Should You Avoid Investing In The Retail Sector? by James Woolley

The high street retailers have had a really miserable time in the last year or so. It seems like every day, at least here in the UK, we hear that another big high street retailer is in serious financial trouble, or worst still closing down altogether. So should you therefore avoid buying shares in the retail sector?

Well in my opinion you most definitely should steer clear of this sector for now. This is only my own view of course and does constitute professional financial advice, but I think the whole face of the high street is changing forever. Internet retailers are basically taking over in terms of market share and they are driving the bricks and mortar businesses into the ground.

Internet retailers have significantly smaller expenses than traditional stores because all they basically need is a website with an online ordering system and a huge warehouse from where they can send out orders. They don't have to pay extortionate rents that the traditional retailers do and so as a result they can afford to charge a lot less for their goods and services.

These cheaper prices have not gone unnoticed by a large percentage of the general public and so many people of all ages are now choosing to do a lot of their shopping online. This is why so many high street retailers are closing down. They simply do not have the market share that they used to have, and a global recession only makes their problems ten times worse because people are reining in their spending as well.

So yes I certainly think you should avoid investing in retailers at the moment, at least the high street companies. I'm more upbeat about internet companies but I would still advise caution because the competition is increasing all the time as new companies start realizing the potential of e-commerce. Established market leaders should continue to grow, so may be worth investing in, but they will have to ensure that they continue to satisfy their customers' needs in order to remain a market leader.

I still don't think I personally would be tempted enough to invest even in strong internet retailers at the moment, simply because there is still a chance of a lengthy and prolonged recession which could still destroy even the very best retailers. If I had to pick one or two companies to invest in, I would probably look to invest in one of the market-leading supermarkets such as Sainsbury or Tesco, but this would be very much a long-term buy and hold strategy, and would only happen if they fell sharply so I could enter cheaply.

Overall though I think the retail sector is one that should be avoided for now because the whole high street as we know it is dramatically changing. Only the strongest will survive so until the economy recovers, it's probably worth looking at stronger sectors for now.


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