Mail order forges impressively ahead: Back to growth of early 1970's

Abstract

The recent surge forward in equity markets has seen the share prices of our leading retailers outperform the broadly based indices by generous margins. Since the stockmarket reached a low point in October last year, food retail shares have shown a rise of 136.5 per cent, according to the FT Actuaries Index, while stores have done even better with an increase of 146 per cent. Even in recent weeks, when some rather gloomy statements have been forthcoming from some retailers, shares in the sector have continued among the top performers. Yet the savings ratio remains high — indicating that consumers are still not all that confident in the future ‐sales figures still show volume falling in real terms this year, and wages are still under restraint of sorts. In these circumstances is it logical that retail shares have proved to be one of the most favoured sectors in this recent market rise? Over the past three or so years retail shares have had a rough ride. One leading firm of City stockbrokers pointed out in a circular recently that, despite the large rise in share prices since the beginning of recovery, price earnings ratios, on average, in the sector, are still only half what they were five years ago, when the market reached roughly the same peak. But that was in a period before margin restraint, price controls, and a system of wage restraint that dealt a body blow to retailers, whose employees are traditionally among the lowest paid of the country's workforce. That latter problem, at least, appears to be over. In 1975 the £6 a week cash limit (which rapidly became the increased pay norm, resulted in a wage rise of about a fifth for retailers across the board. It dented margins — even in the most efficient companies, and provoked some hefty cost (and in some cases staff) cutting measures. This year 10 per cent looks like becoming the norm — and it is still a fairly large amount. But retailers have achieved considerable economies in internal costs over the last few years. Unless the informal pay agreement is breached seriously and consistently, retailers should find that they are able to absorb this year's rise in wages fairly comfortably. But what of underlying demand? We hardly had a summer this year — and that does not bode well for textile‐based retailers' profits. Clothing — both men's and women's — has been a poor market in recent years, as have shoes and consumer durables. The exception in the case of the latter is the little pre‐budget booms aimed at avoiding higher rates of value added tax. The consumer durable trade should give the Chancellor credit for sustaining the concept of panic buying in the hearts of its consumers during such bad times for spending as a whole. In the opening 9 months of the year volume has been about 25 per cent down in real terms across the board. People's disposable income must still be shrinking. But the euphoria created by the rise in the pound, and the rush and gush of North Sea Oil will, it is forecast, lead people to dip into their bank balances and building society accounts from this winter onwards — leading up to a consumer boom in 1978 and 1979. Mail order sales are already doing well — and because the bulk is done on credit terms this is thought to be a barometer of future spending trends. Lower interest rates mean that consumers may be more willing to enter into Hire Purchase and other credit arrangements despite the fact that their actual earnings are still lagging behind the rate of inflation. The lowering of the Building Society mortgage rate puts a bit of extra cash into people's pockets. So spending should start to pick up significantly next year. Many leading retailers — Sainsbury springs to mind — have been seriously tackling the question of operational efficiency over the past few years and would appear to be in a good position to reap the profitable benefits of an upsurge in volume sales. But it seems to be foolish to expect even the ‘blue chips’ like Sainsbury, Marks & Spencer or British Home Stores to regain the very high price earnings multiples saw in 1972 and 1973. For price and wage control exposed retailers' vulnerability to governmental action. The consumer now has far more official support than she or he had five years ago, people are far more conscious of prices and more suspicious of large profits. It has proved to be simple, cheap, and effective to camouflage the full impact of rising prices on the Retail Price Index by whipping a bit off retail margins here and there. If ever we faced similar circumstances as at the beginning of the 1970's there is no doubt that retailers would be the first to find themselves under restraint once again. This should be reflected in a less giddy price earnings ratio average for the sector in the present bull market.

Citation

(1977), "Mail order forges impressively ahead: Back to growth of early 1970's", Retail and Distribution Management, Vol. 5 No. 5, pp. 68-71. https://doi.org/10.1108/eb017915