved themselves up to the challenge of recession. While performance was subdued, nasty surprises were avoided in the main and even weaker retailers were able to restructure and refinance.

UBS analyst Andy Hughes believes the risk of a sector de-rating is overdone. He said in a note: “While the outlook may change over the course of trading updates, the major stocks in the sector still look well-placed in terms of margin, costs and cash.” He said the sector’s PE ratio of 12 times was “undemanding”.

Oriel analysts are also optimistic. The broker expects full-price sell-though to have risen sharply at Christmas and that earnings momentum will make up for any potential de-rating. “While the sector may not see the gains seen in 2009, 2010 will still prove to be a good place to have exposure to non-food retail equities on a stock-specific basis,” said Oriel.

7 - Will online growth start to level off?

As etail matures, it is to be expected that the exponential levels of growth seen to date might level off. Towards the end of last year there was a slowing of growth rates, according to the IMRG/Capgemini online sales index, which recorded its lowest ever year-on-year growth of 7.6% in September. Growth rates were further affected by concern about postal strikes as autumn progressed.

That said, for most retailers online remains a huge opportunity. John Lewis’s online sales in the 19 weeks to December 19 were up over a third and online grocery shopping was also hugely popular over the festive period, with Ocado’s sales up 30% in December.

One trend that is set to continue is of established multichannel retailers developing cross-channel elements, with services such as reserve and collect becoming more significant parts of their business.

8 - Can all big four grocers continue to prosper?

During 2009 the big four supermarkets all managed to grow or at least consolidate their market share, according to TNS’s respected till roll data, at the same time as increasing their like-for-likes more strongly than the general retailers.

Morrisons, Sainsburys and Asda all prospered throughout the year, and while Tesco faltered, towards the end of the year the UK’s number one retailer came back strongly, with a double Clubcard points offer helping tie in customers. Other leading grocers, notably Waitrose, also made headway.

Part of the explanation lies in the Co-op’s Somerfield takeover, which required a large-scale store disposal exercise and enabled other retailers, especially Morrisons and Waitrose, to gain stores.

But the grocers have also benefited from high levels of food inflation, which inflated their like-for-likes over the past year. With inflation falling significantly towards the end of 2009, like-for-likes should give a truer indication of how well the grocers are growing their volumes. Those without a sizeable non-food presence are likely to be most affected.

9 - Will the VAT increase halt the big ticket recovery?

It was a torrid 2009 for the big-ticket retail sector, but there were signs of improvement towards the end of the year. A spate of collapses among furniture groups helped the stronger players like Carpetright, DFS and Dreams strengthen their market share, and improving consumer confidence encouraged shoppers to come back to make bigger purchases.

However, they will be wary of getting carried away with hopes of a recovery. The economic outlook remains uncertain and Sales before the new year are likely to have been artificially boosted by the VAT rise on New Year’s Day.

In the big-ticket electricals market, the event of the year will be the delayed arrival of Best Buy. The US giant arrives with a formidable reputation, but its rivals DSGi and Kesa have been working hard to get their own offers into shape before it opens in the spring.

10 - Will landlords remain more flexible?

They may not have much choice. 2009 was a year of sea change in landlord-tenant relationships, but a lot of this was driven by necessity as a flurry of retailers resorted to CVAs to get their portfolios in order. It meant pain for landlords but, unless they felt a tenant was trying it on, generally they tended to accede.

2010 will inevitably see more CVAs as some of the big accountancy firms hawk the manoeuvre around retailers. But landlords will also come under more pressure to renegotiate deals from successful retailers too, many of whom are angry that their struggling rivals are getting better terms as a result of CVAs.

Even if the retail sector recovers in 2010, commercial landlords will remain under pressure from the continuing growth of online. So expect more regearing of leases, resulting in lower rents and fixed uplifts, and the gradual decline of quarterly rents and upward-only reviews.