Has the tide turned for UK equity income in 2024?
In the dim and distant 2000s, UK equity income was the hot sector. Home to a raft of star manager...
How merry is the upcoming festive season likely to be? Everyone is hoping for a relaxing time with their families after Covid-19 put such a dampener on 2020’s celebrations.
However, retailers are fearing a nightmare before Christmas this year due to a combination of supply chain issues, delivery problems and rising energy costs. Companies and industry organisations have already aired concerns about potential problems with the celebrations still seven weeks away.
According to Paul Martin, UK head of retail at KPMG, staffing pressures and supply chain issues are making it harder to get goods into the UK – and into customers’ hands. “This may feed into limited availability of certain products and the spectre of price rises remains as retailers pull out all the strings for Christmas,” he said.
He suggested consumers were expected to start shopping earlier to bag items already being reported as potentially out of stock by December. “Successful retailers will have to work very hard to ensure the right availability of the right product at the right price to satisfy the requirements of an ever more demanding customer,” he added.
Helen Dickinson, chief executive of the British Retail Consortium, pointed out that the country’s economic recovery was dependent on strong retail sales during the festive season.
“Retailers, farmers and manufacturers are already making preparations to ensure enough food and festive gifts move through the supply chain in time for Christmas,” she said.
However, she warned a lack of HGV drivers is hindering these efforts and increasing costs, which will eventually be reflected in higher prices. While retailers are working hard to recruit and train thousands of new British drivers, she has called on the Government to extend its visa scheme to address the 90,000 shortfall. “Without swift action, customers face disruption and frustration this Christmas,” she added.
Robert Keen, director general of the British International Freight Association (BIFA) acknowledged there were “operational challenges” but insisted they were being addressed.
“Many products that consumers are beginning to fear will be absent from shop shelves could well have been shipped and received by retailers already,” he said.
He also explained more teu – a unit of cargo capacity standing for twenty-foot equivalent – was shipped in August this year than in August 2019, before the pandemic started. “If we see normal purchasing patterns, we should also see that most of what consumers are seeking will be available to purchase,” he added.
Of course, issues facing retailers in the run-up to Christmas don’t just impact shoppers. They also affect investors deciding which companies will be the most affected. Toymaker Hornby, which makes model railways, cars and planes, has said its profit outcome for the full year was subject to sales over this crucial trading period.
“Our outstanding order book is very strong and substantially higher than a year ago,” it said in a statement. “However, timing is everything when it comes to Christmas, and we are mindful of the potential supply disruption at the ports continuing.”
According to Danni Hewson, a financial analyst at stockbroker AJ Bell, it’s tricky to know which retailers will win the battle for Christmas – but supply chain issues certainly change the battle. “The winners will be those getting to grips with supply chains early,” she told us. “Bigger businesses with more clout are the ones that go to the front of the queue when it comes to suppliers.”
A prime example is Tesco, the UK’s largest supermarket chain and one of the largest holdings in the Artemis Income fund, managed by Adrian Frost, Nick Shenton and Andy Marsh. The sheer size of the company, which currently accounts for 3.6% of the portfolio’s assets under management*, is expected to help it secure much-needed supplies.
Ken Murphy, Tesco’s chief executive, recently highlighted the issues facing supermarkets as the retailer reported first half results. “With various different challenges currently affecting the industry, the resilience of our supply chain and the depth of our supplier partnerships has once again been shown to be a key asset,” he said.
However, in such an environment, he insisted Tesco had many unique advantages. “The scale and reach of our store estate and online operations are unmatched in the UK,” he said.
Industry rival J Sainsbury, which is currently the largest holding* in Nick Kirrage’s Schroder Income fund, is also focused on ensuring it’s properly prepared for Christmas. The chain has launched its biggest-ever recruitment drive with 22,000 seasonal jobs available on fixed contract bases until early January.
There are 14,500 Sainsbury’s and Argos colleague roles in stores, 3,000 online delivery driver positions, 4,500 warehouse and logistics openings, and 180 contact centre opportunities.
Fashion retailer Next recently admitted that disruption to its supply chain meant that stock levels were lower than planned. In fact, they were 12% down on two years ago. “These stock levels are far from optimal and have noticeably affected sales in some categories and in stores,” it said in a statement to the London Stock Exchange.
However, the company, which is one of the 10 largest holdings* in Simon Brazier’s Ninety One UK Alpha fund, insisted the choice it offered enabled shoppers to find alternatives. “The situation is currently improving, and we expect stock to return to more normal levels by December,” it added.
There could be some other beneficiaries over the next few months – within both retail and associated industries, according to AJ Bell’s Danni Hewson. “Simplicity could be a virtue and the likes of B&M European Value Retail could be in for a decent festive season as it doesn’t have set stock it needs to get through the doors,” she said. “With budgets getting ever tighter, its ‘pile it high, sell it cheap’ mentality will also be in vogue.”
She also believes Redde Northgate, which provides mobility solutions and automotive services to a wide range of businesses, could be affected in a positive way. “It could be one to watch as businesses try to circumvent the HGV driver logjam and instead turn to white van man to bail them out of the festive hole,” she said. “With more vehicles on the road, big oil and supermarket forecourts could also enjoy a bumper return.”
*Source: fund factsheet, 31 August 2021