Retail – picking winners from losers

Hardly a day goes by without a warning of tough times for retailers. Just last week Next, in spite of announcing half year profits up 10%, warned that life was getting tougher both on the high street and online. Morgan Stanley downgraded its recommendation on DSG Group, owners of Currys and PC World to "underweight" adding that that they were "much more sickly than most investors realise" and that the dividend "appears unsustainable and could be cut next summer". This week Debenhams report like for like sales down 5%. All cite interest rate rises, fuel and food price rises and now Northern Rock’s problems as factors affecting consumer confidence and their willingness to spend. A distinct nervousness about the prospects for Christmas is creeping in

In August we commented on how John Lewis’ superior Competitive Strength (read it here) had enabled them to buck the trend when it reported substantial increases in sales and a programme of stores openings, new concepts and investment in customer service.

Last week John Lewis announced a 50% increase in first half profits. Their Chairman Charlie Mayfield said that he was “quietly confident” about in the run up to Christmas. He claims that “We are confident our partners will continue to set us apart from the Competition”. A clue as to why his confidence is justified and why John Lewis’ superior competitive strength will continue to set them apart from their competition can be found in a report in September’s Which magazine.

In a guide to buying a computer the clear winner was John Lewis, the only retailer to get a 5 star rating with 61% of customers saying they’d be very likely to return when they needed a new computer. Which was curious about what makes John Lewis so good so they asked some survey participants for some more detail. The overwhelming impression was that “the staff knew what they were talking about”!

When times are tough it is a real advantage if you can hang on the customers you have got. John Lewis can clearly do this and when research shows that it costs 5 times a much to win a new customer than to keep an existing one this creates significant competitive advantage. What’s more they are investing a further £1.5m in staff training and increasing by 200 the number of trained specialist staff in stores.

So we say Charlie Mayfield’s “quiet confidence” is highly likely to be vindicated. As for the others well, PC World came bottom in the Which survey. Looks like Morgan Stanley have got it right with the downgrade. Go to the Competitive Strength Report website and see if you can spot why John Lewis is likely to win and DSG may well lose.