If Associated British Foods didn’t have a controlling shareholder, an uppity US hedge fund would probably have demanded the company be split into pieces years ago. Whitbread is somehow deemed offensively diverse because it owns Costa Coffee and Premier Inn, but take a look at AB Foods’ portfolio: it runs from sugar production around the globe, takes in grocery brands such as Twinings, Ovaltine and Kingsmill, and has spawned discount clothing chain Primark.
Outside shareholders should give thanks for the refusal to bend to the demand for focus. Primark, one suspects, wouldn’t be the same conquering force without AB Foods’ willingness to experiment slowly, a quality that may flow from the 54.5% ownership by Wittington Investments, itself controlled by the charitable Garfield Weston Foundation. These days, Primark contributes just over half the group’s operating profits: £341m out of £648m at the half-year stage.
Primark’s astonishing run hasn’t stopped the City fretting on two fronts. First, there is the worry that the chain’s refusal to sell online is a historic mistake. Second, is expansion into the US, graveyard of British retailers, a step too far? Amid the general gloominess about retailers, AB Foods’ share price had fallen by a fifth in six months before Tuesday’s 4% bounce.
The US concern won’t be answered quickly since some of the nine stores in the north-east have been open for less than a year. The company admits it is still tweaking ranges to improve sales densities. But the news that Primark is already looking to open a store in Florida suggests something is going right in the US.
As for the supposed threat from online rivals, it’s hard to spot. Like-for-like for sales fell 1.5%, not helped by cold European weather, but the UK was up 3%. Between sermons on the effect on sugar prices from the end of EU quotas, management offered a persuasive argument that pinging promotional videos across Instagram is a smarter way to drive Primark sales than shouldering the distribution costs of an online shop.
The store-only logic probably only applies at the cut-price end of the clothing market and, eventually, even Primark may have to rethink. But there’s currently no reason to mess with a formula that, even in a soft half-year, produced a profit margin of almost 10%. Most of the online-only brigade would love that.
Intu takeover: time to call it off?
Sadly for Intu, the shopping centre group, there aren’t more Primarks. If there were, the owner of Lakeside and Trafford Centre wouldn’t have felt obliged to make an extended plea that everything in the world of malls is lovely, despite the rise of Amazon and the troubles of the likes of New Look, Toys R Us and Prezzo.
The state of UK retail’s ill-health
Retailers that have gone bust 2017-18
Toys R Us: 180 stores employing 3,000 staff, collapsed 28 February. Owes £15m in VAT, due by 1 March.
Maplin: 200 electronics and gadget stores, founded 1972, also failed on 28 February.
Warren Evans: bedmaker went into administration earlier in February.
East: fashion brand with nearly 50 outlets folded in January.
Juice Corp: business behind brands including Elizabeth Emanuel and Joe Bloggs went under in January.
Multiyork: furniture chain with 50 stores went into administration in November.
Feather & Black: bedroom furniture and bedding specialist with 25 outlets collapsed in November.
Retailers under pressure
New Look has debts of more than £1bn and has lost some of its credit insurance cover, which protects suppliers if a retailer goes bust. In the 10 months to Christmas, sales fell 11% and losses hit £123m. The company intends to close 60 stores and change its fashion ranges, but faces a struggle to win back young shoppers.
House of Fraser’s Chinese owner, Sanpower, had to stump up £25m to see the store through Christmas and its debt is rated as junk. The retailer is attempting to reduce the size of its stores by 30% and has asked landlords to cut rents.
Debenhams, a 178-store chain that is more than 200 years old, is axing one in four of its managers and considering closures to cut costs. It has warned that profits have been hit by lower than expected sales, with profit margins also down as a result of having to cut prices to match rivals.
Photograph: Tony Margiocchi / Barcroft Images/Barcroft Media
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The point of the breathless release about “record retail demand” and “increased rents” in its centres, one assumes, was to try to convince Hammerson not to walk away from its £3.4bn bid for Intu. That cause isn’t completely hopeless since Hammerson chairman David Tyler would happily seal the deal if he had a free hand. He shares the view that good shopping centres have a decent future.
The trouble is, Tyler and Hammerson’s board must know their adventure is in deep trouble. Dutch pension fund group APG, the second-biggest shareholder in Hammerson with a 7% stake, is opposed to the Intu purchase and it won’t be alone. Put simply, many Hammerson investors think their own company’s assets, including Brent Cross and Birmingham Bullring, are superior to Intu’s estate with its rump of smaller centres. They can’t see the appeal of diluting the mix via an all-share takeover.
Tyler & co were right to reject the under-priced approach for Hammerson itself from French group Klépierre, but their shareholders’ patience is wearing thin. If Intu won’t renegotiate terms, call the whole thing off.
Time for a new broom at WPP?
None of the names being thrown around as a potential next chief executive for WPP sounds worth a bet. Jeremy Darroch of Sky? Why would he want it? He’s made a fortune at Sky and untangling Sir Martin Sorrell’s creation would be a very different gig. Adam Crozier, lately of ITV and once of Saatchi & Saatchi, seems happy on the non-executive circuit. Andrew Robertson, chief of advertising agency BBDO, has been floated, but importing a long-serving big name from a direct rival would be risky at a company with a culture as distinct as WPP’s.
Almost by default, an internal pick – with Mark Read, one of the stand-in chief operating officers, the obvious name – starts as favourite. But one suspects shareholders would prefer an outsider with zero attachment to WPP’s current structure.