It looked like a sign of things to come in January 2020 when the market value of fast fashion retailer Boohoo surpassed that of venerable Marks and Spencer, once the UK’s largest clothing retailer.
But two years later, M&S is comfortably worth more than Boohoo and its online rival Asos combined. It has improved its earnings forecast twice in the past year and Clive Black, an analyst at real estate broker Shore Capital, believes he may do so again when he briefs investors this week. Its share price rose by three quarters in 2021.
Meanwhile, shares of Boohoo, which twice warned of profiting in 2021, fell by nearly two-thirds. Asos, which is also due to release a trade update this week, has lost more than half of its market value and its chief executive.
The resurgence at M&S is not one-off. B&M, a variety discount that only sells in stores, is set to hand over another £ 250million to shareholders after strong trading.
Shares of Next, which have raised their earnings forecast five times since the start of 2021, hit new all-time highs last year. JD Sports did the same. Frasers, owner of Sports Direct and Flannels, expects to make his biggest profit this year.
Kate Calvert, retail analyst at Investec, said much of the bifurcation in stock price performance was due to equity-specific issues, such as the heavy restructuring of Marks and Spencer or the bold acquisitions of JD Sports in the United States.
But there are also industry-wide issues. The first is that long-established, primarily store-based retailers have used the pandemic to accelerate existing cost-cutting and restructuring plans. “In tough times, you make bigger, bolder decisions,” Calvert said.
John Lewis, Boots, and M&S, for example, have closed stores, cut thousands of head office jobs, and cut levels of store management.
“They also learned how to work more effectively online within their own businesses,” Calvert added. Higher volumes helped; around 34% of M&S clothing is now sold online, up from 22% before the pandemic. At electrical retailer Currys and DIY specialist Kingfisher, the increases are even more dramatic.
But while many more consumers have made it a habit to shop online during the pandemic, they haven’t given up on the stores.
“For much of 2020, everyone working from home and online was the only viable channel,” said Richard Chamberlain of RBC. “It was very different in 2021, people wanted more of a multi-channel experience.”
In mid-range fashion, offline competition has diminished as retailers such as Debenhams and Gap have disappeared from the shopping streets. This has helped retailers such as M&S and Next sell more products at full price, thereby increasing their profit margins.
But online competition has grown – ultra-cheap operators such as China’s Shein, established rivals such as Germany’s Zalando, and global players such as Hennes & Mauritz and Inditex, who have invested in e-commerce. .
And many of the factors that helped online retailers early in the pandemic have faded. The proportion of clothing returned for reimbursement – a significant cost to e-commerce players – initially fell as shoppers loaded up with elasticated sweatpants and loose hoodies, but has since picked up.
Chamberlain said online operators were also heavily exposed to rising costs. “There’s a lot of upward pressure on labor costs in warehousing and logistics and it’s hard to absorb them when you’re already working at low margins.”
This has affected established players as well, but their store usage – four of Next’s five returns are processed in its stores – means the financial burden is less.
The logistical challenges have also raised questions about the international expansion of Boohoo and Asos, which does not hide their desire to be global players.
“To really compete internationally, you need scale,” Calvert said. The investment needed in logistics and marketing to achieve this is considerable, while distribution to Europe from the UK has left them ‘to be killed’ by the post-Brexit cost and complexity of exporting to market. unique.
In contrast, many traditional retailers have long since reduced their international ambitions to focus only on markets where they have a significant presence.
As a result, they ended up dominating certain niches – Kingfisher in DIY, Currys in electricity, Halford in cycles or DFS in home furnishings. Their dominant positions in these markets give them more weight with suppliers and shipping companies than online entrants such as Made.com or AO.com can exercise.
This could prove to be significant in 2022, as cost inflation is set to remain acute and discretionary income increasingly under pressure.
Next said this week that its clothing prices would on average be around 6% more expensive by the end of the year due to rising input costs.
With a 9 percent share of the UK clothing market, according to Kantar data, it has a better chance of sustaining such increases than Boohoo, which owns 0.7 percent and competes heavily on price. .
Retailers will be rigorously tested in 2022, but many expect the older, wiser cohort to come out on top.