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Thursday 19 July 2018

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Fund manager predicts death of the High Street

Written by Peter Walker
16/04/18

High Street retailers are headed for an “extremely unpleasant existential crisis”, according to the manager of a fund that takes advantage of industry disruption.

Eurof Uppington, portfolio manager of disruptive innovation strategy at Quaero Capital, explained that while the internet as a disruptor of bricks and mortar shops is nothing new, the extent of the problem traditional retailers face is being widely underestimated.

“Our contention is that some retailers may not recover as e-commerce becomes all encompassing. In order to survive, these companies need radical surgery – closing huge amounts of stores, centralising back office functions and investing in omnichannel strategies,” he commented.

The hedge fund launched in November 2017 with $7 million under management, after a year running as a model portfolio, returning just over 12 per cent year to September last year. It goes long on online retailers like Amazon for example, while shorting offline-heavy Walmart.

Sohyun Yim-Heintze, a research analyst for the Disruptive Innovation Fund, said they use an ‘echo strategy’, working outwards from those two companies for instance, taking views across the rest of the value chain.

“Failing traditional retailers and restaurant chains exist in malls, Real Estate Investment Trusts are highly exposed to malls, and regional banks invest in the REITs – so we short companies that echo out from the likes of Walmart,” she stated. The fund therefore shorts BOK Financial, a local US bank with around 15 per cent exposure to mall operators.

While the initial focus has been on trends on that side of the pond, Uppington said he sees the UK as potentially even more advanced in terms of High Street demise. “We worry that retailers are like Nokia, they just can’t adapt and change course in time. Most have so much capital tied up in real estate it’s like an anchor around their necks,” he opined.

“Stores should be complementary to a brand’s website, rather than the other way round. If you’re truly omnichannel, then all you need are a few ‘brand temple’ outposts where people can get inspired and fitted, while continuing to order online.”

The latest British Retail Consortium and Springboard figures showed footfall in March down by six per cent, the steepest year-on-year fall since the end of 2010. Growth fell in all shopping destinations, with the High Street down 8.6 per cent, retail parks down 1.8 per cent and shopping centres down 4.8 per cent.



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