Only online retailers will have a happy Christmas

By Euan Stuart Dec 07, 2005

At MoneyWeek, we’re looking forward to the festive season as much as anyone, but we still view the prospects of the retail sector this Christmas with about as much enthusiasm as Ebeneezer Scrooge himself.

However, while the high-street operators await their seasonal fate – lousy sales and lousy margins – like a flock of plump turkeys, there is still festive cheer to be found amid the carnage: online shopping. We may hate the high street, but we love the internet, says Richard Fletcher in The Sunday Times.

Only last week, John Lewis announced that catalogue and online sales would exceed £100m this year, and overall 24 million UK shoppers are forecast to spend some £5bn online this Christmas. Even the Government has noticed what’s going on, with some bright sparks in the Treasury questioning whether they need to adjust official retail sales figures properly to reflect this “unprecedented” boom in online sales.

The sector has a chequered history. In the 1990s, hundreds of millions of pounds were invested in internet retailers, many of which promptly collapsed. They had the right idea – that expensive rents and salaries would eventually force a large number of traditional retailers out of business. The problem was really just one of execution (generally bad) and timing (too early). Still, this boom spurred the larger store groups on, making them invest properly in their own websites. That investment is now paying off.

Look at Tesco. In 2000 it invested £35m in its own online service: Tesco.com now serves 170,000 shoppers a week, and in 2004 saw a whopping 24.1% jump in sales to £719m. That’s the kind of business the big retailers can raise a glass of winter warmer to. That said, the online business remains a small part of overall sales (£29.5bn for Tesco in 2004) and is a long way from making up for the last seven months of poor retail trading.

Another problem for retailers is that selling online often hits margins too. Disposable incomes are being squeezed as higher taxes and fuel costs take their toll. That makes one of the biggest reasons to go online the hope of getting cheaper prices, and internet retailers have to deliver. The result? The internet market place is even more cut throat than the high street: TVs and DVD players are everywhere on the internet at prices up to 20% cheaper than in-store meaning the likes of Currys and Dixons have had to introduce “dual-pricing” to compete. They now charge cheaper prices on the internet than in their stores.

Still, on the plus side the UK’s big retailers are financially strong enough to survive this margin-crimping and to put pressure on their financially weaker independent rivals. This means the remaining specialist internet sellers need to keep looking over their shoulders: Argos, Tesco and Woolworths are gaining on them fast. In particular, Argos, the most visited UK website last Christmas, seems to have the right recipe. Its customers can shop online, over the telephone, or in store, so that wherever people choose to shop they save money.

Those who have most to worry about are retailers who underinvested in the internet. A study by accounting firm Deloittes estimates total spending on gifts this Christmas will fall by around £400m, the first decline in a decade, says Sean Poulter in the Daily Mail. And since this is expected to be almost “entirely shouldered” by traditional stores, those that don’t have a successful internet profile should probably expect a visit from the Ghost of Christmas Past.

Four internet retailers to check out

Among the companies with the most problems in the internet age is Dixons (DXNC, 368p), recently re-named DSG. It’s hard not to conclude that this is a business whose best days are behind it, says Neil Collins in the Evening Standard. Customers might still visit the shops, but they just look at the products then go home and find a better price on the internet.

HMV (HMV, 187.5p) is in similar trouble. Online book sales are attacking subsidiary Waterstones, while music sales are under threat from file-sharing. Conversely, in an uncertain retail sector, GUS (GUS, 902p) looks like a safe haven, says The Mirror. GUS owns Argos – whose internet arm, Argos.co.uk, has seen sales of more than £1bn since it started in 2000. The group has also managed to maintain its gross margins and, although earnings growth could slow to under 3% next year, it should return to double digits in 2007. On a 2006 p/e of 14 times, GUS could be worth “checking out”. 

Those willing to take a major gamble can look instead to online fashion retailer Asos (ASC, 73p). It sells cut-price versions of celebrity outfits over the internet and just announced a 78% increase in interim group sales to £8.3m, says The Daily Telegraph. It has 725,000 registered users and sales for the eight weeks to 27 November were up a huge 58%. That said, the shares trade on a current p/e of 55 times, so are hardly cheap.

Published in Tips & advice | More articles by Euan Stuart

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