I need a holiday, and by the time you read this I will have had one. Instead of penning my thoughts a few hours before the deadline, as is my wont, I am hitting the keyboard the day before I embark for a week in Tuscany.
So why do I need a holiday? An acid test is my mounting frustration at the naive valuation analysis that keeps landing on my desk. Of course, I should just bin it and move on, but that is easier said than done. I had thought of spending this month's column venting my frustration on this subject, but there is enough negative industry and economic comment around at present and I do not want to add to it.
Let me just say that you cannot have your cake and eat it. You cannot add the real estate value to a retailer's valuation without adjusting earnings downwards for the rent that would become payable on disposal. While financial efficiency is a laudable objective, leveraging up a balance sheet with debt has a cost as well as a gain attached to it.
With that off my chest I can look forward, specifically to our Global Retailing Conference in New York in early September. My contribution will be to share a platform with my Asian and US colleagues on the subject of what will become of the clothing sector as quotas disappear at the start of next year. At present, this reminds me of the millennium bug debate, with a few voices predicting huge upheaval, yet an equal minority saying the sourcing adjustments have already been made so the transition to a free trade market will be seamless.
Most participants I talk to are somewhere in the middle. Yes, there are further significant bought-in gains to be had, but retailers will only be able to hang on to enough of these to offset the resultant deflationary pressure on margins. Otherwise the consumer will be the winner.
I worry about this consensus view as being a little too pat.
Quotas in 29 apparel categories to the US were lifted in 2002.
The average US unit price of these categories fell by 34 per cent in a year, and Chinese exports of those products jumped 110 per cent in year one and a further 84 per cent in year two.
While a draw was the right prediction for the millennium bug debate, I am uncomfortable with it as the right answer for next year. That is where I need some help. Goldman Sachs is conducting a global survey on what the industry is expecting from quota removal. We may have faxed or e-mailed you a questionnaire, in which case please take five minutes to send it back. If you are willing to participate, please e-mail me at keith.wills@gs.com.
The broader the church that responds, the better. In return I will share the global results and conclusions with Retail Week readers in a future column.
Deflation and supply side developments are key themes for the sector at present, and will no doubt dominate our conference discussions. China is bigger than Shanghai, and the large-scale retail winners beyond next year are surely going to need an efficient sourcing mechanism that recognises this fact.
- Keith Wills is managing director of international equity research at Goldman Sachs.
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