Callum Abbot JPM

Written by Callum Abbot

May, 2021

In association with

The long and short of it: Review of the markets in April

The road to reopening continues to proceed as expected in the UK. I went into the office a couple of times in April after a year out (with the exception of picking up my bike last summer). On one day my floor was so quiet that the lights, which are triggered by motion sensors, kept turning off through the day.  On the other there was a bit of a buzz about the place with lots of catching up and nostalgia. Outside the office things seemed closer to normal; a big shout out to TFL for the authentic commuter experience including a signal failure and long delays…it’s good to be back on the tube.

Retail has evolved significantly over the past few centuries. Looking at the industry through the prisms of price, selection and convenience explains how we have reached the point we are at today and why certain companies have been hugely successful whilst others have failed.

Over time there has been a number of notable retail formats. In the 19th century there were general stores and mail order catalogues, the 20th century saw the arrival of department stores, malls and the hypermarket. Each format offered slightly more of price, selection or convenience, but at the expense of another. Ecommerce changed everything as it had the potential to push the boundaries on all three. Modern ecommerce provides us with unlimited choice, delivered to our door or alternative place of convenience with excellent price visibility and price competition. The most successful marketplaces and retail platforms offer all this on their app or website alone.

Technological change has been an essential enabler for the change in retail, particularly convenience. A hypermarket or mall only works if roads to it are built and customers have the ability to travel there and come home laden with goods. Personal computing connectivity has driven the ecommerce revolution. We now have a handheld computer that can browse any shops full product range, compare similar and like for like product pricing across retailers, order and arrange convenient delivery, often next day and occasionally same day, all while half watching the latest box set on one of the streaming platforms. To top it off, if we are not happy we can send it back for a refund, no questions asked.

The most successful retailers are the ones that offer the most convenience, greatest range, that have built enough faith on price competitiveness that you do not even compare elsewhere and have a silky smooth checkout process. The gold standard is Amazon. However, there are some fantastic retailers in the UK that do a lot right and serve their area of the market brilliantly.

The Long

Next. The home and fashion retailer has successfully reoriented the business to remain relevant in today’s retail environment. Its online business accounts for the vast majority of revenue and profits and is of course higher growth. They have increased the products on their website by nearly 600% (Source: Company Annual Report: January 2021) including a huge range of third party brands. Their Total Platform provides a service to other retailers that have great brands but lack the knowhow to succeed in modern retail.  Next takes care of this, leaving the brands to focus on what they are good at. It has become a real one-stop shop for modern retail.

The Short

NewRiver REIT. NewRiver own a portfolio of tertiary retail sites and pubs. It is now attempting to dispose of the pubs to reduce their loan to value from 48% to below 40%, which still looks high. All the major retailers are looking cut rent costs; in Next’s recent annual report they announced 62 lease renewals at an average reduction in rent of 58% (Source: Company Annual Report: January 2021). This is a structural trend. The prospect of declining rents and, ultimately, values of NewRiver’s portfolio against a high albeit reduced loan to value make it a challenging investment.

Sources

Next annual report: https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2021/annual-report-and-accounts-jan21.pdf

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