I. Sector Landscape and Outlook
 

The UK, a country of 67.26 million people, is the most varied market in the world, due to regional diversities in terms of cultures, lifestyles, and preferences. The UK retail sector is going through an exhilarating phase, characterised by a curious interplay between e-commerce, technology, and customer experience with brick-and-mortar stores at the centre of it all. Rapid digitisation is further driving new customer trends and behaviour. Hyper-customization and mass personalisation are expected to be primary offerings from retail brands, going forward.

UK Retail Sector Key Facts

According to the latest figures reported by the Office of National Statistics (ONS), online shopping is booming amid COVID-19 pandemic. In May 2020, the proportion spends on online retail sales soared to a record high at 33.4% against 30.8% reported in the previous month. Store closure owing to the containment measure taken by the government boosted online sales as more stores are going online to save their top-line. The volume of retail sales in May 2020 surged by 12% following a record plunge of 18.1% in April 2020. Fuel sales volume increased in May after a steep reduction in April 2020; however, still remain approximately 42.5% lower than February 2020, when travel restrictions were not in place. Non-food stores provided the biggest monthly contribution in May retail sales, driven by a strong jump of 42.0% in household goods stores, with the opening of hardware, paints and glass stores. Sales at non-food stores soared by 23.7% in May 2020; however, it was still 42.1% lower on a YoY basis, with apparel stores in the hardest-hit category with sales down by more than 60%.

Fig 1: Retail Sales Trend


Source: ONS

Fig 2: Retail Sales Breakup
 
 

Source: ONS
 
Key trends in the retail industry

1. The rising footprint of Omni channels: E-commerce transactions across the board are growing significantly faster, making this a huge untapped market for the next growth phase. Further, the cost of servicing to smaller cities is likely to reduce as supply chain, and logistics companies are innovating digitally. Omni-channel initiatives such as 'click and collect' would allow companies the luxury of not needing to maintain a separate inventory at the warehouse, thereby reducing costs. This would help companies to reduce duplication of inventory, increase the throughput of the store, and offer seamless online and offline experience to customers. Younger consumers' preference for novelty, coupled with technology and social media, has helped new brands to enter the market and disrupt the business models of legacy brands, dramatically levelling the playing field. Instagram advertising and influencer marketing have helped their cause, coupled with e-commerce focused distribution.

2. Use of technology in supply-chain management:  Supply-chain challenges have increased multi-fold during the current environment and include a) inventory management, b) demand forecast accuracy, c) order fulfilment and d) returns management. Technology has helped to manage and enhance the exchange of information between various supply-chain partners to attain outcomes such as increased control over demand planning, better inventory management, and effective and near real-time tracking and delivery. A single view of product for efficient execution of online orders is a key for higher sales through the omnichannel. By using technology to establish a two-way flow of information, retailers have started to adopt the 'replenish and pull' supply-chain model against the 'forecast and push' model, leading to better inventory management.

3. Retailers are focusing on Future Store: Customers are becoming channel-agnostic, leading to the rapid adoption of multichannel commerce. Well-integrated technology is no longer a value creation, but now a necessity to deliver a unique customer experience which increases customer stickiness. Customer experience is likely to play an important role in the next 3 to 5 years and would overtake price and product as a key brand differentiator. To drive footfalls to stores, retailers are focusing on endless aisles, self-checkouts, VR zones, free Wi-Fi, lounge area, WhatsApp shopping, wheelchair service, virtual trial rooms, and customised 3D printing of accessories. We believe that AI services, smart assistance, and cameras and sensors are likely to be used in stores in delivering personalised services to customers in the medium term.

4. Strong demand for home office equipment: Electronic equipment retailers are monetising on a rapidly expanding remote workforce and experiencing a demand boom as they look to provide solutions for employees, who are now working from home on account of the coronavirus pandemic. According to the Dixons Carphone Plc, a United Kingdom-based electrical and telecommunications retailer, the demand for home office equipment including computers and home networking devices is soaring. Further, the demand for television and gaming devices has also spiked amid COVID-19 pandemic. Also, the lockdown has helped to revive the TV market after years of slow growth, primarily demand of large-screen television model has soared sharply. 

Risk

A slump in the consumer purchasing power due to massive lay-offs and furloughs could have a weigh on the demand side of the economics. If unemployment continues to surge, it would have an adverse impact on the demand. Though the government has announced a series of stimulus, the next wave of the outbreak could be a catastrophe, especially for the non-essential and discretionary product retailers.

Outlook

In the near term, most of the retail sales are likely to be driven by e-commerce segment. Hence, companies have been enhancing and investing in their digital infrastructure. Currently, e-commerce accounts for a small contribution for most brands and provides an opportunity to tap a bigger market. Going forward, we expect the demand for essential items to remain steady as the demand for these products are immune to the economic cycles. Non-essential products’ demand is expected to revive further in coming months as this segment reported a sharp recovery in May 2020 after months of contraction, and trend is expected to continue with gradually cooling lockdown restrictions. Also, demand for electronic and network equipment would continue to grow, as prevailing work from home and remote working would be in fashion for an extended period of time.
 
II. Investment Theme and Stock under Discussion (SBRY, DC., PETS and DNLM)

After understanding the recent trends in the retail industry, let’s now look at the four players from the industry those are listed on the London Stock Exchange. To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).