High street retail stocks: Best ways to play the theme

The high street is in decline, with one in 10 shops empty, but some outlets are thriving in the online retailing storm. David Prosser explains how investors can pick the winners and avoid the dogs. 

Retailers are calling 2018 the year of crisis. By the end of October, almost 3,500 stores on the UK's high streets had shut their doors for good during 2018, according to the Centre for Retail Research (CRR), resulting in the loss of 49,600 jobs. Retail specialists have been forecasting the death of the high street for some time, but this has been the year in which those predictions have really started to come true. 

"Since 2008, retail has gone into slow decline," says Joshua Bamfield, director of CRR. "Its decline is now speeding up. The equivalent of just under one in 10 retail employees has been affected by administration in the past 10 years. In the previous 10 years, the figure was about one in 50." 

To understand why, consider a single statistic: last year 16.3p of every pound spent by shoppers in the UK went to an online retailer, up from 3.4p in 2007, according to the Office for National Statistics. 

Retail derailed 

Other factors have played their part. During a decade in which people's earnings have failed to keep pace with inflation, consumer spending has come under ever-increasing pressure. Meanwhile, retailers' costs have increased – not least business rates that their online competitors don't have to pay – while many retailers over-expanded and over-borrowed during the better times, when consumer credit was fuelling a spending boom in the run-up to the 2007 financial crisis. 

These latter problems are all woes that will pass. However, the rise of online shopping looks inexorable. Research consistently shows millennials and members of Generation Z, a younger cohort, are more likely to do their shopping online than their parents are. They still visit physical stores, but often only to size up or try potential buys before shopping around online or on mobile channels. 

Fewer people are going to be buying in-store in the future, unless retailers do something radical to change this dynamic. And not only on the high street. The shopping centres and out-of-town retail parks once seen as the biggest threat to high street shops in towns and cities are suffering just as badly. 

Retailers that did not anticipate the pace of change and position themselves accordingly have been painfully caught out. Retailers that have collapsed this year, such as Toys R Us, Maplins, House of Fraser and Poundworld, have in the main been those that missed the online boat. They follow a long line of retailers – beginning with Woolworths a decade ago – that simply no longer seem relevant.

So is this the end of the road for the UK's once-bustling high streets? In some towns, it might feel like that. According to The Local Data Company, across the country as a whole, one in 10 shops now stands empty the to-let boards forlorn reminders of what has been lost. And this is just an average figure. More like one in five shops stands vacant in the worst-hit areas. 

And yet, while the high street is changing, it is not disappearing altogether. Certain types of retail outlet are bucking the trend towards closure. Data from PwC shows that there were more openings than closings last year among beauty stores, coffee shops, ice cream parlours and booksellers. 

"The UK high street is undoubtedly facing headwinds, but retailers are waking up to the challenge and reimagining the future," says Lisa Hooker, PwC's consumer markets leader.

"The winners at the moment – nail bars, coffee shops, bookstores and craft beer pubs, for example – are all flourishing because they serve the needs of emerging consumer segments such as experience-seeking millennials, and offer a differentiated physical proposition that online offerings can't compete with." 

The second idea is easier to grasp. Coffee and craft beer are products that consumers will always need to buy in-store, assuming we're talking about drinking them immediately. Similarly, nail treatments really can't be delivered online. 

Source: interactive investor      Past performance is not a guide to future performance

Points of difference 

As for the emerging consumer segments, the key here, retail experts believe, is to think more deeply about how and what shoppers want to buy. 

The smartest retailers recognise that modern technology can be used to augment the in-store experience and provide a point of difference from the online shopping experience. For example, touchscreen smart mirrors can recognise items customers take to changing rooms to try on and suggest new ways to style them. Ralph Lauren shops report good results from such an innovation. JD Sports is another retailer benefiting from the use of in-store technologies, such as 3D printing to create bespoke products, in-store integration with mobile apps and facilities for testing out new boots. 

"Experience shopping" is now a growing trend, with retailers seeking to entice shoppers into their stores with more than just products. That might be Space NK's in-store lessons on applying makeup, or Lego's and Disney's efforts to encourage children to play with their products. It might simply take the form of a small independent retailer providing a highly specific service and knowing the local market extremely well. 

The appearance of bookshops on PwC's list of retailers opening new stores is significant in this context. Waterstones alone has opened 20 new shops over the past two years. Its business model is to focus on delivering a good customer experience. To that end, managers, given freedom to run their shops to reflect their individual personalities and the needs of a local community, appear to be connecting and engaging with customers, principally through recommendations and book readings. 

Jill Standish, head of the retail practice at consultancy Accenture, argues that a key challenge for retailers is building a brand that reflects their customers' values.

"The millennial generation has high expectations when it comes to retailers’ commitment to inclusion and diversity, and those values are influencing their decision-making," she says.

Shops that don't employ staff who represent the make-up of the local community are likely to alienate customers, while those that insist on using models who look nothing like the target market – in terms of ethnicity or body shape, for example – can expect a backlash. 

Personalisation is another theme concentrating minds. There was a time when your local butcher or grocer knew your name, but today online retailers with a wealth of data about their shoppers find it easier to interact with customers on a one-to-one basis than store staff do. However, technology will change that. Some retailers are now adopting tools that enable them to make real-time offers to shoppers in-store – perhaps a discount based on their purchasing history or an idea for a recipe using ingredients in their basket. 

Many of these developments are at an early stage, but they offer clues to how the high street can compete. And, of course, retailers don't face a binary choice: leading retailers increasingly operate multi-channel business models, selling online and in-store. The high street can benefit here. The click-and-connect model, for example, incentivises shoppers to return to stores to collect purchases rather than pay for a home delivery. 

These new retailing models have worked well. The tie-up between Argos and Sainsbury's, for example, has boosted sales for both businesses. John Lewis, meanwhile, says most of the online orders it receives are picked up from its stores. Three-quarters of its click-and-collect customers pick up their parcel from a nearby Waitrose, and many of them then spend money in that store. 

Support strategy 

That said, the high street will need support to keep the casualty rate down. A revamp of the business rates system, now under consideration by government, is one possible source of help. However, local problems abound. Many retailers blame high parking charges for customers deserting high streets. "The success of every high street is linked to the success of its town or conurbation," says Bamfield. "If it is declining, the high street is likely to be declining. New strategies are needed, particularly for the areas facing the greatest decline."

Get it right, and the high street will evolve rather than die. Shops will succeed by offering a more engaging and personal experience augmented by new technology – or at least a service that can’t be delivered online. They will serve as just one part of a retailer's distribution strategy.

How to invest in changing face of the high street

There is a range of different ways to play this theme. One possibility is the Amplify Online Retail ETF, which invests in both pure online retailers and those with physical stores, if they make more than 70% of sales online. This global fund's holdings include Land's End and Etsy.

Another option is the Vanguard Consumer Discretionary ETF, a US-focused fund that tracks an index of ­firms that sell consumer discretionary goods. Its biggest holdings include Amazon, The Home Depot and Nike. Inevitably, however, these two ETFs are specialist plays. 

For investors looking for greater diversi­fication, Philippa Gee at Philippa Gee Wealth Management suggests a smaller companies fund with a good track record in this area. "Larger funds often feel obliged to hold high street companies in their portfolio for the wrong reasons – Debenhams is a classic example," she says. "You need a fund with dexterity, such as Liontrust UK Micro or Miton UK Smaller Companies."

Another way into the sector, according to Martin Bamford, managing director at ­financial adviser Informed Choice, is through a property fund with exposure to retail.

He says:

"Our preferred fund is the L&G UK Property Feeder fund, which has a healthy cash balance to manage investor redemptions, and a good spread of holdings across office, industrial and retail units."

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