The Great British High Street has been decimated by the growth in popularity of shopping online. BHS, Peacocks, Jaeger, Game, Woolworths, JJB Sports, Comet, HMV, Blockbuster – to name a few – have all fallen foul of e-commerce.
Many brands can point the finger at their assassin; Amazon (AMZN). And the seemingly one-way trajectory, coupled with Brexit uncertainty around the domestic economy have put many fund managers off retailers for good.
The US behemoth has attempted to muscle in on many a sector since its 1995 founding as an online bookstore. It’s already changed the face of retailing and its cloud and Amazon Web Services businesses give it huge market share in logistics too.
Amazon’s acquisition of Whole Foods marked the next step-change for the firm, and grocery retailers now look set to feel the full force of the Amazon juggernaut in the near future.
“Amazon is a Macro Risk”
David Coombs, head of multi-asset investments at Rathbones, says that Amazon has now become a macro risk due to the scope of its potential impact on companies akin to that of an economy. Whether you think it’s expensive is irrelevant, he adds, owning the company mitigates against that risk in your portfolio.
However, Alasdair McKinnon, manager of The Scottish Investment Trust (SCIN), thinks the threat is overblown in this particular sector.
The UK’s top supermarkets must also deal with declining real wage growth and the threat from discounters Aldi and Lidl. To the latter point, the latest data from research firm Kantar Worldpanel show the German duo growing their sales by 15.1% and 14.5% year-on-year. That compares to average growth of just 1.9% for the big four UK supermarkets.
But their market share still lags and McKinnon believes all is not lost for the biggest players in this area. Tesco’s (TSCO) market share of 28.2% makes it the UK’s most-popular supermarket and it is a top 10 holding for McKinnon’s £672 million trust.
He also has Marks & Spencer (MKS) as his fifth holding, so he’s betting on others being wrong in the long term, especially those who are negative on the outlook for the UK economy. While many fund managers, including the likes of Neil Woodford and Mark Barnett, are betting on domestic growth, the majority are still betting against the UK.
McKinnon’s holdings in these UK retailers, and his bullishness on the case for London-focused real estate investment trust British Land (BLND), suggests he is less concerned.
Contrarian Picks in a Value Warped World
While his investment style has many traits of value investing – buying unloved stocks in the belief they will become back into favour – McKinnon describes the trust’s approach as contrarian rather than value.
The only large US tech stock he holds is IBM (IBM) and he thinks the FANG – Facebook, Amazon, Netflix and Google – basket of companies are not being valued properly anymore. Amazon trading on a price/earnings ratio of more than 200 times suggests this to be the case.
So, why the traditional retailers? McKinnon says people would be right to wonder why anyone would go to shops anymore but, actually, many still enjoy the experience. While he acknowledges retailers need an online presence, he notes that it is much more difficult to return items online than it is physically.
Strong Brands Will Ensure Survival
Although, more pertinently for McKinnon it’s the valuations that appeal. He explains that they are currently being valued “as if they are going to go bust”. However, he believes that their strong brands will be able to survive.
He says Tesco and M&S are in a similar position, with new management in Dave Lewis and Steve Rowe respectively beginning to turn around the ailing high-street chains.
Tesco is further down the road to recovery and has bounced back after a mid-year fall to trade 23% higher than end-June. However, it’s flat on the year and the trust’s latest annual reports show it lost £3.7 million on its investment in the year to 31 October.
But McKinnon says the Booker deal will help it scale up further. That Booker chief, the experienced and well-respected Charles Wilson, will join the combined business is an added bonus.
Marks still has a way to go. Its clothing business has been a drag in recent years, but November’s half-year results suggested that was about to turn with sales coming in flat – better than expected. Its omni-channel offering is also improving.
There’s signs things can be changed, McKinnon says, and he’s prepared to be patient, especially when there’s a 6% dividend yield to compensate for that.
