FEXIT before BREXIT

FEXIT comes first…..

So we all know BREXIT is happening on March 29th. But there’s a more significant series of events set to land in the UK ahead of this date.

Picture the scene. During the run up to Christmas British businesses are loaded up with stock and with minimum cash - ahead of the seasonal spending spree and sales that occur every year between 1st November and the middle of January. The intention? To maximise profit and cash income over what is a twelve week period of peak sales opportunity. At the end of this period, sometime around 13th January this commercial position should be inverted - with stock at a minimum, cash at a maximum. But I don’t believe that is going to happen this year.

How can I say this? Am I scaremongering? Not intentionally but…… Debenhams are known to be in dire straits. They’ve rejected the £40m loan from Mike Ashley. Why? Perhaps it’s because they need to trigger their CVA in January and get to a renegotiated rent across their retail estate with their landlords. With £40m in the bank this may have proven more difficult to justify. So maybe the Board said no to protect the process of the CVA’s implementation.

Of course the ongoing decline in retail (Everyone blames Amazon!) is traditionally offset by an equal and opposite upside in Etail. Only this year it isn’t! Because if ASOS’ profit warning is anything to go by then Etailing hasn’t fared any better either. Add to this the retail associations stating Christmas shopping footfall statistics being 3%-4% down year-on-year in real terms along with a reduction in basket spend and the fact Land Rover have already declared their intention to implement several thousand redundancies, well all of the indicators from production, retail and consumer confidence are there staring us all straight in the face. 

Of course when consumers stop buying high priced capital goods like cars they switch to self-gifting in the food and beverage market. Only this isn’t happening either it seems as the supermarkets seem to be encountering problems too.

So here we are. In my opinion we are about to enter another financial crisis but this time it’s not the banks, it’s not the fat-cats, it’s not Government, it’s actually worse than that – it’s customers! There’s a massive reduction in consumer confidence and people are keeping their cash in their pockets. They simply aren’t spending. The “Demand” side of the market has arrested, it has placed itself on pause, it has gone into “safe” mode - where the only thing customers now trust is pure, unadulterated liquid cash.

So what happens next? Well I’m calling this FEXIT. If I’m right we’ll see a stream of profit warnings, restructuring announcements, redundancy notices, CVAs and insolvencies being declared over the next fifty days through to the end of February. Why? Because a significant number of businesses have no choice. They’ll see the Christmas trading figures, they’ll do the maths, and then they’ll have to go to the Board and mitigate the risks to their shareholders. Because that’s what an employed management has to do if they don’t want to take the inevitable blame for being reckless with their shareholders’ funds.

For the more mature businesses with daily numbers like Debenhams they’ve no doubt already extrapolated the scale of the problem, they’ll have a series of scenarios and options in place and by now I’m imagining the Board have decided they can’t trade for another ten months to next Christmas with the organisation they have and with the costs they need to bear through the period. They have no option but to announce their CVA and get straight to the table with their landlords and suppliers and progress a fundamental restructure of the business.

For those slightly less mature businesses who are waiting for the Christmas trading numbers from the finance department's reporting of both December and January’s results – they will likely have a Board meeting scheduled in early-February. It’s that meeting which will be the decision point. Directors all over the country will be in Boardrooms as usual, but in many cases, perhaps more than ever before there will likely be another person in the room. An adviser, an outsider, someone to keep the Board focused on the numbers and the process they need to get through to restructure and refocus the business through what is set to be a very difficult time ahead.

So which areas of UK PLC are in trouble? Debenhams is a proxy for the retail sector. Jaguar Land Rover is a proxy for car manufacturers, but don’t forget the car dealers and automotive retailers who already have stock piled high on their forecourts and their supply chain which is nearly the same size as the manufacturing base again. Then add housebuilders, home improvement companies, estate agents, technology and mobile phone resellers, the list goes on. Then let’s add the UK-based foreign holiday companies. With the pound where it is the consumer isn’t going to indulge in overseas holidays. So foreign flights and overseas holidays are going to take a hit too.

Retail, Etail, high-priced capital goods, food and beverage, they're all down. Not one, all!

Is there an upside? Overall the answer has to be no, not for quite some time. The market has to go through something of a reset before confidence is restored once more. Shops have merely become showrooms. Retail has shifted to Etail. Ownership has been ditched in favour of Pay As You Go. Technology is here to stay. 

However there will likely be pockets or areas of opportunity. “Do It Yourself” has become “Do It For Me”. So staycations, hotel bookings, home dining, film and music streaming services may do well as we self-gift to ourselves and our families to maintain some degree of momentum and normality. Education and schooling, health and wellbeing will remain important too.

So while everyone is talking about BREXIT I’m going with FEXIT. The days from now through February will crystallise what I'm predicting here. And it’s not going to be pretty.

DG
27 December 2018.