The now annual sale known as Black Friday has changed the face of consumer spending. While 2018 looks set to be another record-breaking year, we believe this promotional environment acts like the Sword of Damocles over the future of many UK retailers.
Facing growing pressures, retailers have to keep up with the staggering consumer demand this event creates. What was once a single day of price cutting has now extended into a several-week period. The danger for retailers is that this further narrows the time frame that customers are willing to spend on discretionary items and potentially also creates logistical problems.
As you would expect, this frenzied event can bring footfall and volume uplift. Yet it also distorts behaviour and trading performance. At a time of persistent discounts and tough conditions, Black Friday presents management with an opportune way to accelerate clearance activity.
However, the picture of crowds of people pressed up against storefront doors is quickly growing less relevant in favour of online shopping. Meanwhile, as a sign of the times for the UK high street, more and more discount stores are opening up new premises.
The value-for-money discount proposition feels more relevant now than ever
As an example of what’s happening in the sector, a former Homebase store in Tonbridge has been converted into a retail space that is shared by discounters B&M Value Retail and Aldi. On the first day of trading, B&M saw its best ever opening day.
With major physical retailers such as Toys R Us withdrawing, this has created a flurry of opportunities in the UK property market. This helps accelerate expansion plans for discounters, where simplicity and low overhead costs mean that new store payback returns continue to be very attractive. Following the opening of their 600th UK store, B&M management reminded us of the superior store economics of this segment, citing that it brings a 'treasure trove' experience to the consumer.
Our confidence in the discount retail opportunity is supported by conversations with management of 3i Group. With its buy-and-build model, the company invests proprietary capital into private equity businesses with secular growth. Its largest business is Dutch discount retailer Action, a company that has had significant success as its earnings growth compounded over recent years.
We believe in the superior store economics of the discount segment
Similar to B&M, they have a credible ‘customer value’ concept and are looking to accelerate a roll-out strategy that will likely see them expand store space across its core European markets. We believe that Action’s high growth track record demonstrates the appeal of a sharper price proposition and a cost-conscious culture.
Elsewhere, Primark owner AB Foods recently reported a positive strategic update on its US operations. After making revisions to their trial format – in both size and product offering – they have seen a considerable improvement in operational performance. Their journey in recent years helps illustrate the importance of right-sizing store formats. Meanwhile, the brand strength of Primark and trading performance in the UK market remains impressive.
While the outlook for the current retail trading environment is tough, we remain upbeat on the prospects of this cost-effective model and believe it should be well insulated against tougher times.
Yes, the Black Friday event may stimulate erratic short-term buying behaviour, but we believe the value-for-money discount proposition feels more relevant now than ever.
A sharp slowdown in US earnings growth looks likely next year. Perhaps the more important question to answer is where will S&P 500 earnings growth settle after the effect of tax reform, fiscal stimulus and oil price movements drops out?