Are retailers delusional?

I picked up a book at a jumble sale last week. It's quite a novelty reading from paper.

I bought 'The Art of the Long View', by Peter Schwartz, an old edition published in 1991 because it promises insights into two interests that have hitherto proved incompatible, investing and the future.

Schwartz has written a number of books on futurism and runs a business consultancy. Its bulletin is a good read too.

Value investors have a vexed relationship with the future. We know it's all that matters, but we don't believe it's predictable. A framework for thinking about the future that doesn't involve predictions might help.

So, and I'm only ten fascinating pages into the book, I'm intrigued he endorses an Arab proverb:

He who predicts the future lies even if he is telling the truth

And I'm enthused by his explanation that scenario planning is not about extrapolating current trends into the future, one of the cardinal sins investors make, but presenting alternatives.

The end result, is not an accurate picture of tomorrow'

He says'

but better decisions about the future.

How, exactly, I have yet to discover, but his first example of where scenario planning might have helped reminded me strongly of the situation retailers face now.

He describes the crisis overtaking the advertising industry in the 1980's. Anyone could see the growing popularity of new communication technologies, cable TV, videocassettes, fax machines and email that would drain audiences and revenues from network television. No-one could say how the future would play out but it was obvious that advertising agencies were facing radical change or a serious diminution of their businesses.

By 1987 the shock had hit, profits were declining and staff were laid off. Yet most of the ad agencies Schwartz talked to wouldn't join his study of the industry's future:

To judge from our conversations with them, they are afraid of what they might learn, as if the cost of ignorance was smaller.

Recently I relocated operations to Cambridge's remarkable public library (its new, three storeys high, and bigger than Tesco. Although I don't like making predictions I doubt many more will be made like it).

The library is in Lion Yard, a new retail development in the centre of the City, and I've shifted temporarily so I can observe retailers and their customers. Already I've seen shoppers queuing around the block to buy the new iPhone from the Apple Store, while the shops opposite, Vodafone and 3, who'd also opened early and devoted their window-space to advertising the iPhone 4s, were populated only by bored-looking members of staff.

Lion Yard is populated almost exclusively by mobile phone shops, fashion stores, and John Lewis, which sells both. The apparent glut of shops, many of them empty when I walk past, makes me wonder whether John McElligott of the rather fearsomely named Value Stock Inquisition blog is right when he says.

I am of the opinion that the UK has way too much retail real estate.

He cannot understand Argos owner Home Retail's strategy. Sales at Argos are falling, but within that internet and telephone orders mostly for collection or home delivery are growing, and now account for 46% of the total. McElligott would like to see retailers like Argos shedding stores and the expensive leases that come with them, but Home Retail is opening and refurbishing more. It sounds as if the company thinks the falling numbers of customers visiting its showrooms is temporary.

I profiled Home Retail rather more favourably last December, but still didn't add it to the Thrifty 30.

As well as the future, value investors have a vexed relationship with retailers at the moment. They look cheap, but keep getting cheaper. Some like Schroders' Value Perspective team, think the sectors continuing decline is unjustified, and in particular those companies with strong balance sheets should profit investors in years to come. It's a classic value case.

Home Retail, incidentally, is in an undervalued retailer with a strong balance sheet according to Schroders, but McElligott thinks its actions, a generous dividend and store openings (and share buybacks presumably) are sapping its financial strength.

An alternative scenario is the Internet is draining customers and retailers are either going through fundamental change or a permanent diminution of their business.

We can't predict how it will pan out, but would be very wary of companies that appear to be planning for business as usual, when business may never be the same again.