Worse to come

The stores sector is bracing itself for a longer-than-expected downturn following a sales collapse at Marks & Spencer and a warning that a full-blown recession is on the way.

Some experts even fear that retail may never return to its historic levels of profitability.

As M&S shocked the City with a first-quarter sales plunge, chief executive Sir Stuart Rose admitted it was difficult to foresee an end to retail’s difficulties.

“I haven’t got a crystal ball,” he said. “Personally, I think there’s worse to come. It’s the fastest and most severe slowdown since the early 1990s.”

M&S’s dismal update sparked widespread fears about how long torrid trading conditions are likely to last. Kaupthing analyst Matthew McEachran said: “Key indicators suggest we are at the start, not the end, of a period of much weaker retail spending.

“Whereas there was hope at the start of the year for stability to emerge by end of 2008 or early 2009, this now looks unrealistic.”

Veteran sector watcher Richard Hyman, adviser to Deloitte, expected the downturn to last another 18 months.

Even when it is over, retailers’ lives are unlikely to become much easier as excess space and online cannibalisation continue to bite, he said.

He said: “Retail will be a lower-growth, lower-margin industry from here on in. There’s a new era of structural change. A new order is emerging and it’s not very comfortable.”

On the same day as M&S brought forward its trading statement, Capital Economics warned that there is “a strong chance” that the economy will enter a recession and unemployment may reach 1 million by the end of 2010.

Capital Economics’ Vicky Redwood said: “Even in 2010, there won’t be a return to the [retail] boom that we have seen in the past decade.”

Rose called on the Government to calm growing fears by, for instance, providing fuel tax relief. “They should be very mindful of not letting confidence slip below a certain level,” he said.

Fat Face chairman Alan Giles backed Rose’s view. He said: “Recovery hinges on whether the right economic decisions are made to steer the country away from the worst consequences of stagflation.”

However, he said he was “reasonably optimistic” that that would happen and conditions would improve “in 18 months or so”.

Matalan chief executive Alistair McGeorge was optimistic that retail would stage a comeback, but admitted: “It won’t be quick.”

Disposable income at lowest in five years

Consumers have less spare cash to spend than at any time in the past five years as the cost of living rockets.

The average household’s discretionary monthly spend as a proportion of gross income has fallen to just below 20 per cent after tax and bills, compared with 28 per cent five years ago.

Disposable income plummeted almost 12 per cent over the course of the past year – the greatest fall in five years – and is 15 per cent below the 2003/2004 level, according to Ernst & Young’s Annual Discretionary Income study published today.

Cash-strapped households have £772.79 to spend a month after fixed outgoings, compared with£909.84 in 2003/2004.

Monthly mortgage repayments have rocketed by an average 78 per cent to just below£735 as a result of higher interest rates and bigger mortgages, while energy bills average£95.80 a month – a 110 per cent increase over five years. Petrol costs have climbed by almost a third.

Ernst & Young retail director Jason Gordon said the pressure on consumers would mean tougher trading for retailers in the second half of this year and margin pressures would intensify. He expects more profit warnings and administrations.

Gordon said: “Successful retailers will be protecting profitability at all costs. They will be squeezing out extra trading margin, for example, through effective pricing and promotions, sourcing and supplier management and driving working capital efficiencies.

“They will also have a keener focus on delivering returns from new ventures.”

M&S to review adverts after profit warning

Marks & Spencer will freshen up its advertising this autumn as it battles to restore its fortunes following Wednesday’s profit warning.

The retailer’s “Not just food…” and celebrity-led campaigns helped chief executive Sir Stuart Rose deliver a turnaround after joining in 2004.

M&S executive director Steven Sharp said the campaign was a continuing success, but changes will be made. “We are looking at new ideas,” he said.

M&S shocked the City with a 5.3 per cent fall in like-for-likes during its first quarter. Analysts had expected a decline in general merchandise, but were shocked by a 4.5 per cent fall in food like-for-likes.

Rose admitted that “self-inflicted” problems had undermined food performance.

Steven Esom, the food supremo who joined M&S just a year ago, has been shown the door. He has been replaced by director of home and M&S Direct John Dixon.