• Morrisons’ wariness about taking the online plunge is understandable
• Why are UK gilt yields rising?
• Goldman Sachs sees the fiscal cliff coming
It was an online Christmas, it seems. John Lewis says it conducted a quarter of its trade over the internet, a remarkable statistic even if it is inflated by the click and collect service. Next week we’ll learn what happened to a retailer that (so far) has declined to play the online game. Morrisons, if the rumours are correct, had a shocker. Its like-for-like sales are estimated by the City to have fallen 2.5%.
Strip out inflation and that implies volume – the quantity of stuff being shifted – is declining at about 5% a year. For a business with a huge fixed overhead in the form of 455 supermarkets, that’s serious. Morrisons, almost certainly, will soon bow to the inevitable and name the date it will adopt its main rivals’ online ways.
But don’t make the mistake of thinking this is a tale of an idiosyncratic shopkeeper being dragged into the 21st century. Morrisons’ wariness about taking the online plunge is understandable. For traditional supermarkets the economics of online retailing look horrible. Sir Ken Morrison himself dismissed home delivery as something he had done “on a bike as a young man”.
The rule of thumb says it costs £15 to £20 to pick and deliver a customer’s order. But nobody is consistently charging more than a fiver and the groceries themselves cost the same whether you turn up in person to wheel a trolley or have the goods delivered to your front door. Sir Ken was right: for the retailer life is much easier when the customer does the fiddly part.
But his latest successor, chief executive Dalton Philips, would also be right to admit that the penalty for not playing by the new rules is now too great. The online grocery market is worth £5bn and is growing at £1bn a year – that’s a big pie to refuse to fight for. Just don’t expect the economics to get better for anybody. Investec’s Dave McCarthy, who has been warning for ages that the supermarkets face a “damned if they do, damned if they don’t” choice online, thinks industry conditions are the worst for 30 years. Even early internet-adopters such as Tesco and Sainsbury’s, he estimates, are suffering 3%-5% volume declines in their traditional large stores.
Managements, naturally, are keen to promote the idea that they haven’t squandered capital and that, actually, a virtuous circle is developing. Tesco and Sainsbury’s argue internet shoppers tend to be more loyal to the brand and spend more.
Really? McCarthy is sceptical, asking why these supposedly perfect customers require so many discount vouchers and why Tesco and Sainsbury’s are still suffering like-for-like declines in sales volumes. That £5bn online market has not been created out of nothing. In the main, it’s cannibalisation of sales from traditional stores. Profits, concludes McCarthy, may have peaked in 2010, which is what share prices suggest.
Of course, the plot would change again if supermarkets could persuade online customers to pay, say, £20 an order. But there’s little chance of that in the current climate. It’s all so much easier for non-food merchants, who are, in effect, re-creating catalogue retailing from the 1960s and 1970s but without the printing costs. For the ideal model, look no further than Next, whose 25-year-old Directory business has morphed into the slickest online operation in the land.
Next’s logistical skills are impressive but, against the supermarkets, the group starts with the advantage that clothes don’t have been to be delivered in refrigerated vans. Chief executive Simon Wolfson is also ruthless in pruning high street stores whose profit margins are slipping: in macho supermarket-land, that’s still alien thinking.
On such details, retail empires shift. It’s astonishing to report that the stock market value of little Next (£6.2bn) is now within a whisker of that of grand old Sainsbury’s (£6.3bn) and is above Morrisons (£6.0bn).
Why are UK gilt yields rising?
UK gilt yields are rising. On the 10-year, we passed 2% this week and we’re now neck-and-neck with France, which a couple of months ago was being described by the Economist as the ticking time-bomb at the heart of Europe. Why are yields rising? Three possibilities:
(a) It’s the beginning of the end for George Osborne and the coalition government. Bond vigilantes are on the march and have rumbled a chancellor who can’t meet Labour’s pre-election debt-reduction targets, let alone his own. International investors will now demand a better return for the privilege of funding HM government’s deficits.
(b) It’s a sign of a return of normality and should be welcomed. There’s a whiff of growth in the air, at least by the end of 2013, and it’s only natural for investors to imagine the day when the gilt market is not so distorted by bursts of quantitative easing.
(c) It’s too soon to say. Everybody should calm down and remember that a shift from 1.5% to 2.1% in the 10-year yield is hardly momentous. In any case, US Treasury yields are also rising. It may simply be that Mario Draghi at the European Central Bank, by making Italian and Spanish IOUs relatively safer, has dampened the panic buying of the supposedly “safe haven” sovereign debt of the US and UK. That’s a good thing too.
At the moment, factor (c) is probably uppermost, but (a) (especially) and (b) should not be dismissed. This plot is still developing – indeed, developing fast. Britain’s triple-A rating may be soon be history and on 25 January we’ll learn whether the UK is halfway into a triple-dip recession. The economists’ consensus thinks so: a fall in fourth-quarter GDP is predicted and Friday’sservice sector data was bleak.
A modest fall in GDP should not scare the market. But the reaction to a big decline – say 0.4% – is tricky to predict. Would investors question Britain’s deficit-fighting capability or take the benign view (from Osborne’s perspective) that interest rates will be low for longer and so gilt yields should fall again?
Hard to say, but there’s a lot else happening at the end of this month, such as the removal of child benefit from higher earners, a process that could be both chaotic and shift opinion polls just as investors start to think about the 2015 election. A “perfect storm”, could be brewing, thinks Nick Parsons, strategist at National Australia Bank. Landfall, if it happens, is about three weeks away.
Goldman workers need to lead from the front
Nobody ever got to the top of Goldman Sachs without being able to spot a trading opportunity at 10 paces. No surprise, then, that the investment bank noted that the fiscal cliff drama could have implications for executives’ bonuses – or, strictly speaking, restricted stock units earned in previous years but awaiting distribution.
Pay them in January, as normal, and the bonuses could be subject to the (modestly) higher 2013 tax rate for big-earners that a cliff compromise was very likely to bring – and did. Hand out the shares on 31 December and the executives – 10 individuals collecting $65m – would benefit from 2012 rates.
It’s not the most egregious piece of tax planning you’ll see. But Goldman chief executive Lloyd Blankfein, one of the beneficiaries, has been banging on for ages about the need for rich Americans to accept higher taxes as part of the hoped-for US revival. The new year soft-shoe shuffle makes it look as if senior Goldmanites would prefer to lead from the back. Why couldn’t they show self-restraint? They just can’t help themselves.