Dunelm’s share price has fallen by more than 40% over the last two years.
Part of that decline is due to the market’s Brexit-related dislike of UK-focused cyclical stocks, as some fund managers have pointed out.
However, some of the decline is likely due to increased uncertainty about the company’s growth potential and its ability to compete in the new world of online and mobile shopping.
But before I get into that, let’s back up a bit and have a look at how Dunelm got to where it is today.
Curtains: A surprisingly profitable business
Dunelm started out in 1979 as a market stall in Leicester, manned by Bill and Jean Adderly. They sold curtains, slippers and other goods which they’d bought as factory seconds, and the business was very successful from day one.
They opened their first shop in 1984 and in 1991 they stepped up another gear, opening their first out-of-town superstore. Within a decade, Dunelm had 50 superstores and after another decade it hit the 100-mark.
Today the company generates revenues of almost £1 billion pounds, post-tax profits of around £100 million and is the UK’s leading homewares retailer (ahead of arch-rival, John Lewis).
Here’s what the company’s performance looks like over the last few years:
As the chart shows, the company’s progress has been exceptionally rapid and steady. Here are some numbers to give you a better idea of how impressive this company’s performance has been:
- 10-Year growth rate: 13.5% (FTSE 100 = 2.1%)
- 10-Year growth quality: 96% (FTSE 100 = 63%)
- 10-Year profitability: 38% (FTSE 100 = 10%)
And here are some other attractive features:
Strong balance sheet: Dunelm’s debt ratio (total borrowings / 5yr avg. post-tax profits) is just 1.5, well below the 4.0 average for UK dividend-paying stocks.
Capital light: The company rents its store space and has relatively little need to invest in expensive capital assets such as machinery, vehicles or other physical infrastructure. This gives Dunelm a low 10-year capex ratio (capex / post-tax profit) of just 46% compared to an average of 66% for the 215 dividend-paying stocks on my stock screen.
One benefit of a low capex ratio is that expansion is easier and less costly. In other words, Dunelm doesn’t have to spend huge amounts on physical infrastructure today in order to generate revenues and profits tomorrow.
No defined benefit pension scheme: DB pension schemes are getting a lot of attention at the moment, and rightly so given their frequently huge deficits. For Dunelm investors, this is one less thing to worry about.
Good dividend cover: Other than in 2017 (which in some ways was a bogey year for Dunelm) the company’s dividend has been covered about twice over by both profits and free cash flows. That sort of cover is generally seen as very healthy, although of course a progressive dividend cannot be guaranteed.
With all this good news and its many attractive features, it is perhaps no surprise that Dunelm’s shares went above 1,000p in early 2013, giving the company an optimistic PE ratio of 28 and a paltry dividend yield of just 1.4%.
However, since those happy days, the shares have fallen by more than 40% to 570p as I write. So if everything at Dunelm is so rosy, why has the share price performed so badly?
Overpriced Brexit fodder facing a low-growth future?
To be honest, I don’t like to think too much about why a company’s shares have gone up or down. It could be down to any combination of a million different reasons, many of which have nothing to do with the business (an investor could, for example, sell their Dunelm shares because they want to buy a speed boat).
In this case, it might be useful to look at what could be some of the main reasons for the decline.
An overpriced starting point: Perhaps the biggest driver of Dunelm’s share price decline was the excessively high starting point. At more than 1,000p the company’s dividend yield was barely above 1% and my favourite valuation metric (PE10, price to ten-year average earnings) was 43, well above my preferred maximum of 30.
The problem with high starting prices is that they’re fuelled by optimism. The slightest whiff of bad news can cause a collapse in optimism and a collapse in the share price, as Dunelm shareholders have found out.
Brexit: This is widely seen as a bad thing for UK-focused stocks. Increased uncertainty has led to a weaker pound and that in turn means higher costs for imported materials. If companies cannot pass higher input prices onto their customers then they’ll have to absorb them, which means lower profit margins and lower profits for shareholders.
Stalled like-for-like growth: Over the past decade, Dunelm’s like-for-like sales growth has averaged 2% per year, i.e. broadly in line with inflation. However, in 2017 like-for-like sales declined by 0.5%, despite inflation being close to 3%.
In the 2017 annual results, management gave multiple reasons for this decline, including unfavourable weather, a late Easter and disruption following the introduction of a new warehouse.
Regardless of the reasons, this will not please investors as like-for-like growth is a key component of the company’s growth strategy.
A slower store rollout program: In the last decade Dunelm stepped up its store opening program, opening more than ten stores every year to add to its hundred-plus total. Opening new stores is the main driver behind the company’s impressive growth and it hopes to reach at least 200 stores in the UK at some point in the future (it’s currently up to 160).
But over the last two years, the pace of new store openings has dropped, with an average of just six stores being added in each of the last two years.
Going from ten new stores per year to six may not sound like a drastic change, but in percentage terms it is.
For example, back in 2012 when investors were optimistic about Dunelm’s future, the company started the year with 104 stores and opened another 14 during the year. That’s a 14% increase in the number of stores in a single year.
If those new stores can be as profitable as existing stores then the implication is that the company has increased its profit potential by 14% in one year, a healthy figure by most people’s standards.
In contrast, 2017 saw the company start with 152 stores and end with 160, an increase of just 5%. That’s still a reasonable rate of growth, but for the fickle Mr Market, it certainly doesn’t justify the company’s previous growth stock rating and near-1% dividend yield.
Potentially lower growth prospects: This one combines the previous two points about like-for-like growth and new store openings. These are two of the company’s key growth goals, with the third being expansion into multi-channel retailing (i.e. increased online orders).
One simplistic way to estimate a retailer’s growth rate is to combine its like-for-like growth rate (i.e. growth from existing stores) with its store-count growth rate.
For example, in 2012 Dunelm’s like-for-like sales grew by 3% and its total store count grew by 14%, giving a “combined” growth rate of 17%. Obviously, that’s pretty good and you can see why investors might pay a premium for that sort of growth.
Following the financial crisis, Dunelm’s combined growth rate averaged 13% per year, but in 2016 and 2017 it fell to 5% due to lower like-for-like growth and fewer store openings.
Of course, if Dunelm’s future growth rate is going to be closer to 5% than 13% then investors will demand a much higher return from income to offset the reduction in growth, and that’s probably a big part of why the dividend yield has gone from 1.4% in 2013 to 4.6% today.
CEO and CFO step down for “personal reasons”: I don’t put a great deal of weight on this sort of thing, but when the CEO leaves after the latest annual results and the CFO leaves after the latest interim results, I think investors are right to be concerned (if only mildly).
So Dunelm is a mixed bag. On the one hand, it’s a fantastically successful market leader which has grown at double-digit rates almost every year like clockwork. On the other hand, it’s facing difficult economic conditions and a potential shift from growth to maturity.
Given all this uncertainty, negative news and massive share price declines, it would be reasonable to ask:
Why do I still hold Dunelm?
There are three main reasons:
1) Mr Market is frequently wrong
In 2013, Mr Market valued Dunelm at 1,000p per share, probably because he was sure the company would keep growing at double-digit rates for many more years.
Today, Mr Market values Dunelm at less than 600p per share, probably because he’s afraid the company will become the next Marks & Spencer, with virtually no growth prospects at all.
Given that Mr Market was so wrong in 2013, why should we trust his judgement today?
The answer is that we shouldn’t. Mr Market does not know what the future holds for any particular stock and, unfortunately, neither do we.
So the fact that Dunelm’s share price has fallen by 40% over the last couple of years tells me nothing about what its share price will do next. It is entirely possible that it could increase by 100% over the next year, or crash by another 40%.
If that degree of uncertainty surprises you then all I can say is, welcome to the stock market.
Because of this price uncertainty, I would never consider selling a “loser” just because its share price has fallen; even if the fall was as much as 40% or more.
So rather than worry excessively about Dunelm’s share price decline, I prefer to focus on the company’s long-term past and its long-term future. And that’s the second reason why I still hold Dunelm.
2) Dunelm’s long-term past is still impressive and its long-term future could still be bright
Mr Market seems to base his valuations on how a company is performing today.
From a valuation point of view this is a problem because good companies have bad years and bad companies have good years. Basing valuations on short-term results will therefore result in wildly volatile valuations, and that’s exactly what we get from the excitable Mr Market.
Dunelm, for example, has been a very steady company with very steady growth in revenues, profits and dividends. Despite that steadiness, its price has varied from 230p in 2006, to 110p in 2009, to 1,040p in 2013, to 570p today.
Rather than Mr Market’s short-term approach, I think a better way to value companies is to think about their long-term future prospects, as implied by their long-term financial past.
For example, despite Dunelm’s somewhat slower growth in the last couple of years, its ten-year growth rate is still 13%, measured across revenues, profits and dividends. It has also increased its revenues, profits and dividend 96% of the time during that period, and its ten-year average return on capital employed is a very healthy 38%.
On top of that, the company has low levels of debt, no pension scheme to fund, no track record of wild acquisitions and relatively low capital investment requirements.
A steady track record of growth and a strong balance sheet doesn’t guarantee a bright future, but I think they’re a much better indicator than a low-growth past filled with losses, cut dividends and massive piles of debt.
In short, and largely ignoring some of the short-term uncertainties caused by Brexit and the UK’s economic situation, Dunelm is still a company I’d be happy to invest in.
Yes, it’s going through a difficult period at the moment, but as a long-term investor, I see difficult periods as inevitable, entirely normal and nothing to get excessively worried about.
Short-term difficulties are definitely not a good reason to sell, especially as Mr Market and the share price are likely to be depressed.
Mr Market is currently negative towards Dunelm, but what does he know? Not much is my answer. Looking into my speculator’s crystal ball, here are just a few of the million-and-one positive things that could happen:
- Brexit turns out to be not so bad for retailers.
- The UK economy picks up over the next few years, as the global economy seems to be doing.
- Dunelm expands rapidly to 200 stores and then begins to replicate its UK success overseas.
- The expansion of its online business (aided by the recent acquisition of Worldstores) more than offsets slowing growth in its superstore business.
Any and all of those could happen (although that’s not to say they will happen) and I think they’re just as plausible as the more negative scenarios.
But the company is only one side of the investment puzzle. The other side is price, and on that front, I’m also happy to hold.
3) Dunelm’s share price is still attractive (and getting more so)
Given that I think a) Mr Market is frequently wrong and b) Dunelm’s long-term prospects are largely unchanged, I also think today’s lower share price represents better value for money than the previously higher price.
For example, the dividend yield has increased from 1.4% in 2013 to 4.6% today. If Dunelm’s long-term dividend growth rate is more or less the same from both starting points (let’s say 7%), then buying its shares today with a 4.6% yield will give a higher expected return (11.6%) than the 1.4% yield did in 2013 (8.4%).
Or you could look at valuation ratios, such as PE10 and PD10 (price to ten-year average earnings and dividends).
In 2013, when Dunelm’s share price was above 1,000p, those ratios were 45 and 128 respectively, which is far above my preferred maximums of 30 and 60. Today, those valuation ratios have fallen to 15 and 34 respectively, a more than three-fold decline in just four years.
From my point of view, this means we have basically the same company (actually it’s slightly bigger today with higher revenues, profits and dividends than in 2013), facing basically the same highly competitive and unknown future, but which is available for one-third the 2013 valuation, relative to average earnings and dividends.
That’s a massive difference and for me, it makes the company a far more attractive prospect; even more attractive than it was in October 2016, when I invested in Dunelm at 827p.
So despite the share price decline, I’m happy to keep holding. In fact, if I had some spare cash, I’m sure some of it would find its way into Dunelm.
“Capital light: The company rents its store space and has relatively little need to invest in expensive capital assets ”
John did you do the calculations to show the real return on capital, once the lease commitments are taken into account? – Dunelm may not buy it’s properties, but it still has to pay to use them on what I assume are relatively long leases.
Also if the growth rate has fallen so much, isn’t there an operational gearing effect working against the company, like any retailer on modest margins? — although having said that, apart from 2017 which was distinctly negative EPS year, the other years have seen growth of 6 to 9% — and the guesstimate is 6% for this financial year.
It might be more difficult for Dunelm going forward, since The Range kicked off it’s store opening expansion. The Range sites tend to be much bigger and stock pretty much everything Dunelm does and more, as does HomeSense, which is part of the TKMax group — and there’s TK Max itself and bla de bla others in this tightly contested homewares space.
The P/E is pretty low though right now at 12.6, but that’s seemingly true for lots of stocks these days who have the audacity to report numbers good bad or indifferent.
It’s a thought though, with a relatively decent yield and a divi due in March.
LR — looking at ZPG at the moment, having just departed from a short term profitable punt on DMGT – I’m considering that DMGT’s most valuable asset is it’s share of ZPG and the newspaper (print and online) continues to struggle, as might Euromoney, it’s other underlying investment.
Hi LR, no, I don’t lease-adjust capital employed, although I know some investors do (the guys over at SharePad do). Here’s my current reasoning on this:
1) Yes, stores are capital assets that are employed by the business, so perhaps in theory they should be capitalised and put on the balance sheet (there are some accounting rule changes which may address this). However, other capital assets, such as humans, are also employed by companies and nobody capitalises their human capital.
2) I haven’t had a problem NOT capitalising leases, so in keeping with the idea that everything should be as simple as possible but no simpler, I’m happy to stick with NOT capitalising leases. However, if I do have a problem with an investment in a retailer and the probable cause of the problem was my NOT capitalising leases, then perhaps I will start capitalising them.
As for competitors you’ve mentioned, I’m not overly worried as almost all companies face harsh competition. It’s the nature of the capitalist beast. But I’m not complacent either, for the same reason.
ZPG (Zoopla) is a bit young for me and doesn’t have the dividend record I’m after, but the track record it does have is very impressive. Perhaps I’ll take a look in a few years. As for newspapers, I think they’ll end up like CDs and paper books; a niche product for old codgers (like me!).
if it drops another 30% would you still say its the same, actually even better, company only cheaper?
at what level would you accept you are wrong and pull the plug?
Hi Matador. Yes, I would say the same if the only change was in the share price, rather than in the company’s fundamentals (profits etc.).
There is no price (other than zero!) which would make me think I was “wrong”. I would only change my mind about the company if its revenues, profits etc. took a prolonged dive over many years.
I put “wrong” in quote marks because I don’t really like that way of phrasing a bad outcome. I’m very aware that the future is uncertain and that a bad outcome is a very real possibility. I prefer to think of investing as rolling a dice which is loaded in my favour (e.g. I win if I roll 1-4 and lose if I roll 5 or 6). If I roll a 5 then it doesn’t mean I was “wrong”, it just means it didn’t work out on that particular roll, but I still expect to come out ahead after 10 or 100 rolls (or 10 or 100 investments).
John -your “loaded-dice” example is a nice analogy for understanding the difference between quality of decision-making and outcome.
Matador – you’ll find Nassim Taleb’s “Fooled by Randomness’ goes into making this critical distinction into depth; he talks about ‘Invisible Histories’.
Thanks Polar Bear, that’s exactly what I was getting at. Michael Maboussin also talks about this at length, for example:
(video of a talk at Google)
You probably know about the idea of good decisions and bad decisions, and good outcomes and bad outcomes.
Good decision + good outcome = deserved reward
Good decision + bad outcome = bad luck
Bad decision + good outcome = good luck
Bad decision + bad outcome = deserved failure
a value investor should/would not have bought at 1000, it was clearly over valued by the market at that level. i’ve just bought in where commonly accepted metrics deemed it to be a “value” purchase.
Hi Michael, I agree to some extent and fortunately I managed not to buy at 1,000p.
However, value investing is a broad topic and there are many approaches, so I can imagine a scenario where an investor was so optimistic about Dunelm’s future that 1,000p might have seemed “cheap”. But yes, I agree that 1,000p is an unlikely entry point for a value investor.
To be honest, when I bought in the 800s my valuation metrics were a little stretched, so there may be a lesson to be learned there… but it will depend on how things go over the next few years.
As for “commonly accepted metrics”, I like dividend yield, but not ratios like price/earnings, price/book or price/sales. What common metrics were you looking at?
Hello John,
I have not followed DNLM closely, but to me the main issue here is management.
More than any other industry, retail requires tip-top leadership to stay ahead of the pack in an ever-changing and competitive sector. The very best retailers are usually run by fanatical entrepreneurs, who know everything about the shop floor right down to the types of coat hanger being used.
“CEO and CFO step down for “personal reasons”: I don’t put a great deal of weight on this sort of thing, but when the CEO leaves after the latest annual results and the CFO leaves after the latest interim results, I think investors are right to be concerned (if only mildly).”
I would be more than mildly concerned about this.
DNLM’s heyday coincided with Will Adderley (son of market-stall holders Jean and Bill) leading the business. No doubt his enthusiasm and knowledge for the business was inherited/instilled from his parents, and I dare say that was reflected by the group’s achievements.
It appears by 2011, Will wanted to take a back seat and has since appointed three different chief execs during the last seven years. The previous two chief execs lasted three years and c18 months respectively. The third one has only recently started the top job.
Clearly something is wrong with DNLM’s nomination committee, as it can’t seem to hire the right boss. Or perhaps Will interferes too much from his executive deputy chairman position. Whatever, the revolving boardroom door does not look great from a shareholders point of view, and is probably why the business has floundered somewhat of late.
What we all have to remember here is that the financial ratios delivered by DNLM in years gone by have been the result of strategic decisions by management. But now the talent has taken a back seat and likes to employ professional bosses to look after his fortune — and has not really done a good job with his appointments,
I struggle to think of any large retailer that has done well long term with a ‘professional’ salaryman as a boss. The best ones — of the top of my head, e.g. SuperGroup, Ted Baker, — are led by founder/entrepreneurs.
Maynard
Hi Maynard, that’s an excellent point and I agree entirely. There is definitely an issue with their leadership process although personally I wouldn’t let this sort of thing affect my investment decisions. I have zero ability to spot “good managers” and much prefer to do things on a numbers-first basis.
But that’s just me and I’m sure many other investors have a much better grasp of this sort of qualitative factor.
Having said that, I don’t think having Will Adderly as the “Executive Deputy Chairman” is very helpful. I think he should either run the business or stand fully aside because nobody likes a back seat driver.
Hi John – where did you get your figure for the statement ’10-year capex ratio (capex / post-tax profit) of just 46% compared to average for dividend-paying stocks of about 100%.’? I can work out the Dunelm 46% but not so sure about the 100% average for dividend-paying stocks. Surely if dividend-paying stocks are using 100% of their post-tax profit on capex then there is no money left to pay dividends without taking out debt? Any explanation of your workings would be appreciated. Tom
Hi Tom
Thanks for pointing that out. It’s either a typo or my brain was switched off when I calculated the average capex ratio (I probably looked at the capex/depreciation ratio, which is typically around 100%).
The true average capex/profit ratio using the 215 dividend-paying stocks from my stock screen is 66% (mean) or 47% (median). I’ll fix the article once I’ve finished this comment.
As a final point, a company can spend more on capex than it makes on profits over a long period, as you say either funded by debt but also when capex is significantly and/or consistently higher than depreciation (as depreciation lags capex when capex is expanding). On my screen there are 48 out of 215 companies that fit this description, so it’s quite widespread but certainly not the norm.
Having said that (i.e. my previous comment) it is quite possible (but unusual) for a company to consistently spend more on capex than it makes in profit.
For example, imagine a widget-making company where revenues are £100k, capex is £800k every ten years (to replace the widget factory which is worn out and worthless after ten years) and there are no other expenses (to make the maths easier).
In year 1 the company spends £800k on a new factory (£800k cash was sitting in a bank account) but this is capex so it doesn’t affect profit. However, there is £80k of depreciation, so the year’s results are:
P&L for YEAR 1: Revenue £100k, expenses (depreciation) £80k, profit £20k.
In cash terms: £100k came into the business. £80k cash was put into a savings account to cover the cost of the replacement factory. £20k cash was left over. This “free cash” could be paid out as a dividend (ignoring tax, and other minor details).
The subsequent years look like this:
P&L for YEARS 2-9: £100k revenue per year. £80k depreciation expense per year. £20k profit per year.
Cash for years 2-9: £100k cash income per year. £80k per year saved towards replacement factory. £20k free cash available for expansion, dividend, etc.
So in this very simplistic case the company is consistently and sustainably spending an average of £80k per year on capex, which is 4x the company’s profits.
This is a very capital intensive business, but it’s not unsustainable. The reason is that depreciation is an expense which is deducted from revenues in order to calculate profits. It is not deducted FROM profits. So depreciation can be higher than profits essentially forever without requiring an increase in debts, and since capex is typically similar to depreciation, the same is true of capex.
If there are any accountants out there, please feel free to critique my example!
Thanks for the reply John – have just placed an order for your book 🙂
Could we also use the Cash Flow From Operations / Capital Expenditures ratio, to find out if the Capex is actually being done using borrowings?
A ratio more than 1 would probably mean that company is generating the cash to buy assets and a ratio less than 1 would mean it is using debts to fund asset purchases.
Actually I’ve been doing quite a bit of testing lately, looking at the relationship between net operating cash flow, capex and tangible capital employed.
In Dunelm’s case, it generated about £180m net cash from operations over the last two years and spent £100m of that on capex. The remaining free cash flow wasn’t quite enough to cover the dividend, although I think free cash flow was negatively impacted by the acquisition of Worldstores in 2017. Dunelm has almost no debt so it could easily top up the dividend (or capex, if you want to think of it that way round) using debt for a while if it needed to.
Hi John,
You will note that some hedge funds hold short positions against Dunelm. These include Marshall Wace, who recently seem to be able to predict stocks that are about to fall. Does this concern you?
I am considering adopting a policy where I only buy stocks that don’t exist on the FCA’s short positions report. I’d be interested to hear your views on short sellers.
FD
Hi FD, I’m afraid I don’t have any interesting opinions on short sellers. To me they’re just like any other investor except they back their negative ideas rather than (or as well as) their positive ideas.
I’m certainly not concerned about the presence of short-sellers on any of the stocks I hold, any more than I am about the presence of long-only investors on stocks I’m selling.
More generally, I prefer to imagine that I’m investing against the fickle and emotional Mr Market, rather than the many thousands of highly skilled, highly intelligent but also highly emotional investors whose aggregate decisions he’s made up of.
I think John the problem is that it sells curtains. This is not a business with a moat.
It is just a business selling curtains, and sooner or later enough competition will be into this market to reduxe their earnings per share.
Hi Eugen, I agree. But curtains were invented several thousand years ago, so there has been a competitive market in curtain selling for a very long time. Despite that fact, Dunelm managed to go from one market stall in the 1979 to a billion pounds in sales today.
If the UK eventually becomes saturated with out of town homewares superstores, who’s to say the same sort of opportunity doesn’t exist elsewhere in the world? I’m not saying it does, but it’s a possibility that could drive Dunelm’s growth over the next forty years or more.
And of course curtains are unlikely to be exposed to technological disruption anytime soon, so it should be a pretty steady business for a long-time yet (as long as management don’t do anything daft).
They certainly had an advantage for a while that kept their EPS high.
Some firms seem to reinvent themselves and keep their advantages, some others let competition into their market and find themselves having to cut prices more and more to keep shifting the stock.
The way that distribution is changing around Amazon and other online platforms disturbs a lot of firms owning sheds, out of town superstores and warehouses.
I have just looked at their website too. I have moved house in December, and bought a few things: bed, mattress, some other furniture, etc. I did not know this firm exists before you wrote about it, now it seems it has a shop in Bournemouth, 5 miles from where I live. I bought all the items online apart from a new settee which I found it at rock bottom price in one of the Coop owned furniture shop (APH??!).
I think this says it all. Distribution channels change, if you do not embrace it, they are going to steal your market!
Hi John I was wondering in light of current high street woes i.e. House of Fraser, Poundworld and now Debenham. Do you still believe the retail sector has good prospects and in your investments concerning Dunelm?
A year ago I made an invest in Dixons Carephone alas I was attracted by the cheapness of the stock but because of shift in philosophy in dividends it became clear the Dixons Carephone (DC) stood on shaky grounds where dividends were concerned. DC had no pricing power, a huge burden of a retail estate and faced competition from Amazon and niche retailers leaving it in a very sticky situation.
On further analysis it became clear that most high street retailers were also stuck in this unfortunate situation i.e. huge overheads and very little pricing power. This is why I have no desire to invest in companies within this sector. The only three companies I would make the exception is Games Workshop, Hermes or LVMH if price became more realistic.
For DC luckily I divested from it making no gain or loss on this investment. What are you thoughts concerning retail sector specifically on Dunelm?
Hi Reg
I think traditional retail faces a massive uphill struggle and is likely to shrink dramatically over the next decade. People just don’t buy stuff in shops like they used to. It’s far easier to browse through a website and order whatever you want.
The retailers that will do best are (in my opinion) those that can a) shrink their store estate in line with declining demand and b) grow their online sales in line with that channel’s growth and c) update existing stores to they ‘add value’ to the customer’s visit, i.e. aren’t somewhere to just browse and select items (that’s what websites are for).
a) Shrinking the store estate – Dunelm doesn’t give any details on average lease periods other than that they run “up to 20 years”, so it’s hard to say how flexible the estate is. I think these very long lease periods are probably the major problem for UK retail.
b) Growing online – Dunelm has recently purchased an online competitor (Worldstores) and the company has already stated that online is its priority for future growth rather than additional stores.
c) Value-added stores – I’m no expert, but I assume any sane retailer is looking to improve their in-store ‘customer experience’.
Overall, I’m wary of retail because of the Amazon effect, but there are some retailers I still like, either those that offer convenience (WH Smith, Greggs) or those where touching or trying purchases first is sometimes important (Dunelm, Ted Baker, etc).
In the long-run I guess Amazon can eat almost everything as long as it doesn’t want to make any profit. At some point regulators will call it a monopoly, but I have no idea when or how much ‘damage’ it will have done to other companies by then.
I think Amazon has massively altered shopping behaviour for several reasons:
1) Exceptional Value for items/service purchased as it more or less owns internet retailing globally alongside a few others like Alibaba and Ebay.
2) Excellent customer service
3) Customer reviews on products – I buy a lot of books from Amazon for the simple reason that it offers good value for money, convenience for delivery and the reviews from customers always allows me to make an informed choice. This often involves the “touching and trying goods”.
As you said the only companies that may prove resilient is Greggs and WH Smith.