The last few years have been difficult ones for the UK retail sector with most of the headlines being dominated by the woes of the big four supermarkets, while the general retail sector has by and large outperformed though we have seen some high profile under performers. Increased competition, as well as changing shopping habits, has been part and parcel of this change in the fortunes of a number of established high street names as they have wrestled with the twin challenges of falling profit margins as well as establishing a more efficient on line presence. Retailers that failed to adapt to this change in shopping habits have seen their business models suffer significantly over the past few years with some notable casualties in the aftermath of the 2008 financial crisis, with the collapse of some notable high street brands including HMV, Jessops and Blockbuster in 2013, while well-known brands like Argos owner Home Retail, and Marks and Spencer have struggled to adapt to changes in consumers shopping tastes, as their shares have underperformed relative to some of their more agile peers. It can’t be a coincidence that the retailers who have adapted to the new popularity and convenience of on-line shopping have managed to mitigate the worst of the fall-out from the change in the way consumers go about their spending their hard earned money, with Inditex, Ted Baker, Next and Associated British Foods owner Primark all outperforming since 2011. The contrast is best borne out by the divergence between the food retail and general retail sector over (shown below) the last five years with the food retail sector paying the price for being slow to adapt to not only the shift to on line shopping, but also to the emergence of budget retailers Aldi and Lidl. In the last five years the FTSE350 food and drugs index has halved in value in stark contrast to the FTSE350 general retail index which is up over 60%. The big question now is whether this divergence can continue and whether we can expect to see any let up in the pressure on not only the food retail sector, but also whether the recent gains seen in general retail could about to come to a shuddering halt. Since its peaks in the middle of last year the general retail sector has slowly been losing ground touching one year lows yesterday in the process. With that in mind the first part of January is always a key period for the UK retail sector as it generally sets a benchmark for the winners and losers in the pre and post period Christmas trading period. If last week’s events have shown us anything it’s that times remain tough for certain parts of the UK retail space, though on the plus side the UK consumer has reaped a dividend in terms of lower prices over the last twelve months, with the unfortunate side effect that UK retailers have struggled to maintain margins as price conscious consumers shop around, either in-store or on-line. In the context of the UK economy retail sales have been running well above trend for the past two years, averaging well over 3% annualised, which suggests that we might well see a slowdown in 2016. With retailers already under pressure from lower margins and higher costs as the higher minimum wage kicks in from later this year, investors are surely going to need to take a long hard look at, not only some of the outperformers of the last few years, but also the retailers who are continuing to struggle. Last week John Lewis shot out the lights by posting numbers well ahead of expectations as it posted a rise in like for like sales of 5.1%, though revenues were slightly lower, but that’s not altogether surprising with shop price deflation, according to the BRC running at -2% year on year. We saw disappointing updates from Next which saw a sharp slowdown across the board, in not only its Directory catalogue arm, but also in store as well, with the company blaming the mild winter seen thus far, raising the question as to whether a company that has seen share price gains of over 240% since 2011, is due for a little bit of a realignment in expectations. Marks and Spencer also disappointed posting a similar sharp slowdown in its problematic general merchandise division, as its CEO Marc Bolland decided to call time on his six year tenure in charge of the business, while Sports Direct also posted a profits warning as both businesses blamed the unseasonably warm winter weather. Sports Direct share price has almost halved since the peaks seen in August last year as investor’s tire of CEO Mike Ashley’s extra-curricular activities with respect to other retailers share prices. This week the focus returns to the supermarkets with Q3 trading updates for Morrison, Sainsbury and Tesco. Is there light at the end of the tunnel for Tesco and Morrison, or will their share prices continue to probe the depths of levels last seen in the early 2000’s? Morrison's does appear to have stopped the rot by beating expectations this morning with a marginal rise in sales over the festive period, but the outlook continues to look challenging. Last weekend’s announcement by Asda boss Andy Clarke that they would be introducing another £500m worth of price cuts, on top of the £1bn already announced last year is not good news for a food retail sector already struggling to compete with Aldi and Lidl, who appear to be gearing up for further expansion. As far as Sainsbury is concerned it was the best performer in 2015 by far and as such could be more vulnerable to disappointment if it comes in short of expectations, particularly given last week’s revelation that it is looking to take on Home Retail, who are also due to post Q3 trading numbers. This move by Sainsbury also raises a more significant question, as to whether 2016 could bring about some consolidation in the retail sector, or whether we see further collaborations in the form of store concessions on a much smaller scale. It’s certainly not the first time that a move on Home Retail has been mooted, and given the pressure on margins it may not be the last. In this respect both Sainsbury and Home Retail’s trading updates could well offer some important direction in this regard, especially if the Argos part of the business disappoints once again. Many have questioned the wisdom of Sainsbury’s bid for Home Retail and while it carries risks it would appear that it is being led by concern about the prospect of Amazon’s foray into the UK grocery market in the form of Amazon Pantry, begging the question as to whether the old food retail model is changing. Is Sainsbury’s responding to a credible on line threat, or will Amazon’s foray into groceries be a step too far. After all shopping on line for consumer discretionaries is one thing, but groceries is quite another. Ultimately checking the sell by dates on perishable food products like fruit, vegetables, dairy and meat will always require an in store visit, something that Amazon may well struggle to provide. Tesco is also set to announce its latest trading update this week and faces even greater challenges than Sainsbury particularly in terms of underperforming floor space. It could try to address this in a similar fashion to Sainsbury’s by leasing out floor space to Peacocks and Sports Direct, in the way it has done in some of its European stores, but for some reason appears reluctant to do so here in the UK on a wider scale. More importantly could last week’s bid by Sainsbury mark the start of a consolidation phase in the retail sector for 2016? This week could offer some important clues, but one thing does seem abundantly clear. The general retail sector could well find that its recent outperformance could well be difficult to sustain, against a slightly weaker economic backdrop. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. 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