Retail titans ride the boom

THERE is something unreal about the buoyancy of High Street sales. Like the housing market, they appear to have a momentum all their own, unrelated to conditions in the broader economy.

Investors in Marks & Spencer and Tesco will have few complaints. But why is the sales boom happening and can it continue? M&S chairman Luc Vandevelde believes that British consumer behaviour is strongly influenced by the lowest interest rates in 40 years.

In a home-owning democracy, where mortgage repayments have long taken the biggest whack out of wages, disposable income has soared and people are spending to the hilt.

Add to this the cooling in the market for bigger ticket and technology items such as mobile phones, and clothing and food retailers are reaping the benefits.

The corollary is that this may be a one-off and, as house prices adjust upwards (as they are doing) and when interest rates eventually rise (as they will), then the extraordinary sales gains will ease back.

Still, there is overwhelming evidence that Vandevelde has turned around M&S's core clothing sales and produced exceptional growth. It may be a long time before M&S restores its historic market share, but it is on the right path.

Enough, in fact, to push the share price above the 400p mark and to end the bleats from shareholders about the recent capital reorganisation.

For the future, M&S recognises that, in addition to pushing on relentlessly with clothing sales gains (at a more normal rate of 3%-plus, rather than the last quarter's 10%), it needs to build momentum in its other businesses.

Financial services have fallen behind (Tesco among others pushes forward on this front), home wear needs to rolled out more widely and the 'simply food' neighbourhood delis need to be expanded aggressively. Plans are being developed for another 100 shops beyond the 20 already in the pipeline.

M&S has a long way to go to catch up with the share of British shopping held by Tesco. Many of us were sceptical when Tesco went for overseas expansion, remembering past failures in France, and the difficulties that so many of our retailers - from Dixons in the US to Boots in Japan - have had in transferring their model overseas.

Under Sir Terry Leahy, Tesco has proved the exception, pushing international profits up 61% to £119m.

Like M&S at its best, it is also reaping the benefits from past investment in financial services, which is now handsomely profitable.

It is also in Boots' territory, claiming to become a market leader in volume terms in health and beauty. In its core domestic grocery business, Tesco has hit back at claims that Sainsbury is taking market share.

Not everyone is convinced. Broker ABN Amro (dismissed by Tesco as Sainsbury acolytes) argues that Tesco inflates its profits by failing to take a generous enough depreciation charge against capital expenditure, an interesting sideshow.

Advertising bravado suggesting it is Britain's lowest-cost retailer has been challenged by the Advertising Standards Authority. And boasts of e-tailing supremacy are translating into less-than-impressive growth and profits.

But, on the plus side, Tesco has moved 59,000 workers from a defined contribution to a defined benefit scheme (based on average rather than final salary), one of the few British companies with the confidence to invest in the long-term loyalty of their workforce. For this and the ability to outpace market expectations, Tesco deserves plaudits.

Vodafone sinks
THOSE fund managers who expressed concern about the dominance of Vodafone in the FTSE and the negative impact it could have on tracker funds are looking prophetic. In another day of extraordinary trading, in which 513m shares changed hands, it skidded to 120p, way off its 400p peak. The spread-betters are now giving odds on it slipping below £1.

So far this year, the shares of Britain's leading mobile operator have underperformed those of its rivals by 15%. A series of analysts' reports debunking the mythology of the recent past, when it paid £83bn for Mannesmann and £13bn for mobile licences, has led investors to fear write-offs on a titanic scale. Broking houses are lowering targets, with Schroder Salomon Smith Barney cutting its price forecast from 200p to 160p.

The decision of BT to move back into the mobile sector will not help either. Not so long ago, Sir Chris Gent was walking on water. Now he is treading water..