UK Edition
The popularity of online shopping has risen dramatically over the past 15 years. In January 2007 just 2.7pc of all retail sales in Britain were conducted online; today that figure stands at 27.1pc – a tenfold increase.
The trend towards digital retailing has certainly been accelerated by the pandemic, which forced many consumers to explore digital avenues where they might previously have avoided them.
However, the shift from bricks-and-mortar retailing to digital sales has been a key feature of the retail industry for many years.
This makes the continued focus on its physical shops on the part of B&M, the value-focused retailer, somewhat surprising.
The company, which has 1,110 stores across Britain and France, has a website that lists its range of home, garden, food and other products but, although there are pictures and prices, the products cannot be purchased online and cannot be reserved for in-store collection. Instead, they must be bought in one of the shops and are therefore subject to local availability.
In its latest half-year results, the company said it planned to implement an online trial that included home delivery at some point this year.
In Questor’s view, this belated entry could represent a strategic long-term advantage for its rivals.
They will, in some cases, have had many years to build their online presence and overcome any teething problems. As a result of their established positions, B&M could struggle to capitalise on long-term growth trends within the retail industry.
Separately, the company and wider sector face significant challenges from persistently high inflation. The Bank of England currently expects inflation to reach about 8pc in the spring.
With high inflation also present across much of the world economy, input costs within the retail industry could increase dramatically in the coming months.
Since B&M’s business model is focused on offering value for money, its customers may be more price conscious than the industry average.
As a result, it may struggle to pass on rapidly rising costs to customers in the form of higher prices without a severe impact on demand.
Furthermore, its lack of competitive advantage beyond offering low prices may mean it struggles to expand, or even maintain, margins in an era of higher inflation.
Of course, rapidly rising prices are prompting a cost of living crisis for Britain’s consumers that is widely expected to worsen over the course of the year.
Some investors may understandably conclude that shoppers are likely to trade down to cheaper options as they cut back on spending, which would be expected to benefit no-frills operators such as B&M.
However, in our view this may prove to be too simplistic an assumption. The biggest impact of a cost of living crisis could be felt among the existing customers of value-focused retailers, who may cut back on spending more than other groups.
B&M has also historically benefited from a high degree of impulse spending. This is where it cross-sells high-margin items to shoppers who entered its stores in search of other products.
Such spending may decline more heavily than other areas as consumers adapt to having lower discretionary incomes by reducing their non-essential expenditure.
B&M’s share price has risen by 92pc since this column advised readers to invest in the company in April 2020. This is in spite of a relatively poor share price performance over recent months, which may have been prompted by news of a large sale of shares by a director in January.
Even after their earlier surge, the chain’s shares still trade on a relatively appealing price-to-earnings ratio of 13:5.
However, the company’s lack of online retail presence means it is missing out on what remains a fast-growing segment of the wider industry.
In addition, its focus on price makes it more difficult to pass higher costs on to consumers – many of whom will themselves be seeking to cut back on spending. We will therefore take our profits on B&M.
Questor says: sell
Ticker: BME
Share price at close: 577.4p
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