Interest in retail stocks shows the industry is home to innovation.
A rush of new flotations is a rare thing in itself, especially in recent years. But the extraordinary feature of this latest craze for IPOs is the overwhelming interest in retail stocks, which have dominated the new launches.
The key question is: why? Retail shares are an important part of any investor’s portfolio, especially with a consumer recovery in sight. But they are also risky, and the IPO queue is a very mixed bag.
An analyst I spoke to recently gave one answer. He said: “Most of the older quoted shares are rubbish. At the moment there are no more than five or six retail stocks on the market that I would consider worth owning. That’s why investors are so keen on new issues.”
This is a sobering reflection on the quoted retail sector. It means that in the eyes of investors, some 85% of those businesses are unattractive investments. This is a fairly astonishing proportion, but there are some good reasons for it.
One of the biggest concerns hanging over retailers is excess space. The boom in physical expansion up to 2008, coupled with the significant inroads of online trading, has left many retailers with too many shops, shops that are too large, or shops in the wrong place.
Sales densities have been falling and will continue to do so.
Shifts in the market are also playing a role. For example, in grocery the move towards convenience is leaving everyone with too much out-of-town footage. And anyone who (like me) has had to offload excess space into a slow market knows that this is one of the most challenging tasks in retail.
Another factor is whether online looks like an opportunity or a threat. For too many established retailers, it still looks like a threat and the City can see this. I have written before about how so many of us were slow to embrace online trading, and the legacy of this is now apparent in many cases.
Add in the population of retailers who have issued profit warnings in the past months, or let down investors, or have no clear long-term strategy, and you can begin to see why there are so few attractive stocks.
Many of the businesses coming to market are seen as having less baggage, being more internet-savvy (or are wholly online), and look like a new generation with fresher stories and better growth prospects. Although expensive, they represent a more attractive way of investing in a consumer recovery.
“For too many established retailers, Online still looks like a threat and the City can see this”
For us retailers, there are two contrasting messages.
The first is that those who focus only on their comfort zone of short-term sales driving, and ignore the longer-term trends affecting their businesses, will eventually end up left on the shelf.
The second is that, far from being in danger of extinction, retail is producing a new generation of successful businesses, well-adapted
to the new world and demonstrating yet again the resilience and innovation of one of Britain’s best business sectors.