Originally published in Retail Week.
Our industry finds itself in a perplexing spot in 2024.
Macroeconomic conditions aren’t great but they’re an awful lot better than they were a year ago. Opportunities abound, particularly the potential for AI to deliver efficiencies throughout the value chain but the challenges are also plentiful.
The stock market, mesmerised by technological possibilities, appears to have lost interest in the sector. That is beginning to be reflected in bid activity from investors attracted by some extremely low valuations. Global geopolitical factors appear, increasingly, to play an outsized role in business dynamics – these are beyond the control or predictive capacity of even the very best management teams. So which way now?
In some respects, the UK consumer sector continues to muddle through following the ructions of Covid-19 as unusually large swings in supply and demand dynamics have created significant imbalances.
In isolation, the pandemic lockdowns, surges in online demand, Brexit-related complications, supply chain dysfunction, multiple prime ministers (and some unconventional policymaking), an inflationary and interest rate surge, wars in Europe and the Middle East, multi-decade lows in consumer confidence would each have represented managerial challenges. Taken together over a few short years, executives could be forgiven for feeling punch drunk.
Extreme folly
There was a flurry of, predominantly digital, retailers that floated on the London Stock Exchange in 2021 on the back of strong performance through lockdowns, with investors persuaded by the narrative that the online channel was experiencing a quantum leap in penetration. This has proved to be extreme folly.
The median share price performance of this group has lost over 80% of its value since floating. Two of the group, Made.com and In the Style, both went into distressed sales, while another, Seraphine, was taken private at a price that, even after a bid premium of over 200%, represented a loss of 90% for investors in the IPO. Overall, something over £10bn of value has evaporated across this cohort of listings.
The credulity that investors demonstrated with regard to the sustainability of Covid-enhanced performance was hard to fathom at the time – the companies came to market on an average multiple of EBITDA of over 19x against a long-term sector average of 7x to 8x. For those that remain listed, the average is now, by no coincidence, 7x.
The challenge for these companies and others in the sector is whether a public listing is the most appropriate ownership model. As highlighted above, many are miles under their IPO price and investor interest in their performance and strategies has all but disappeared. The volume of shares being traded is minimal, creating liquidity issues that further undermine the attraction of the businesses to investors.
"Removing stamp duty on share trading has been mooted as a means of reducing the liquidity challenge but this is unlikely to make a meaningful difference”
This risks leaving businesses adrift with, in practice, very limited access to capital and, with the ‘weighing machine’ function of the markets clearly awry in respect to accurate price discovery, potentially vulnerable to takeover.
Currys is the latest business to find itself in this twilight zone – once part of the FTSE 100, the shares had fallen by 90% from their peak in 2016 before bid interest emerged last month.
It’s hard to identify clear solutions to these interconnected problems. Removing stamp duty on share trading has been mooted as a means of reducing the liquidity challenge but this is unlikely to make a meaningful difference.
On the positive side, there are doubtless attractive opportunities within the listed sector – for those with the diligence to look and the means to transact, it’s highly likely that the volatility of the recent past has created bargains.
