Friday 9 December 2016

It will be a tough year for retailers with high rents and price deflation

Consumers have been holding tightly on to their purse strings as they save more than they spend

Published 07/01/2010 | 05:00

Derek Hughes says the run-up to Christmas trading was looking "very dodgy" as his Hughes & Hughes bookshops entered their single busiest trading season of the year.

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The chain, of which Mr Hughes is executive chairman, typically racks up between 30pc and 35pc of its annual sales during the six weeks before Christmas, as some people make what will be their only visit to a bookshop during the whole year.

"There are fewer people out on the high street, and while our unit sales were up, we've had 16pc price deflation during the year," adds Mr Hughes.

While he says the period was "tough", Hughes & Hughes managed to hit its numbers even as the retail sector experienced what has almost certainly been its most bruising time ever.

The last publicly available accounts for Hughes & Hughes, for the year ended March 2008, show the group reported turnover of €37.8m and pre-tax profit of €551,000. Mr Hughes declined to divulge what the accounts for the last reported period will reveal, but said that turnover has "struggled" in line with the experience of other retailers.

That consumers have been holding tighter than normal on to their purse strings in the past few weeks comes as little surprise. A 12.5pc unemployment rate has encouraged more of us to save rather than spend, event though it's difficult to get a precise handle on exactly how much we are saving.

Prediction

Ronnie O'Toole, chief economist with National Irish Bank, says that the "big thing" for his predictions relating to any return to growth in consumer spending is the number of people out of work.

"The unemployment rate has stabilised a lot earlier than we could have hoped," he explains.

"If that rate is stable, then people can feel a bit more secure in their jobs."

That in turn, might encourage them to stop saving as much and to begin spending again. Mr O'Toole recently predicted that a rise in exports and modest rises in consumer spending could spur "tepid" growth this year.

This week, Davy Stockbrokers said it also expects the Irish economy to pull out of recession during the first quarter of this year, with consumer spending "likely to rise" as unemployment peaks and the fiscal position improves. It added that disposable incomes "should start to grow" in the second half of 2010, which will also boost consumption.

Meanwhile, the decline in retail spending during 2009 has been stark.

At the beginning of December, the Central Statistics Office (CSO) released its latest retail sales figures, for October, that showed core sales volumes fell 1.7pc compared to September and were 9.1pc lower year-on-year during October.

The monetary value of retail sales fell 13.9pc year-on-year in October, as price deflation also kicked in.

Volumes

Clothing, footwear and textiles sales volumes were down 6.8pc during October, while sales of household equipment were 11.7pc lower. Sales volumes at department stores around the country were 2.4pc down on September, and 5.9pc down year-on-year.

For the retail sector, where an estimated 30,000 jobs have been lost in the past year or so, the statistics do little but confirm just how difficult things are.

The picture in the UK also remains uncertain. This week, publicly-quoted fashion group Next said that a recovery in consumer spending mightn't be sustainable, even as a surge in Christmas sales prompted the UK's second biggest clothing retailer to raise its annual profit target.

Surprisingly, high-end retailers including jewellery group Boodles and upmarket department store Fortnum & Mason reported strong growth in Christmas turnover as well-heeled shoppers decided to splash out in the face of a depressing economic backdrop.

But back home, David Fitzsimons, the chief executive of industry representative group Retail Excellence Ireland, says that retailers are simply desperate to convert stock into cash. He's also predicting further high levels of fall-out for the sector.

"There will be the same number of insolvencies in the retail sector in the first half of 2010 as there was in the whole of 2009," he expects.

Last year, 201 companies in the Irish retail sector collapsed, according to figures released this week from insolvency practitioner Kavanagh Fennell. That number accounted for over 14pc of the total of more than 1,400 insolvencies recorded in Ireland during 2009.

Mr Fitzsimons' prediction does not bode well for the sector, but Ronnie O'Toole thinks the rate of job attrition particularly is to be expected, and that unlike industries such as construction, the retail sector will be quicker to add jobs again once the economy begins to recover.

"In terms of overall employment, we don't have a large retail sector," says Mr O'Toole. "We don't look out of sync with the rest of Europe and we're not over-shopped." Still, Mr Fitzsimons thinks the first half of 2010 will be "quite challenging", especially as banks begin to "vigorously" enforce loan agreements.

"Things will get worse before they get better," he maintains, believing that a "key determinant" for retailers will be interest rates on their loans.

"The banks won't be able to keep rates as low as they currently are," he forecasts.

But one of the most pressing matters for many retailers remains the high rents being charged by landlords, especially institutional ones. The Government recently banned upward-only rent review clauses in contracts, and the law will come into force at the end of next month. The impact of the law will take some time to filter through to trade, though.

"The two big costs in retail are labour and rents," says Derek Hughes. "Landlords really have to work with retailers to allow some flexibility on rents. There's been a huge amount of resistance amongst them."

Mr Hughes claims that some developers who built shopping centres with loans that could be headed for the National Asset Management Agency might be declining to reduce rents because that in turn adversely affects the yields, which will in turn depress the capital value of the asset on which the loan rests.

"They're happier to leave units empty in shopping centres," he maintains. "I can't understand it."

One industry source also says that some institutional landlords will begin reducing rents to reflect the current environment. She expects one major Dublin city centre shopping centre to begin cutting rents by as much as 12.5pc in coming weeks, with the discount probably being offered to tenants that can prove their current rental rate is significantly adversely affecting their trading ability. But such moves will be too late for many retailers operating by the seat of their pants.

For multiples too, times have been tough. Speaking just before Christmas to the Irish Independent, Superquinn executive chairman Simon Burke said that he saw no real signs of any improvement in consumer spending.

In the four weeks to the end of November, Ireland's largest indigenous retailer, Dunnes Stores, saw its share of the grocery sector decline 1.6 percentage points to 22.9pc, while discounters Aldi and Lidl boosted their combined share to 8.2pc from 7.5pc, according to the data from TNS Worldpanel.

The spectre of cross-border shopping also continues to weigh heavily on the retail sector. The CSO reported last month that €435m was spent by consumers from the Republic on shopping trips to Northern Ireland in the 12 months to the end of July and that 16pc of households in the Republic had at least one shopping trip to Northern Ireland during the period.

Peter Murray, manager of the Buttercrane shopping centre in Newry, says that he expects continued weak sterling during 2010 will further bolster trading in the city.

"In Christmas 2008, there was nearly parity between sterling and the euro," he says. He adds that as sterling was slightly stronger this Christmas, there was probably a very marginal downward impact on the spend by consumers from the Republic in Newry.

"The tap has been turned on for us in terms of shoppers from the Republic, but over the years that business does ebb and flow, although we welcome it very much. It's a nice bit of icing on the cake."

Any post-Christmas celebrations amongst retailers south of the Border will have been extremely muted, with many simply happy to have survived 2009 as they face another year of uncertainty.

"It's going to be another tough year," admits Derek Hughes. "We'll keep trying to take further costs out of the business."

For other retailers, Christmas 2009 will have been their last in business.

Irish Independent

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