It felt like a sign of things to come in January 2020 when the market value of upstart fast-fashion retailer Boohoo overtook that of the venerable Marks and Spencer, once the biggest clothing retailer in the UK.
But two years later, M&S is worth comfortably more than Boohoo and its online rival Asos combined. It has upgraded profit forecasts twice over the past year and Clive Black, analyst at house broker Shore Capital, believes it may do so again when it updates investors this week. Its share price rose by three-quarters in 2021.
Meanwhile shares in Boohoo, which warned on profits twice in 2021, are down by almost two-thirds. Asos, which is also due to issue a trading update this week, has lost more than half of its market value and its chief executive.
The resurgence at M&S is not a one-off. B&M, a variety discounter that sells only through stores, is about to return another £250m to shareholders after strong trading.
Shares in Next, which has raised profit guidance five times since the start of 2021, set new all-time highs last year. JD Sports did likewise. Frasers, the owner of Sports Direct and Flannels, expects to make its biggest profit ever this year.
Kate Calvert, retail analyst at Investec, said much of the bifurcation in share price performance was down to stock-specific issues, such as the heavy restructuring at Marks and Spencer or JD Sports’ bold acquisitions in the US.
But there are also some sector-wide issues. One is that long-established and mostly store-based retailers used the pandemic to accelerate existing cost-cutting and restructuring plans. “In difficult times, you make bigger and bolder decisions,” said Calvert.
John Lewis, Boots and M&S, for example, have closed stores, shed thousands of head office jobs and taken out layers of store management.
“They also learned how to do online more efficiently within their own business,” added Calvert. Higher volumes helped; around 34 per cent of M&S clothing is now sold online, against 22 per cent before the pandemic. At electricals retailer Currys and DIY specialist Kingfisher, the increases are even more dramatic.
But while many more consumers formed an online shopping habit during the pandemic, they did not abandon stores.
“For much of 2020 everyone was working from home and online was the only viable channel,” said Richard Chamberlain at RBC. “It was very different in 2021, people wanted more of a multichannel experience”.
In mid-market fashion, offline competition decreased, as retailers such as Debenhams and Gap disappeared from high streets. This has helped retailers such as M&S and Next sell more product at full price, boosting profit margins.
But online competition has grown — from ultra-cheap operators such as China’s Shein, established rivals such as Germany’s Zalando and global players such as Hennes & Mauritz and Inditex, which have poured investment into ecommerce capability.
And many of the factors that helped online retailers in the early stages of the pandemic faded away. The proportion of clothes returned for refunds — a significant cost for ecommerce players — initially fell as shoppers loaded up on elasticated sweatpants and baggy hoodies but has since picked up again.
Chamberlain said online operators were also acutely exposed to rising costs. “There is a lot of upward pressure on labour costs in warehousing and logistics and it is hard to absorb those when you are already operating on thin margins”.
This issue has affected established players as well but their use of stores — four in five of Next’s returns are processed in its shops — mean the financial burden is less significant.
Logistical challenges have also raised questions about international expansion at Boohoo and Asos, both of whom make no secret of their desire to be global players.
“To really compete internationally you need scale,” said Calvert. The required investment in logistics and marketing to achieve it is considerable, while distributing into Europe from the UK has left them “getting killed” by the post-Brexit cost and complexity of exporting into the single market.
By contrast, many traditional retailers long ago scaled back their international ambitions to focus only on markets where they have a meaningful presence.
As a result they have ended up dominating certain niches — Kingfisher in DIY, Currys in electricals, Halfords in cycles or DFS in home furnishings. Their commanding positions in these markets give them more clout with suppliers and shipping companies than online entrants such as Made.com or AO.com can wield.
That may prove significant in 2022, with cost inflation likely to remain acute and discretionary incomes coming under increasing pressure.
Next indicated this week that its clothing prices would be on average around 6 per cent more expensive by the end of the year as a result of higher input cost.
With a 9 per cent share of the UK clothing market, according to Kantar data, it has a better chance of making such increases stick than Boohoo, which has 0.7 per cent and competes largely on price.
Retailers will be robustly tested in 2022, but many are expecting the older and wiser cohort to come out on top again.