Consider the non-food sector as life's extras. It’s a rather big umbrella and covers retailers providing most of our luxuries in clothing and footwear; homeware; furniture & flooring; DIY and gardening; electrical and health & beauty.
As a consumer you’ll understand that buying products in these areas are not often life’s ‘must-haves’ but ‘would like to haves’ and as such we use our discretionary spending to buy the latest fashion clothing or to have a particular type of flooring in your home.
This is a crucial difference for the non-food sector as items in this category are considered luxuries rather than absolute necessities.
Retail companies that produce and deliver these products are categorised as part of the consumer cyclical industry.
If you are considering investing in this area then it’s important to understand the characteristics of the industry and the companies.
What is consumer cyclical?
Retail companies like other companies that fall under the consumer cyclical category will find performance is closely tied to the business and economic cycle.
When the economy is rolling and consumer confidence is high, these companies do well but when times are lean and consumers are less confident about the economy, they are vulnerable to consumers tightening their belts.
Retail companies are broken down further by sectors (Clothing and footwear; homewares; furniture and flooring; DIY and gardening; electricals and health and beauty) with some cross over between them. For example, Marks & Spencer and Primark can be found in both clothing and footwear and homewares. Argos, John Lewis and Ikea deliver products in both homeware and furniture and flooring. You can find a list of the top 10 retailers in each category by market share here www.retaileconomics.co.uk/top-10-retailers-furniture-and-flooring.
Who are the players?
It’s a diverse arena and many names are found on the high street such as: John Lewis Partnership, Walgreens Boots Alliance, Dixons Carphone, Home Retail Group (comprising Homebase and Argos), Amazon, Primark, Sports Direct, Debenhams, Inditex (including Zara, Zara Home, Massimo Duti, Pull and Bear and Stradivarius), Laura Ashley, ASOS and French Connection.
Other general retailers include Dunelm, Carpetright, Halfords, Kingfisher and Mothercare. Health & Beauty in the UK is dominated grocery retailers Tesco, Asda, Sainsbury, Morrisons and Boots and Superdrug.
Among the FTSE 100 companies, which are companies with the largest market cap, as of June 2017 there are three retailers: luxury brand Burberry, Marks and Spencer and Next.
What is shaping the non-food sector? The Amazon effect
When it comes to sales growth in the retail sector there is a complex interplay of economic factors such as consumer spending and the economic backdrop.
The current environment is described as challenging by many retailers and undoubtedly the non-food sector is one shaped by the twin threats of intense competition (particularly, the hulk that is Amazon) and the revolutionary change in the our shopping habits (think of the sheer range of things we now happily purchase online).
Certainly, a big headache for older companies are the new business models altering a fractious landscape and how to adapt.
There's the usual balancing act to make more cost efficiencies while delivering profits and value for shareholders. PwC puts it succinctly in describing that "retailers are being confronted with challenges to their very existence".
Department stores are having a hard time to be relevant as more specialty stores crop up customers no longer have the same amount of time to browse and one-stop shopping no longer satisfies needs as specialty stores can provide more selection, quality as well as reasonable prices.
Then there is Amazon such is the breadth and scale of the online giant that analysts have taken to calling its catalytic presence on the retail map as the “Amazon effect”. The online retailer accounts for almost a third of the S&P 500 retail index and its market cap is $477bn.
In June, Amazon snapping up US grocery retailer, Whole Foods, had reverberations not just in grocery retail but also across the entire retail sector, as investors sent shares tumbling seemingly unconvinced of an able response by competitors.
Bricks and mortar retailers are suffering not only from the threat of Amazon but the way consumers are willing to shop is sending the sector in to spasms.
Consumers’ willingness to spend more of their time conducting their shopping experience online will have an impact on the level of footfall in shopping centres. Retailers may open more physical stores but they will do it in tandem with an increased online presence and expand in to other markets.
PwC in its Total Retail 2017 report outlines six areas that retailers now have to focus on in response to changing consumer behaviour: pricing, loyalty, delivery, in-store knowledge of products and interaction, mobile and innovation (such as virtual reality and wearable technology).
It is a difficult sector to invest in because of the many variables that can beset retailers and therefore involves greater risk. As with any other investment researching the stock is a must.
Distinguishing which companies will outperform requires undertaking analysis to fully understand the metrics that underpin the industry, company, profit and return potential and ultimately, share price.
However, when the retail sector falls out of favour there may be room for improvement if interest rates remain low and consumer confidence rises. Naturally, if share prices fall enough bargains could be had but here are a few other things to consider:
What can make one company buck the trend?
Companies that are able to differentiate themselves from the competition are usually the ones at the forefront. But as set out previously, the sector’s intense competition means it’s only harder to stand out but also more difficult to do it over a long period.
Companies with scale and brand differentiation and strategies to stay ahead will be at the top of the class. Staying new and developing technologies to keep customers coming back. Remeber, the sector is a low-return business and has very few barriers to entry making it a competitive market place.
Perhaps you were drawn to investigate a company because you’ve used it and spotted something unique as well. In retail, a standout company may have one or more of the following: unique products, brand loyalty, ability to be a low-cost producer and strong franchises.
ASOS future perfect?
ASOS niche online fashion retailer for the twenty-something set differentiates itself from the competition. It is a hot stock and brand.
According to the Financial Times' market data, as of 21 Jul, the consensus forecast amongst 29 polled investment analysts advised that the company will outperform the market.
This has been the consensus forecast since the sentiment of investment analysts improved on 1 Sept 2015.