Retail Melts Down Before Christmas in the UK, Spreads to Continent

After “the worst-on-record unbelievably bad” November, even e-commerce gets hit, not just brick & mortar, on fears Christmas sales could be terrible. 

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

With just one week left before Christmas, Europe’s fashion retail sector is showing little sign of yuletide cheer. On Monday, the shares of UK-based online fashion and cosmetics retailer Asos Plc plunged 37% to £26.14 after the company warned that Christmas shopping on its web platform had got off to a disastrous start. The stock rout, the company’s worst in almost five years, wiped more than £1.4 billion of its value and raises fears that Europe’s high street malaise may be spreading from bricks-and-mortar stores to e-commerce. Since its peak in January 2018, shares the stock has plummeted 65%.

Asos slashed its full-year sales-growth guidance for the year to August 2019 from 20-25% to 15% on the back of a “significant deterioration” in sales in November, which was followed by just a slight uptick in December. The company laid much of the blame for its weak performance on big price cuts across the market, which had forced it to sweeten its promotions to attract customers.

“In fashion we are seeing an unprecedented level of discounting, certainly something I have not seen before, and that’s across the board,” said Asos chief executive, Nick Beighton, adding that the disposable incomes of Asos’s twenty-something customers were still well below the levels they were at a decade ago. “It’s more than just the Brexit-related factors,” he said.

Another possible reason for Asos’ shrinking sales is the over-indebtedness of consumers in its domestic UK market. British household finances, among the most solvent a generation ago, are now among the most indebted of the Western world. According to official data, unsecured consumer debt (not including housing related debt) last year reached a record high of more than £205 billion (€227 billion). PwC says that by its measure, it’s almost £100 billion higher.

This summer the Office for National Statistics (ONS) warned that the accumulated deficit of UK households was equivalent to 1.2% of GDP. That compares with a surplus in France equivalent to 2.7% of GDP and a surplus equivalent to 5.1% in Germany. But that’s scant comfort for Asos, whose sales in France and Germany, which account for over half of its EU sales, are also languishing. On Black Friday, the company knocked 20% off everything, as it did in previous years, but to little avail. Its rivals went lower.

News of Asos’ sales warning sparked a frantic sell-off on Monday of other online retailers such as Boohoo Group Plc, whose shares plunged 13.7%, and Zalando SE (11.6%), as well as store operators like Marks & Spencer Group Plc (4.5%), Next Plc (4.6%) and Hennes & Mauritz AB, the owner of H&M stores (8.5%), compounding concerns that Christmas sales could be exceptionally bad this year. On Tuesday the shares staged a recovery but not to pre-Monday levels. Asos’ stock clawed back less than 5% of the value lost.

Mike Ashley, the founder of discount retailer Sports Direct, last week described November as “the worst on record, unbelievably bad”. Sports Direct recently reported a 27% fall in half-year profits after taking over the insolvent department store chain House of Fraser for £90 million in August. Since then the department store has clocked up additional losses of £31.5 million and Sports Direct’s shares have slumped over 45% since hitting a 52-week high of £4.36 in July.

Holders of retail debt are also feeling the pain. UK department store chain Debenhams’ £200 million of bonds due July 2021 have plummeted 36 pence on the pound since the start of 2018 — on surging fears of a default.

Even Europe’s two biggest high street behemoths, Spain’s Inditex and Sweden’s Hennes & Mauritz, are finding life a little harder this Christmas. Last week, Inditex, whose subsidiaries include Sara, Massimo Dutti, Bershka and Pull&Bear, missed sales and profit forecasts, which it blamed on an unusually warm September and adverse currency moves.

The fast-fashion group, founded 33 years ago by Europe’s richest man, Amancio Ortega, operates some 7,500 stores in 93 countries. It generates over half its sales in currencies other than the euro. But thanks to its centralized sourcing and distribution model, a sizable chunk of its costs are in euros, meaning that when important emerging market currencies fall, as has happened this year, the company’s margins can suffer. At constant exchange rates, the group claims it would have reported nine-month earnings growth of 14%. Instead it had to make do with a meager 3% rise, to €3.07 billion.

It was less than expected. Indeed, the company is on track for its weakest full-year earnings growth in at least four years, according to Bloomberg. Since reporting its latest sales figures, Inditex’s market cap — the largest in Spain and one of the largest in Europe — has shrunk by 15%, to €73 billion. Barring a dramatic turnaround in the next two weeks, the world’s largest fashion retailer will notch up its second consecutive year of declining share prices, which are now down 36% since hitting a historic peak of €36 in June 2017.

Inditex’s biggest rival, H&M, is in similar straits, having seen its shares tumble by over 16% since the beginning of December. Unlike Inditex, it has been slashing its store prices. Yet despite reporting local-currency sales growth of 6% during the September-to-November period, the company is still heading for a third straight year of declining profits as a result of slowing footfall at its core brand stores, which are struggling against online competition.

But if Asos’ recent tribulations are any indication, even the online competition may now be struggling. “This goes against the script,” said Stephen Lienert, a credit analyst at Jefferies. “It was supposed to be bricks and mortar that’s dying and online is the future, but that headline gets ripped up today,” he said.

While other online retailers such as Boohoo and Zalando predictably deny having similar troubles to Asos, if sales in December don’t dramatically improve on Europe’s high streets and e-commerce platforms, the New Year could bring with it a flurry of profit warnings, or even worse. By Don Quijones.

In the US, e-commerce sales growth is still hot, but the brick-and-mortar stores that populate malls face a grim reality. Read… Mall Retailers Melt Down in Four Charts  
 

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  42 comments for “Retail Melts Down Before Christmas in the UK, Spreads to Continent

  1. Michael
    Dec 18, 2018 at 2:56 pm

    This hardly comes as a surprise. The UK retail climate is very bad. Large chains preparing to close stores. Already many locations are empty. Heard on the street: a business angel who is supporting many smaller retailers is currently working full time trying to get their customers out of high street properties rather than supporting strategical moves. If the recession is not here already it will be shortly.

    • Cynic
      Dec 18, 2018 at 4:38 pm

      An interesting phenomenon in the UK is the progressive abandonment of even quite prosperous medium-sized towns by the main chains, leaving huge gaps which are very hard to fill. This will undoubtedly accelerate in 2019.

      The prime street here -supposedly one of the most prosperous cities – now has only a TK Max and lots of shuttered premises. Oh, and a Subway…..maybe for those who like to end it all? :)

    • fajensen
      Dec 19, 2018 at 1:19 am

      Never mind that Brexit is in 3 months. People will be thinking: “Should I go splurge on performing the usual “God I am tired of this ritual”-Christmas shopping or should I save some money for when I maybe lose my job later in the year?!

      My son works in an “off high street” specialty smaller business in Copenhagen (a business which is not that small money-wise). They are doing well and as you said, they are ganging up with other small businesses on sharing services like advertising and on driving quality customers (people who spend) in each others direction.

      The high-street and the malls of today are high-debt, high-expenses locations serving developers. They are, from what I can see in the mall, attracting lower-value demographies (people who “hang out” not buying anything except fast food) than the simpler shop in a cheap, but “boutique” street, but with an internet shopping add-on.

  2. KGC
    Dec 18, 2018 at 3:18 pm

    Disposable incomes at all age levels have been declining as housing and transportation costs have increased and real inflation outpaces salary growth. This is a problem going back more than 20 years. I keep expecting the “experts” to realize you can’t have an economy based on constant increasing sales when wages don’t also increase, and the solution cannot be to provide more gov’t handouts to unproductive member of society.

    • Because Steve Keen said so
      Dec 18, 2018 at 7:53 pm

      Disposable income/expenditure = C + dis-saving + credit

      We have relied on the latter variable for too long to drive a substantial proportion of the economy. When this declines, so too does the economy.

  3. 2banana
    Dec 18, 2018 at 3:20 pm

    Debt, debt and more debt.

    Taxes, taxes and more taxes.

    Eventually – you run out of road to kick the can. Even with cheap and easy money.

    • Willy2
      Dec 18, 2018 at 7:19 pm

      – Don’t forget the impact of increased productivity. That also leads to lower demand.

      • medialAxis
        Dec 19, 2018 at 2:09 am

        Yes, and at the same time the lower cost of production ought mean cheaper prices plus working fewer hours = deflation, which is fine, IMO. Alas, most economists tout the line inflation good, deflation bad.

  4. Dec 18, 2018 at 3:24 pm

    The problem is shipping times can’t meet the deadline, I think USPS might be the best this year. Even Prime customers aren’t getting timely delivery. I was going to buy something, free shipping which would arrive in FEB and I thought I can wait until Jan and get the same time frame for delivery.

    • Chim Ritchalds
      Dec 18, 2018 at 3:28 pm

      I ordered something on Prime yesterday afternoon and had it delivered by 10AM this morning. They seem to be doing ok at least where I am.

      • polecat
        Dec 18, 2018 at 8:56 pm

        Amazon is SATAN !

        just sayin ….

    • 2banana
      Dec 18, 2018 at 3:31 pm

      Or buy at a store for instant delivery….

      :-)

      • curiouscat
        Dec 18, 2018 at 10:14 pm

        If they have what you are looking for

    • Jay
      Dec 18, 2018 at 5:09 pm

      Orders in December that deliver in February usually originate in China.

  5. Cynic
    Dec 18, 2018 at 3:46 pm

    The problem is particularly severe in the UK, with simply horrendous housing and commuting costs, both greatly increased as a % of post-tax income since 2008: not much left over for the average consumer.

    Tim Morgan has done interesting work on the decline of real prosperity in the UK – on the slide since the early 2000’s, and hard to see how it can be arrested let alone reversed.

  6. Alex V
    Dec 18, 2018 at 4:14 pm

    Of course retailers have been training customers to wait for sales for decades, so price cuttinginly reinforces the race to the bottom….

    • MC01
      Dec 18, 2018 at 5:25 pm

      Zalando has been slashing prices savagely in a desperate and, honestly, not too bright attempt to take on Amazon head on. In short they are having sales even before Christmas thus chewing into their most profitable shopping season.
      I’d like to say at least they now have something to brag about, but Amazon has been having “daily specials” every single day since Cyber Monday, no doubt to teach companies like Zalando a lesson. People say do not fight the Fed, but I always say do not fight Amazon.

      Then there’s the issue of the brick and mortar meltdown. Yes, we have it in Europe as well, the only difference is due to much cheaper capital costs too many companies are still able to party like it’s 1999, literally.
      Unibail-Rodamco-Westfield is building a €1.5 billion mall 5 miles from Milan, and I keep scratching my head at the number of places selling prescription glasses and underwear that keep on popping up, always in places with rents running in the thousands of euro per month. That’s a whole lot of glasses and even more underwear just to pay for the rent. No small wonder 10% of Europe’s public companies are officially classified as zombies (cashflow not enough to cover operations) and in the private company sector things are rumored to be “downright scary”.

      While I wait for this retail bubble to hiss out air, I am off to Amazon to buy some books to kill time. I already have Big Like…

      • Atu
        Dec 18, 2018 at 6:30 pm

        Well, the accountant has to buy new glasses when he reaches the bottom line, as he is sure he has made a mistake. When he finds out he hasn’t he also changes his underwear. Before he goes to report to his boss, he also has to change underwear.

        The staff, as he is on his way to the boss, ask why he keeps changing underwear, and he tells them that the company is making serious losses, that surely there will be lay-offs. The staff all have to change underwear. They also each buy the trendiest dark glasses in the shop so as to “go unnoticed”.

        When the accountant exits from the bosses office, he has to change his underwear, and the staff commiserate and do the same.

        This all goes on for quite a while, so to cut a long story short and jump to the moral of the story, the glass and underwear shop reach a perpetual symbiotic stasis supported by the hygienic trends of their own staff and the lack of credibility in own accounting.

        The local laundry does quite well too.

        • Cashboy
          Dec 19, 2018 at 2:23 am

          “Well, the accountant has to buy new glasses when he reaches the bottom line, as he is sure he has made a mistake.”

          Having been an accountant for both large and small companies; The bottom line was never wrong. I often prepared the accounts from the bottom line up. The bottom line was to satisfy banks and sometimes shareholders and greedy director’s bonuses. Turnover figure was to satisfy forecast sales; anticipated growth.
          “Revenue recognition” and “Work in Progress” and “Restructuring Accounts” are an accountants dream.
          Auditors were often in cahoots.
          It is so obvious when you see bust companies like Carillion. When they do go bust, appear to have assets that are worth nothing like what was reported.

      • steve
        Dec 19, 2018 at 3:48 am

        My mate was the manager of a opticians in a medium sized UK town in an ex mining region, they turned over >£1M per year, its a license to print money.

        £150 frames, cost £4.
        £80 ultrathin Lenses, cost £8
        Vain people on monthly contact lens plans, ££££££££££

        Notice that careful “handover” between the optometrist and the sales person, yep they take a % of the sales £100K+ salary incoming.

        • MC01
          Dec 19, 2018 at 6:26 am

          Had I listened to how people keep on bragging on how business X or Y is a “license to print money” I would be living in the Budleigh Salterton Twilight Rest Home for the Terminally Short on Cash. ;-)

      • Juanfo
        Dec 19, 2018 at 12:40 pm

        Down here a new $222 mill mall just went up within 10 miles of 2 ghost malls and a good mall. Located in solid middle class core. Retail over saturation and collapsed infrastructure destroyed these locations. Why is good money spent building malls? What we desperately need are better schools, hospitals, roads, bridges, ports that will drive the economy. Instead of shopping centers that will be abandoned once the novelty wears off. I think the banks use it as a way to siphon money out of pension and investment funds. Executives and politicians seem like the only ones making any money off these massive projects.
        Last night I went to the “better”mall in the high end part of the city. Bought nothing sorry, took cash out of 3 banks to stuff under the mattress. 2 semi anchors across from each other shuttered with fancy graphics claiming the next greatest pretzel business since last year.

  7. MD
    Dec 18, 2018 at 5:15 pm

    The difference between real wealth and prosperity delivered by secure well-remunerated jobs of the type that created the middle class, but disappeared when the factories did, and the , ethereal wealth-type effect provided temporarily by handing minimum-wage retail workers credit cards and NINJA loans starts to come into focus – and not only in the UK.

    January sales mean nothing any more – there’s just one sale after another, a symptom of the fact that after all the money is sucked out of people’s pockets and the economy by banks and lenders in the form of economic rent extraction, there’s f-all left for anyone to buy anything with. Apart from payday loans.

    • polecat
      Dec 18, 2018 at 9:13 pm

      I might add that much of what’s for sale nowadays has been crapified beyond all compare. Nothing lasts as it’s designed, constructed, or manufactured to fail or fall apart …. some of which, in the case of electronics and appliances e.i. the internet of sh!t .. steals your data while it spys on you … to add insult to injury !!
      A race to the bottom for sure.

      Ba Humbug !

    • Jon W
      Dec 19, 2018 at 4:02 am

      The most ridiculous part of that puzzle, however, is that once the highly efficient financial sector has sucked the funds from worker’s pockets, it proceeds to do stuff all with the money. This then causes a demand slump. To ‘fix’ this the central bank destroys returns on investment in an attempt to coerce banks into going out and lending to those same workers. When that scheme inevitably falls over, the government will step in to take over the bad loans and try to drive interest rates even lower so the lending can start up again.

      It is a complete mess, and caused by the financial sector’s fundamental inability to actually invest in productive growth. As someone who has started two businesses, I think this is just what happens when you let boring bookworms who aspire to owning the same luxury Porsche as their neighbour take over. They have no concept of growing the pie. They simply see any business or market as a zero sums game where they must capture the market, or destroy their competition to ‘win’. The reality is that when capitalism is managed correctly, everyone can win as growth drives technology and productivity forward.

  8. Stuart
    Dec 18, 2018 at 5:18 pm

    All town centers in the UK have to offer are charity shops, cards shops, Turkish barbers, fast food takeaways and a couple of big name stores. If you added all these stores together it still wouldn’t equal the amount of boarded up stores. I have never seen anything like this in my life (47).

    It’s not all bad though as the Media tells me we have the lowest unemployment rate ever.

    • Cynic
      Dec 19, 2018 at 12:20 pm

      Quite true; subtract the charity shops and the picture would be quite shocking in most British towns.

      The Turkish businesses (fast food, restaurants, coffee shops, barbers) are also a bad sign, in a slightly different way one needn’t elaborate on but perhaps linked to certain intoxicating substances….

      • Jon W
        Dec 19, 2018 at 4:00 pm

        FYI charity shops in the UK do not pay business rates. As these are fixed against the property valuation they present a floor below which cost cannot fall for a regular business.

        A high street full of charity shops is already dead.

  9. Willy2
    Dec 18, 2018 at 7:17 pm

    – The debt-to-GDP ratio is higher in the UK than in the US.
    – Just look at what happened to the british pound in the last years. Both the EUR & USD went up some 30% since 2014/2015. That means all imports (e.g. oil, food, etc.) have gone up in price by some 30% as well.

  10. Alic
    Dec 18, 2018 at 9:02 pm

    My 26 yo (2 business degrees, no debt) girl refuses to purchase retail. She (and many friends in age group) are frugal, avoid flash (Prius is about as racy as they get).

    Main conversation is “dont need it, dont want stuff”.

    What they do want is short work week with meaningful work (WHO DOESNT).

    • fajensen
      Dec 19, 2018 at 2:41 am

      Those millennials might turn out OK after all :).

      Mine are behaving similarly, they do have a few hand-crafted high quality luxury things, like shoes and bags. Most of what they have is used. It’s like the surfer culture has gone global, quality for them is about the experience, the now, the flow, and being lightweight.

      Consumerism as we know it will be dead in the West in a decade or so.

      • Argus
        Dec 19, 2018 at 2:03 pm

        My 35 year old son also lives frugally, does not want a lot of ‘stuff’, although he would like his own house with room to grow veg. He is studying further but also has a satisfying job. His emphasis is more on social contacts than things and this attitude seems to be shared by his friends.

  11. Cashboy
    Dec 19, 2018 at 1:14 am

    I have a small accountancy practice in the UK. Very few of my clients are actually making a profit. A lot are getting into more debt both by boring from banks or finding desperate suppliers willing to give them more credit.
    Retailers appear to be purely trading because they have personally guaranteed the lease agreement of the shop premises and will try to hold out until the lease ends.
    Retail shops in towns are being replaced by charity shops and fast food outlets.
    66% of people in the UK are now dependent on state benefits and those benefits are being reduced in real terms. However those costs are going up for the government and the tax from employees is going down as more and more are on minimum wage so not paying much, if any in tax.
    Hence we are seeing the UK government deficit increasing all the time. That appears to be the same in most of the EC zone.
    Residential rent had been rising fast over the last few years. This has been caused my mass immigration to the UK. I see that the EC immigrants (mainy East European) don’t spend money but save it and take it back to their home countries.
    I have seen a massive increase in the use of illicit drugs (the price of a highs is coming down as the market becomes saturated).
    The increase in the number of vans delivering goods from online sales (especially Amazon) is incredible. The post office seems to be very busy with postal deliveries from China from Ebay and other online sales ( no import tax, no VAT on these sales or income tax on profits to the UK government).
    I think that retail sales are slowing down (will continue to slow down) due to people running out of available credit (credit cards loaded up).
    I have been losing clients as my solvent ones are now retiring or “getting out”. I am not enthusiastic about new young clients as they appear to lack financial accumen. Those “businesses” appear to be working for large corporations that are reducing their costs ( saving on employers state National Insurance and the increasing compulsory personal pension deductions as well as the risk of employment legislation).
    I could go on and on.

    • X-Pat DE
      Dec 19, 2018 at 10:02 am

      Excellent comment.
      “Retailers appear to be purely trading because they have personally guaranteed the lease agreement of the shop premises and will try to hold out until the lease ends.”
      This happened to my sister in law …. almost drove her bankrupt paying for the leased property with no turnover ….

  12. steve
    Dec 19, 2018 at 3:23 am

    They filled every high street with clone shops selling bland crap and they are surprised nobody wants to visit?

    Let them collapse and we will see what interesting ideas replace them. Here’s a hint the new independent baker and butcher in my town are rammed. They sell real produce, no water injected meat, no bread that stays fresh for a month, open from early till they sell out.

  13. Carlito
    Dec 19, 2018 at 7:54 am

    Was in France last 2 weeks.
    A socialist pit.
    Violence in the streets, beggars everywhere, shanty towns in the city itself, “migrants” and the associated nuisances everywhere and literally tribes of young thieves waiting for chinese tourists. Some ares are no longer recognizable as french.
    God was it awful.
    The good news though was that hotels can be had for cheap on discount sites. But the taxes are horrendous. Everything is taxed at puerto rico levels.
    Clearly a country to avoid if you can.
    Entire portions of Paris were closed off for protests. I don’t see how bricks and mortar businesses can thrive in this environment.

  14. Peter Johnson
    Dec 19, 2018 at 11:15 am

    DQ, you wrote:

    ‘“In fashion we are seeing an unprecedented level of discounting, certainly something I have not seen before, and that’s across the board,” said Asos chief executive, Nick Beighton….’

    I wonder how long this fellow has been CEO, because I remember seeing this level of discounting before.

    It was late 2008, when people wondered whether it was the end of civilization, and retailers just wanted cash. They permanently spoiled me for 75-80% discounts.

    I agree with the others that it might not just be Brexit fears or changes in Millennial spending patterns but the early stages of a recession.

    Petunia, I would love to hear your thoughts.

  15. Cashboy
    Dec 19, 2018 at 9:54 pm

    I would actually recommend listening to
    Controversial retail tycoon Mike Ashley, owner of Sports Direct and House of Fraser, says he is “not Father Christmas” in a combative appearance before Members of Parliament in the United Kingdom.Mike Ashley being scrutenised by UK government.
    Mike Ashley started life as a street wise market stall holder and realise that most government officials have never had a proper job.
    He explains the High Street fall:
    https://www.youtube.com/watch?v=wn3p7by5F0I

    • ML
      Dec 20, 2018 at 1:11 am

      Pay no attention. MA is out of his depth. He knows it but won’t admit it.

  16. ML
    Dec 20, 2018 at 12:23 am

    In my newsletter for clients and cintacts, landlords and retailers, I wrote abour and predicted years ago what is happening to UK retail now so for me and those of my readers that weren’t scathing of my comments it is pleasing to have been spot on.

    The upshot is that as a consequence of social transformation there will not be enough demand to support all the shops and related businesses that exist now. The era of mass-marketing is over. At long last, individualism is going to shine through.

  17. R Davis
    Dec 20, 2018 at 3:12 am

    In the UK, people with money travel abroad & spend there.

    Several pre-Xmases ago, UK banks approved credit cards to the poor knowing that – at least they would spend in the UK & a consumer led recovery was had.
    The interest paid on invested monies was lowered to cover the losses incurred by the poor c/c holders failure to pay back their spent credit.
    Mark Carney a veritable Robin Hood !!

    Today, it seems that the well to do of the UK do not have the capacity to spend ??
    Gee Golly Gosh – hey.

  18. TheDona
    Dec 20, 2018 at 1:49 pm

    Has anyone factored in the money being spent by the Preppers/Stockpilers? Who needs “fashion” if you think food/medicines/household supplies are going to become harder or more expensive to get in the near future.

Comments are closed.