Is The Death Of The High Street Greatly Exaggerated?

In the period 1979-2009, real disposable wages in the UK, i.e. the amount each person has left over to spend on what they like, adjusted for inflation, roughly doubled from £2,300 a year to £4,700. Since then, this figure has stayed flat.

Wage growth hit a low in 2014 but has since been rising. However, this growth has been offset by a spike in inflation, mainly caused by the effect of a weak pound on imported goods.

The pound stopped falling months ago, and wage growth is accelerating, so there may finally be more money available to spend.

Uncertainty suppresses spending

Unfortunately for retailers, any pent-up demand has been further deferred by uncertainties created by the current political crisis.

It therefore seems probable that any reduction in the level of uncertainty, particularly if not accompanied by a further decline in sterling, will usher in a period of significantly higher retail demand, particularly for higher-ticket items.

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One well-worn explanation for the 'death of the High Street' is 'the hard-pressed consumer.' The other is the growth of internet shopping. There is a well-established growth trend in internet purchases as a percentage of total spending in the UK, from around 3% in 2007.

However, in the last two years, with regular seasonal spikes at Christmas, internet shopping has only grown from about 14% to about 17%.

These considerations don't imply the 'extremely challenging conditions' reported by all retailers are an illusion. Customers have become more demanding.

They want the right goods, available whenever they feel like ordering them, and at a price they are happy to pay. Some retailers understand this and have responded well. Others have gone under or appear to be in terminal decline.

The trends became clearer at Christmas, when some retailers surprised analysts by how well they did, and others by how badly they did.

Winners will take share from losers

Retailers face a barrage of cost pressures, including the cost of imported goods, the Apprenticeship Levy, rising business rates and the National Living Wage, which have made the rapidly-changing environment even harder to cope with. 

When analysing customer-facing companies, we look for talented and experienced management teams which understand what their customers need and continue to deliver it.

Not selling commoditised products which can easily be bought over the internet is important for survival, as is a balance sheet strong enough to take the company comfortably though several years of challenging conditions.

An example is Shoe Zone, a share we have owned in TB Wise Multi-Asset Income for several years. The company exemplifies all the positive qualities we look for, but had been unloved by the market.

After a solid period of trading over Christmas, the market realised it had thrown the baby out with the bathwater, and marked the shares up 30% in two weeks. There are plenty of other examples.

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We believe in 2019 the outlook for the 'winners' in the retail space will improve. The fact that their weaker peers are going under is a further tailwind.

Tony Yarrow is co-portfolio manager of TB Wise Multi-Asset Income fund