The Golden Quarter: Which UK retailers could weather supply chain shortage?
Joshua Warner November 11, 2021 2:33 PM
Retailers could struggle to keep up with demand over the key holiday shopping season amid ongoing supply chain disruption. We outline four stocks that look well-placed to outperform during retail’s Golden Quarter in 2021.
Will supply chain pressure scupper the Golden Quarter?
The Golden Quarter marks the busy holiday shopping season for retailers which, if prepared, can be the biggest sales period of the year and when they generate the most profits. However, with the UK economy still in a fragile state as it recovers from the pandemic and companies facing rising costs and supply chain disruption, there are concerns the Golden Quarter this year could be one plagued by problems and defined as a period of missed opportunity.
UK retailers are being hit from all angles at present. Labour shortages means companies are struggling to find the people they need to transport goods and work in warehouses, costs for labour, materials and shipping continue to rise, and lead times to shift goods around the world has lengthened thanks to congestion within the freight industry and at ports.
Plus, there are still concerns when it comes to demand. Consumer spending dropped for five consecutive months to September, marking the longest consecutive decline in monthly sales since records began in 1996, although sales are thought to have returned to growth now that restrictions have eased – and they are still way above pre-pandemic levels. But, with households facing rising costs across the board for everything from energy to food, there are questions over how frivolous spending will be this Christmas. A recent survey by Barclaycard suggested nine out of ten households were worried about how inflation would hit their finances.
Still, companies from all sorts of industries have struggled to meet demand because of supply chain issues. In fact, around 7% of retailers said they struggled to secure the materials or services they needed in August, according to the ONS, with clothing and department stores being hit even harder. That may have worsened since and is expected to remain a problem over the Golden Quarter.
What retail stocks could weather supply chain pressure?
There is not a retailer that has been able to completely avoid the supply chain problems in recent months. However, a number of big names look to have been prompted into action in recent weeks to ensure they have the inventory they need to meet demand during the key holiday shopping season. If successful, this could allow them to shine when results start to flood-in this January.
Let’s have a look at four UK retail stocks that have the potential to shrug-off supply chain woes and put in a solid performance over the coming weeks.
Associated British Foods is a unique play. It is best known for owning low-cost fashion chain Primark but also runs sizeable food-related businesses offering ingredients, sugar and agricultural feeds while also selling stuff like bakery goods and well-known consumer goods like Twinings tea and Patak sauces to supermarkets. In normal times, Primark is the main profit-driver of the business, but its diversification has paid off as it has been able to offset Primark’s weakness during lockdown with strong demand for its food divisions.
The company said earlier this month that Primark had ‘experienced further supply chain disruption including temporary closures at dispatch ports, limited sea container availability and congestion at destination ports’, which delayed stock being handed over to suppliers and prolonging the time it takes for inventory to hit stores. However, it said the disruption has so far had a limited impact on a small number of lines and that it had already bulked up inventory in its warehouses to ensure it has enough stock to cover ‘the majority of lines for the important Christmas trading period.’ It said it is continuing to work with its suppliers to mitigate any problems and taking advantage of the fact it has larger warehouses than some of its rivals.
Plus, AB Foods is confident Primark’s margin can continue to improve despite the inflationary pressure hitting the markets. It has countered higher supply chain and raw material costs by cutting jobs, improving the efficiency of scheduling the workers that remain, and cutting operating costs.
Primark, which refuses to offer an online delivery service like most of its rivals to keep costs down, has lost around £2 billion of sales since the first lockdown but it is confident it can recover this over the coming years, having seen like-for-like sales rise above pre-pandemic levels during periods when its stores have been opened and unhindered by restrictions.
Meanwhile, its food businesses are also in a solid position to counter any rise in costs, with AB Foods stating it will pass these on through higher prices if necessary. And, being at the raw end of the supply chain for things like sugar and feeds means it has been able to benefit from rising commodity prices, helping to hedge against higher costs when sourcing other commodities like corn oil for its goods.
Homewares outfit Dunelm has been among the strongest performers during what has been a tough 22 months for retailers. It was able to use its stores for click-and-collect even when they were forced shut during the pandemic, helping it to push its online offering that proved particularly popular with people stuck at home during lockdown. But they have still flocked back to stores since they reopened while continuing to embrace Dunelm’s digital offering – with sales an impressive 48% above pre-pandemic levels in the 13 weeks to September 25, with one-third of sales being made online for delivery or click-and-collect.
Dunelm said in October that ‘
and doesn’t need to refresh its lines as often. Plus, customers unable to find exactly what they are after are more likely to pick a substitute product when buying homeware products compared to other segments of the retail market.
The company has also decided to step-up investment in its supply chain with plans that include a new furniture warehouse and a new facility that will be dedicated to serving online delivery orders, which should place it in a stronger position.
Dunelm has so far managed to maintain its gross margin. It has wavered due to the timing of its sales events but has so far avoided any meaningful hit from supply chain pressure, with Dunelm having offset rising costs with sourcing gains.
B&M has had the right offering at the right time. Its food offering meant it was allowed to keep its stores, including the vast majority housing its array of general merchandise, open during lockdown and swallow-up customers unable to shop elsewhere, while finding a bargain has become more important for those who have been forced to tighten their purse strings during the pandemic. That has spurred it on to continue opening more stores.
B&M is all about offering a wide selection at value – ensuring there is something for everyone who visits its stores. But this also means goods can fly out of the door as quickly as they were shipped in, resulting in a higher turnover of stock. B&M adds, on average, 100 new lines every week.
With this in mind, B&M made the decision to stock-up early for this holiday season, in the knowledge that much of its products have to be imported in and are therefore at risk from freight delays or port congestion.
B&M said it has ‘good stock availability heading into peak trading having deliberately taken delivery of imported general merchandise earlier than normal, with supply chains across the group remaining robust’ when it released interim earnings showing revenue growth had slowed following the boom last year but remained well above pre-pandemic levels, with earnings also continuing to climb.
‘We have responded decisively to supply chain challenges by leveraging our strong supplier relationships and we have improved in-store execution. As a consequence, we are fully stocked heading into the Golden Quarter, with stores already showcasing our excellent Christmas ranges,’ B&M said.
B&M’s stringent focus on costs could also bode well when it comes to protecting profitability. One advantage comes from the contracts it has with its long-term partner that ships goods from Asia, with freight costs fixed at pre-agreed rates. That will help alleviate B&M of rising freight costs. For context, the Drewry World Container Index suggests the average world price of shipping a 40-foot container has risen to over $9,000 in November from under $4,000 at the start of 2021.
Fashion retailer Next is notorious for under-promising and over-delivering with its conservative view when it comes to guidance, which has seen the firm upgrade expectations on numerous occasions since the pandemic started. Next has also been among the strongest performers within the retail space over the last two years, with its latest update issued in November showing sales and profits have surpassed pre-pandemic levels this year despite the uncertain environment.
Next revealed in September that supply chain disruption meant stock levels were lower than planned. In fact, it had 12% less inventory in September compared to pre-pandemic levels, which it described as ‘far from optimal’. It admitted that this may have held back sales growth but said its overall performance demonstrates it offers a broad enough range to encourage people to find alternatives when the desired product is not in stock.
However, the situation has improved since then and Next is hoping stock levels will return to more normal levels by December, when it expects inventory levels to be, at worst, just 5% below pre-pandemic levels.
One advantage that Next boasts is it use of Platform Plus, its digital tool that allows it to broaden the selection of products on offer by tapping into data from its partner’s warehouses, allowing it to swiftly add more stock of popular products within a couple of days.
Notably, Next said in September that it was not having any trouble in recruiting staff despite the tight labour market, but it did warn that securing additional staff to work in warehouses and logistics for the peak holiday season was becoming difficult. The situation was dire enough for Next to warn that it was ‘likely to experience some degradation in our service in the run up to Christmas’ unless immigration rules were eased. In November, it said labour shortages were continuing to make it difficult to hire warehouse staff and drivers, but that stock limitations were being offset by ‘strong underlying demand’.
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