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What could Russian discounter Mere mean for the UK?

Decades after Lidl and Aldi arrived in the UK, delivering a shock to the big four that still resonates today, a new discounter force is coming. What's more, it's one that promises to make those two seem positively expensive. As revealed by The Grocer in May, Russian discounter Mere says it will be 20%-30% cheaper than any existing UK grocer.

In essence, it wants to shake up the market in the way Aldi and Lidl did in the 1990s. So, what do we know about the retailer? And what could its arrival mean for UK grocery?

For now, Mere is very much in the planning phase. Its first store is set to open in Preston in mid-July, representing a slight delay to an earlier target of the second half of June. That's to be followed by three more this year: in Castleford, West Yorkshire, Mold, Flintshire, and Caldicot, Monmouthshire.

But as revealed by The Grocer last week, its longer-term plans are far more ambitious. Mere is aiming for more than 300 UK stores in the next eight to 10 years, a rate of growth not dissimilar to that of Aldi and Lidl. Given the track record of its Russian parent Torgservis, the goal seems well within reach.

Founded in 2009 in Krasnoyarsk in Siberia by entrepreneur brothers Sergei and Andrei Schneider, within a decade it had about 1,000 stores in Russia, where it trades as Svetofor, meaning 'traffic light'. Russian market research agency Infoline-Analytika calculated its 2018 sales at close to EUR1bn.

Mere Preston By 2020, Svetofor had become the sixth-largest Russian food retailer by market share, according to Statista.

What's more, its might has forced rivals to make changes to their operations. Russia's largest retailers X5 Retail Group and Magnit began a fightback last year with the launch of their own discounter formats, Chizhik and Moya Tsena (My Price). Under the name Mere, the business has been opening stores in Europe since 2018.

Globally it now has a claimed 3,200 stores, with a footprint in Germany, Poland, Romania, Lithuania, Latvia and Ukraine. Turnover in 2020 is estimated to have been close to EUR2bn. It now plans to make inroads in Italy, Spain, Greece, Bulgaria and the US, as well as the UK.

The company is highly secretive - the founders have a reputation for never giving interviews or indeed responding to enquiries. However, Mere has granted The Grocer exclusive insight into the business's UK strategy, and where it sees its place in the market.

Target audience

From Mere's perspective, there are no true hard discounters in the UK, only very soft ones. Most retailers across western Europe instead target the medium and upper-medium income segment, and with good reason - it's a well populated demographic with sizeable spending power.

A few - notably Lidl and Aldi - cater for the medium and 'pre-medium' segment. Variety discounters may even reach the 'economy' segment. But no one is targeting the 'pre-economy' segment, where Mere sees itself.

Mere says medium-segment customers have some expectations of their shopping experience, such as customer service, which will have to be sacrificed to get its low prices. In fact, it goes so far as seeing hard discounting and customer service as entirely incompatible, due to the cost implications. From the beginning, it has taken the view that there are some customers, not optimally served by any other retailers, for whom price is the primary motivating factor and service is very much secondary.

By service it means anything from convenient location to a beautifully lit shop floor or a big car park (though until recently, property requirements on Mere's UK website specified 30-40 parking spaces). It also means an absence of the core pillar of 'customer service': assistance from staff in stores upon request. Each Mere store will have a maximum of eight staff, including four on the checkouts and one manager.

No one will be milling around to answer queries. That's because the other three will be dealing with another highly unusual and defining feature of Mere's model: deliveries by suppliers directly to stores, dispensing with the need for warehouses.

Mere store front While that will enable Mere to offer the lowest possible prices, it means shoppers may also have to accept gaps in what they might consider a comprehensive grocery range.

If, for example, suppliers cannot deliver litres of milk at a low enough price for Mere to sell them for at least 20% less than Lidl and Aldi, Mere will not sell litres of milk. There may be some brands, but only where they can meet Mere's strict low-price imperative. They will not be treated to any prominent position on shelf, not least because there will be no shelves.

Goods will be displayed on the pallets on which they arrive. Stores will include a walk-in chiller room and large freezer, and offer a maximum of 1,200 Ambient, chilled and frozen SKUs. Nevertheless, the range will be sufficiently broad to satisfy essential everyday needs and the low prices won't necessarily indicate a compromise on quality.

Mere makes a distinction between low prices and cheap products, viewing itself as a purveyor of the former, not the latter. For these reasons, Mere believes it will have no direct competitor in the UK, instead occupying a gap that has been vacant despite the rise of the German discounters. Aldi may have been somewhat similar in its early years but, along with Lidl, it has long since evolved into a different kind of retailer.

So different will Mere be to any existing UK retailer that none need be concerned about its arrival, it argues. While it accepts the UK grocery market is finite, and it will take a proportion of spend, Mere believes other supermarkets won't feel a noticeable loss.

"Each Mere store will have a maximum of eight staff, including four on the checkouts and one manager."

On that front, it faces some scepticism from Paul Foley, who served as Aldi's UK & Ireland CEO from 1999 to 2009. He is familiar with Mere as a board member for some of its competitors in several countries.

Foley accepts that Mere is offering a new concept, "as different to the established and now well-known western European discounters as the very same Aldi and Lidl were to Tesco and Sainsbury's when they themselves entered the UK". Nevertheless, it is a force to be reckoned with. "It is a highly organised and very focused retailer that has achieved tremendous sales and profits success in markets where it's developed a presence," he says. "Establishing a new type of business model is not easy, especially in the competitive market that is the UK, but at the very least their record so far, and their management confidence, suggests ignoring them would be a mistake," Foley adds. Indeed, existing UK grocers are not ignoring the news, with one major supermarket having contacted The Grocer seeking any information that might be shared about Mere's plans.

Discounters launched during the pandemic

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Oops Food Clearance | Founded: First store opened in October 2020 | Number of stores: Four in Preston, Bolton, St Helens and Warrington | Favoured location type: Units of about 5,000 sq ft in residential areas | Ambition: A further 15 stores this year and a total of about 50 by the end of 2022 | Model: Oops repackages surplus frozen food from manufacturers and suppliers that might otherwise go to waste due to issues such as labelling errors or over-production.

The business is now expanding and earlier this year it acquired a 100,000 sq ft warehouse in Birkenhead with capacity to serve 50 stores.

MaxiSaver | Founded: August 2020 | Number of stores: Eight in the Midlands | Favoured location type: Units between 2,500 sq ft and 6,000 sq ft in high streets and city centres, or up to 15,000 sq ft out-of-town sites | Ambition: Another 20 stores this year, from Bedford to Sheffield | Model: A variety discounter with a convenience bent, MaxiSaver sells around 6,000 products priced from 29p to GBP59.99, in food and drink, household, pet and health & beauty. MD Paul Mathers, a Poundstretcher alumnus, says it fills "a gap in the market for a convenience-style retailer offering high-quality products and genuine value".

Poundland Local | Launched: May 2021 | Number of stores: Two, in Kendray, Barnsley, and Hornsea, Yorkshire | Favoured location type: Residential areas not currently served by Poundland | Ambition: To reach new areas that would not support a larger store | Model: Many of the products are from Poundland's core range, including 'everyday' groceries, but the Locals also get additional ranges. Along with fresh fruit & veg, the food offer includes an extended bread range, fresh cakes from the 'Poundbakery', other food to go and chilled and frozen

JTF Central | Founded: Update on planned first stores expected in July | Ambition: 50 stores | Favoured location type: City centre high streets, 25,000-125,000 sq ft | Model: JTF Central is the recently announced "brand new concept" from JTF Mega Discount Warehouse, a membership-based retailer with 12 branches in retail parks.

The announcement in May promised to "place entertainment at the heart of the shopping experience" with features including "fun themed food outlets". The question for Mere, and its soon-to-be rivals, is just how much of challenge it will find in establishing its unusual model in the UK, where many consumers expect shopping and customer service to go hand-in-hand. In Russia, the growth of the business has been linked to falling incomes.

The same could easily happen here in the wake of Covid and the economic fallout. As logical as it may seem, Mere could be in danger of ignoring lessons from history, says GlobalData senior retail analyst Tom Brereton. "I think Aldi and Lidl went in with almost the same mentality and have come out realising that actually the very hard discounter approach is not the most successful model in the UK," he says. "The idea of having no customer service whatsoever in a store could be quite strange to British shoppers.

There are always questions that come up, things about products or whatever. It will attract a subset of Aldi and Lidl shoppers but when they go there quite a few may drop off." Shopfloor Insights founder Bryan Roberts has similar reservations. "Aldi and Lidl's journey towards success involved them adapting their strict hard discount model and essentially transforming themselves into supermarkets, with larger ranges, improved service and bigger, nicer shops," he says.

For him, it will be "interesting to see if any reiteration of Mere's model will be required to crack the UK".

Supplier relations

Mere itself recognises that Aldi and Lidl have evolved in response to shopper expectations. Its argument is that the two have left open a gap. It also intends to tailor its UK operation to the local market, including UK suppliers and farmers, as well as customers.

Suppliers are a key point here. UK suppliers, and Mere's unusual terms for them, could present another challenge for the business, thinks Shore Capital analyst Clive Black. Mere's terms dictate suppliers will only be paid for what is sold.

Indeed, it was a prospective UK supplier, suspicious of the terms, that first contacted The Grocer about the discounter.

"Brands will not be treated to prominent positions on shelves, not least because there will be no shelves"

On top of that, there's the issue of price. "Certain categories and supply chains will be horrified by a 20% cut on base," says Black. "It will be interesting to see how much product is grey, clearance or near shelf-life end. Could Mere be one step above the food bank?" Shorter than usual shelf-life dates are indeed a feature of Mere stores elsewhere in Europe, which resemble warehouses, with one SKU filling an entire pallet.

It means "wastage will be a key variable, and so shoppers may need to be prompt for fresh goods," adds Black. On a store visit to Mere in Poland, Sebastian Rennack, senior retail analyst for Lebensmittel Zeitung, also noted the prevalence of obscure brand names and an absence of organic, free-from or Fairtrade products. Still, Mere seems to be having little trouble finding suppliers in the UK.

Its UK head of buying, Pavels Antonovs, has been busy meeting manufacturers and suppliers - and posting the pictures on LinkedIn. One shows talks with international brand wholesaler and fmcg distributor Pricecheck. "Some will understand us, some won't," Antonovs recently told The Grocer.

Transport links

For those that understand, the location of the stores will be vital. Town centres may be out - as Brereton points out, it will be difficult to have "loads of supplier trucks turning up all the time" in such a built-up environment.

That's why Mere has made good transport connections a key tenet of its conditions for potential new sites. While Brereton says "the idea of sticking near motorways, with trucks arriving all the time, could be a bit strange for shoppers," it will undoubtedly make things easier for suppliers.

Mere Preston chiller area And location data specialist CACI sees no shortage of suitable sites for Mere, even if in many cases it will mean sitting shoulder-to-shoulder with an established discounter.

It's a threat those rivals will be carefully considering, says Black. "I would expect to see Aldi, B&M, Home Bargains, Lidl and Poundland executives or at least their teams engaging in extensive reconnaissance early doors," he forecasts. Black notes Mere would not be the first to try - and fail - to take a meaningful piece of the market from those heavyweights. "There have been many deep discount arrivals from Food Giant in the 1990s through to Dales, Netto, Poundworld, and most recently Jack's, but the big daddies will remain Aldi, B&M, Home Bargains, Lidl and Poundland." But Black has one caveat. "Whilst it would be wrong to think Mere will be a seismic arrival, its time may come, especially if the UK economy entered a deeply distressing point," he says. "Such a time does not feel now but let's see."

Certainly, the potential for Mere's success seems contingent on two variables: its ability to meet UK shopper expectations, and the economic climate that determines those parameters.

And, as the UK reels from yet another extension to Covid restrictions, who knows how far expectations could fall?

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Russian discounter Mere aiming for 300 UK stores in 10 years

Mere store interior Russian discounter Mere has a long-term target of over 300 stores in the UK within eight to 10 years, The Grocer has learned. The business, which claims it will undercut Lidl and Aldi by 20%-30%, is determined to scale its UK presence once processes have been established and bugs ironed out this year.

As revealed by The Grocer in May, the hard discounter plans to open its first four UK stores this year, in Preston, Castleford, Caldicot and Mold. The first, in Preston, is now set to open in mid-July, a date pushed back from June as Mere meets with suppliers and manufacturers and continues to fit out the site. The business is also currently advertising for staff for both the Preston and Caldicot stores, including an assistant manager to handle day-to-day running.

Mere's unusual operating model sees suppliers required to deliver directly to stores, and paid only for stock that is sold. Food will be displayed on pallets in stores of about 10,000 sq ft, including a walk-in chiller. Each will have a maximum of 1,200 SKUs across ambient, chilled and frozen, and eight staff, including about four cashiers and three handling deliveries.

The extreme low-cost operating model is seen as non-negotiable by Mere, and fundamental to making it unlike any existing UK retailer, with prices a third cheaper but also no customer service. Mere's Russian discounter parent Torgservis was founded in 2009 in Krasnoyarsk, Siberia, by entrepreneur brothers Sergei and Andrei Schneider. In Russia, where the businesses trades as Svetofor, it has over 1,000 stores.

It began opening stores in Europe under the name Mere in 2018, and is now in Germany, Poland, Romania, Lithuania, Latvia and Ukraine, with plans to enter Italy, Spain, Greece, Bulgaria and the US, as well as the UK. It has a claimed 3,200 stores globally. In its UK growth plans, the business is understood to be targeting any part of the country where it can lease sites meeting its requirements, including accessibility from major roads.

"The arrival of the Siberians to the UK is interesting and all those in the discount arena should be paying attention," said Shore Capital analyst Clive Black, calling the model a "hark back to the early days of limited assortment supermarkets in the UK".

"Mere is right that in any market there are shoppers that seek out deep value [over service]," Black added.

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Love Holidays Discount Code 40%

Enjoy great deals with Love Holidays discount codes

There is nothing quite like taking a break, getting away from it all, just for a while and experiencing something new and unique. Whatever time of year it is, stepping outside of your daily routine and just jetting off somewhere exotic can be one of the most rejuvenating and rewarding experiences it is possible to have. However, holidays are expensive and taking time away from work and family commitments can often be too much for many people.

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How do I access Love Holidays discount codes?

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Liverpool FC Discount Code 70%

ANSA UK DISCOUNT CODES INTRODUCES THE LIVERPOOL FC ONLINE SHOP

The Liverpool FC online shop is the go-to destination for Liverpool fans looking for clothing, kits and a wide range of other items which celebrate the legendary Reds. This top flight Premier League team is one of the most famous in the world, which is why you see so many fans of every age sporting replica kits and training gear dedicated to the team. The club's online store is the best place for the latest kits, most exclusive collectibles and wide range of items signed by the players themselves.

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DISCOVER A LIVERPOOL FC VOUCHER CODE TO MAKE ONLINE SAVINGS

A Liverpool FC discount code from ANSA UK Discount Codes might be the key to you being able to make that special purchase. It's easier than you probably think to use our site.

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HOW TO USE A LIVERPOOL FC COUPON CODE AT ANSA UK DISCOUNT CODES

Using a Liverpool FC coupon code from ANSA UK Discount Codes at Liverpool FC is a simple and fast process. It couldn't be easier to find the right code and use it on your next purchase at the store.

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Bookmark our Liverpool FC voucher code page so that you can come back to it even quicker next time. Or set up an alert to be informed of new Liverpool FC voucher codes as soon as they are released.


PRODUCT RANGE AT THE LIVERPOOL FC ONLINE STORE

The product range at the Liverpool FC store is increasing all the time, with everything a Liverpool fan, young or old, could ever need. From kits to training wear, fashion clothing and even footwear, you can be kitted out in head to toe Liverpool whether you need items for the pitch or for day to day wear.

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LIVERPOOL FC BESTSELLERS: KITS AND TRAINING WEAR

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Get £10 video game voucher for FREE from Epic Games, no strings attached

(C) EPIC Epic Games Store coupon

PC gamers have been treated to another unbelievable offer, courtesy of Epic Games. In its ongoing battle with , the PC platform holder is giving all customers the chance to claim a free GBP10 voucher, no strings attached. Just head on over to the Epic Games Store, login to your account, and claim your GBP10 video game voucher today.

The GBP10 Epic Coupon can be used on any game priced GBP13.99 or above, even if it's already on sale. The voucher can be used from now until June 17, which is the same date the Epic Mega Sale comes to an end. "An Epic Coupon is the Epic Games Store coupon that is applied at checkout when purchasing eligible games on the Epic Games Store," reads an Epic post.

Cyberpunk 2077: CD Projekt reveal Xbox Series X gameplayWhat to watch next Click to expand Replay Video UP NEXT

"If you already have a GBP10 Epic Coupon from the MEGA Sale, that coupon will be applied to your next purchase of any eligible game GBP13.99 or more, and you'll receive an additional GBP10 Epic Coupon."

You can use the Epic Coupon to get discounts on games like Hitman 3, Assassin's Creed: Valhalla, and . Speaking of Epic Games, customers can also download NBA 2K21 for free over the course of the next week. Whether you're a fan of basketball, or just want to give something new a try, NBA 2K21 can be downloaded from now until 4pm BST on May 27.

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Dividends versus coupons: How to meet the income investing challenge

Investing for income has never been so challenging. Bond yields have been at record low levels for years in the wake of the global financial crisis and quantitative easing programmes. The Covid-19 pandemic saw these central bank policies resume, putting further downward pressure on interest rates.

A 'new normal' for bonds?

On the fixed income side, the role of bonds in portfolios had undoubtedly changed, said Stephen Yeats, global head of fixed income beta solutions and UK head of investments at State Street Global Advisors.

"I think we have to recognise that we are in a hugely compressed yield environment globally," Yeats said. "That creates significant challenges and it does challenge some of the roles that fixed income has traditionally played in portfolios; specifically yield being an obvious one, but also diversification. "This means investors need to be more selective, in terms of which currencies, countries and regions they choose to invest in."

Fidelity Multi-Asset Income portfolio manager George Efstathopoulos supported Yeats' assessment, highlighting the way in which the investment grade and high yield markets have changed in the past decade. "If you look at the composition of investment grade today, it looks significantly worse on a duration basis," he explained. "Durations have been extended at a time when yields are at very low levels...

We have seen a massive ratings downgrade in the investment grade space.

"Ironically, high yield has had a bump up in ratings because of the fallen angels, [while] investment grade has got worse and we have seen more volatility in that space." Remi Olu-Pitan, multi-asset fund manager and co-portfolio manager of the Schroder Life Diversified Growth fund at Schroders, said she and her colleagues had been "trying to find a replacement for bonds" as a defensive asset within a portfolio. She contended that such an asset did not exist in the same way.

She continued: "Rather than having that barbell strategy of risky versus defensive, we think that to avoid that disappointment in terms of your hedges, we are looking more at... a sensible core [of] a wide range of assets that are not necessarily negatively correlated, they have different characteristics." Within this, investors must recognise that the "pursuit of income is becoming slightly more risky", Olu-Pitan said. This means accepting a lower income if investors also want hedging characteristics, or expanding their universe of diversifying assets.

She gave the example of hybrid securities as an asset class that can "help to cushion but not necessarily hedge". The hybrid sector is an example of areas of "niche" fixed income that should be considered by income seekers, according to Duncan Blyth, senior investment manager at Seven Investment Management.  "It's less binary now and you have to do a bit more work [to get] exposure to different return drivers, and I think that's where you can still get attractive opportunities with income," he said.

He added: "I think we are in an environment where investment returns are going to be lower and I think we have to just accept lower yields in many cases.  "If it is coming from areas like technology, again that is long-term growing dividend streams, then they are also going to be lower.  "I think we are so anchored to historically higher yields, we have to be wary of that and an acceptance of lower returns and potentially lower yields is something we just have to accept."  

Kleinwort Hambros senior fund analyst Paul Hookway urged investors to "be very pragmatic" and think "outside the box" when allocating to fixed income. Buyers need to "understand which part of the curve you are playing and what the structure is", he added. "So we have invested in Financial Credit, which has done very well for us."  Investment grade corporate bonds "play a much smaller role than they have done in the past" in multi-asset portfolios, noted Efstathopoulos.

His team had "turned a bit more constructive on equities" in the wake of the November US election result as well as announcements on Covid-19 vaccines, which Efstathopoulos said allowed investors to "look through some of the more short-term issues and... project with more reliability forward earnings". "A headline would suggest that fixed income is challenged as an asset class, but I would argue that the world is not consistent," said State Street Global Advisors' Yeats. "There are areas where this is more acute, particularly in euros.

But also, I think the yield environment we are in is reflective of the economic environment as well. There has been a huge amount of progress made with the virus but ultimately there are significant risks still out there for investors." For those looking for defensive assets in this new environment, Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management (LGIM), said there was no single answer and he highlighted the changing role of bonds in portfolios.

"Five years ago, people had bonds in their portfolio partly as a recession hedge when equities would tank and bonds would do really well. This has been the benefit of balanced and multi-asset portfolios for a very long time, but this becomes a bit more difficult with yields on the floor. "So in a way, the rise in yields we have seen recently is pretty healthy for the long-term future of multi-asset investors."  

There were still bond markets that could offer "steep curves and higher yields", such as Korea, Australia, and New Zealand, he said. However, these markets are not as large as their European or US counterparts so cannot be a solution in isolation. Nevertheless, "they are definitely interesting markets and would provide some downside protection", van den Heiligenberg asserted.

Some currencies can also offer defensive qualities to a portfolio, he added: "There's obviously probably negative carry when the carry trade does really well, but it would provide some defensive characteristics that you normally would expect from bonds."

State Street Global Advisors' Yeats agreed that the US dollar could be a risk hedge "at some level" given the shape of the US treasury bond yield curve, which is starting to look steep by historical standards, while Efstathopoulos suggested the Japanese yen as a cheap defensive option.

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Dividends versus coupons: How to meet the income investing challenge

Investing for income has never been so challenging. Bond yields have been at record low levels for years in the wake of the global financial crisis and quantitative easing programmes. The Covid-19 pandemic saw these central bank policies resume, putting further downward pressure on interest rates.

Meanwhile, huge swings in bond prices caught many investors off guard.

Prices initially spiked as lockdowns were enacted across Europe and the US and investors fled to bonds. This reversed quickly as uncertainty about the impact of the pandemic gripped markets, before volatility dropped and prices began to stabilise as central banks stepped in. At the same time, the unprecedented impact of the pandemic on companies around the world saw dividends slashed.

In the UK, the aggregate 2020 payout from listed companies collapsed to GBP61.9bn from more than GBP110bn in 2019, a drop of 44%, according to Link Group's quarterly Dividend Monitor report. Two thirds of companies reduced or cancelled their dividends between the second and fourth quarter of the year, Link reported. UK dividends are not expected to return to previous highs until 2025 at the earliest.

With this troubled backdrop, where can income investors look for inspiration? Investment Week and SPDR ETFs from State Street Global Advisors (SSGA) hosted a roundtable on 21 April with a panel of multi-asset experts to give their views on where to look now for income as thoughts turn to the recovery: coupons, dividends, or somewhere in between?

Riding the dividend recovery

Starting the discussion and making the case for equities, Ben Jones, vice president and senior multi-asset strategist in the macro strategy team at State Street Global Markets, noted this was a timely discussion "as the yield on the S&P 500 has actually dropped below the yield on the US 10-year bond to near a record low of about 1.4%" (see page 13).   "Although those yields have really narrowed over the course of the last year, obviously a lot of that is to do with the rise in bond yields over the beginning of this year and also the cut in dividend payouts last year," he said.  "I think we need to look for where the recovery in dividends is likely to be greatest, and where the stability is likely to remain.

I think there is going to be a great deal of unevenness in the degree of payouts going forward."   He noted widespread dividend cuts had shifted the landscape in terms of where income will be generated in the equity market. In particular, Jones highlighted UK energy stocks, which traditionally have been "nice, steady income plays that make up a large weight in many income funds".

Following the widespread cuts to payouts last year, however, "there [are] question marks about those areas - and justifiably so".  "I don't think necessarily those dividends are going to recover quite as quickly as some other areas," Jones said. On the other hand, areas that are traditionally not considered reliable income payers are starting to look more attractive.

Jones explained: "One of the areas that I'm looking at very positively, not just from a capital appreciation perspective but also an income perspective now, is the technology sector.  "[Last year] has really shown that tech is becoming in some ways a defensive sector. The income streams and the quality of earnings have become far more reliable over recent years and, in some cases, recurring.

"That means you have got these very steady cash flows being generated and that in turn means that dividends are likely to remain very stable... and forecasts are for dividends to increase quite significantly." Ahmed Behdenna, senior portfolio manager at Aviva Investors, agreed, adding that the wider tech "ecosystem" could also offer up income-generating opportunities. He said: "For example as a sector, data centres in the US.

Those names are exposed to those long-term trends and do carry actually quite an interesting dividend. For us it has also been about thinking a little bit outside the box and outside what has been the norm for income for the last few years, if not decades." Accessing the technology trend also adds an element of growth to an income portfolio, he added.

Wayne Nutland, Premier Miton Investors' head of managed index solutions and manager of the Premier Miton Managed Index Balanced fund, supported the idea of the technology sector as an emerging income play.  "I think looking in other areas for income is very important if only to balance out the factor exposure of the portfolio. I think being able to access income from those growthier parts of the market is really important for a balanced portfolio, particularly if this long-run, sub-trend growth dynamic returns in the major economies in the next ten years."  

State Street Global Markets' Jones also cited corporate cash levels as an important indicator of potential income sources. "If we look across the whole of corporate America for example, cash levels increased by about one-third last year; in Europe cash levels increased by about 20% last year," he said.  "That represents a lot of cash sitting in corporate pockets and really burning a hole there.

I think as confidence returns in 2021 and growth forecasts start to rise, companies will be much more confident in then returning that capital to shareholders in the form of both dividends and buybacks. We are already seeing in some sectors and some markets those dividend payouts starting to increase." Innovation is now needed to give more ways of returning capital to investors, some panellists said.

"Obviously buybacks have been a big way of returning capital to shareholders and traditional income structures don't enable investors to get that capital," Nutland said.  "So if the industry can devise a way of doing that, I think that would be really useful innovation." 

Matt Brennan, head of passive portfolios at AJ Bell, also highlighted a discussion recently started by HM Treasury regarding income distribution from capital.

With more people entering retirement and seeking alternatives to annuities, this kind of innovation could help managers meet demand by finding new ways of building income portfolios and products.

Categories
Coupons & Offers

Dividends versus coupons: How to meet the income investing challenge

Investing for income has never been so challenging. Bond yields have been at record low levels for years in the wake of the global financial crisis and quantitative easing programmes. The Covid-19 pandemic saw these central bank policies resume, putting further downward pressure on interest rates.

Meanwhile, huge swings in bond prices caught many investors off guard. Prices initially spiked as lockdowns were enacted across Europe and the US and investors fled to bonds. This reversed quickly as uncertainty about the impact of the pandemic gripped markets, before volatility dropped and prices began to stabilise as central banks stepped in.

At the same time, the unprecedented impact of the pandemic on companies around the world saw dividends slashed. In the UK, the aggregate 2020 payout from listed companies collapsed to GBP61.9bn from more than GBP110bn in 2019, a drop of 44%, according to Link Group's quarterly Dividend Monitor report.

Two thirds of companies reduced or cancelled their dividends between the second and fourth quarter of the year, Link reported. UK dividends are not expected to return to previous highs until 2025 at the earliest.

With this troubled backdrop, where can income investors look for inspiration? Investment Week and SPDR ETFs from State Street Global Advisors (SSGA) hosted a roundtable on 21 April with a panel of multi-asset experts to give their views on where to look now for income as thoughts turn to the recovery: coupons, dividends, or somewhere in between?

Riding the dividend recovery

Starting the discussion and making the case for equities, Ben Jones, vice president and senior multi-asset strategist in the macro strategy team at State Street Global Markets, noted this was a timely discussion "as the yield on the S&P 500 has actually dropped below the yield on the US 10-year bond to near a record low of about 1.4%" (see page 13).   "Although those yields have really narrowed over the course of the last year, obviously a lot of that is to do with the rise in bond yields over the beginning of this year and also the cut in dividend payouts last year," he said.  "I think we need to look for where the recovery in dividends is likely to be greatest, and where the stability is likely to remain.

I think there is going to be a great deal of unevenness in the degree of payouts going forward."   He noted widespread dividend cuts had shifted the landscape in terms of where income will be generated in the equity market. In particular, Jones highlighted UK energy stocks, which traditionally have been "nice, steady income plays that make up a large weight in many income funds".

Following the widespread cuts to payouts last year, however, "there [are] question marks about those areas - and justifiably so".  "I don't think necessarily those dividends are going to recover quite as quickly as some other areas," Jones said. On the other hand, areas that are traditionally not considered reliable income payers are starting to look more attractive.

Jones explained: "One of the areas that I'm looking at very positively, not just from a capital appreciation perspective but also an income perspective now, is the technology sector.  "[Last year] has really shown that tech is becoming in some ways a defensive sector. The income streams and the quality of earnings have become far more reliable over recent years and, in some cases, recurring.

"That means you have got these very steady cash flows being generated and that in turn means that dividends are likely to remain very stable... and forecasts are for dividends to increase quite significantly." Ahmed Behdenna, senior portfolio manager at Aviva Investors, agreed, adding that the wider tech "ecosystem" could also offer up income-generating opportunities. He said: "For example as a sector, data centres in the US.

Those names are exposed to those long-term trends and do carry actually quite an interesting dividend. For us it has also been about thinking a little bit outside the box and outside what has been the norm for income for the last few years, if not decades." Accessing the technology trend also adds an element of growth to an income portfolio, he added.

Wayne Nutland, Premier Miton Investors' head of managed index solutions and manager of the Premier Miton Managed Index Balanced fund, supported the idea of the technology sector as an emerging income play.  "I think looking in other areas for income is very important if only to balance out the factor exposure of the portfolio. I think being able to access income from those growthier parts of the market is really important for a balanced portfolio, particularly if this long-run, sub-trend growth dynamic returns in the major economies in the next ten years."  

State Street Global Markets' Jones also cited corporate cash levels as an important indicator of potential income sources. "If we look across the whole of corporate America for example, cash levels increased by about one-third last year; in Europe cash levels increased by about 20% last year," he said.  "That represents a lot of cash sitting in corporate pockets and really burning a hole there.

I think as confidence returns in 2021 and growth forecasts start to rise, companies will be much more confident in then returning that capital to shareholders in the form of both dividends and buybacks. We are already seeing in some sectors and some markets those dividend payouts starting to increase." Innovation is now needed to give more ways of returning capital to investors, some panellists said.

"Obviously buybacks have been a big way of returning capital to shareholders and traditional income structures don't enable investors to get that capital," Nutland said.  "So if the industry can devise a way of doing that, I think that would be really useful innovation."  Matt Brennan, head of passive portfolios at AJ Bell, also highlighted a discussion recently started by HM Treasury regarding income distribution from capital. With more people entering retirement and seeking alternatives to annuities, this kind of innovation could help managers meet demand by finding new ways of building income portfolios and products.

A 'new normal' for bonds?

On the fixed income side, the role of bonds in portfolios had undoubtedly changed, said Stephen Yeats, global head of fixed income beta solutions and UK head of investments at State Street Global Advisors.

"I think we have to recognise that we are in a hugely compressed yield environment globally," Yeats said. "That creates significant challenges and it does challenge some of the roles that fixed income has traditionally played in portfolios; specifically yield being an obvious one, but also diversification. "This means investors need to be more selective, in terms of which currencies, countries and regions they choose to invest in."

Fidelity Multi-Asset Income portfolio manager George Efstathopoulos supported Yeats' assessment, highlighting the way in which the investment grade and high yield markets have changed in the past decade. "If you look at the composition of investment grade today, it looks significantly worse on a duration basis," he explained. "Durations have been extended at a time when yields are at very low levels...

We have seen a massive ratings downgrade in the investment grade space.

"Ironically, high yield has had a bump up in ratings because of the fallen angels, [while] investment grade has got worse and we have seen more volatility in that space." Remi Olu-Pitan, multi-asset fund manager and co-portfolio manager of the Schroder Life Diversified Growth fund at Schroders, said she and her colleagues had been "trying to find a replacement for bonds" as a defensive asset within a portfolio. She contended that such an asset did not exist in the same way.

She continued: "Rather than having that barbell strategy of risky versus defensive, we think that to avoid that disappointment in terms of your hedges, we are looking more at... a sensible core [of] a wide range of assets that are not necessarily negatively correlated, they have different characteristics." Within this, investors must recognise that the "pursuit of income is becoming slightly more risky", Olu-Pitan said. This means accepting a lower income if investors also want hedging characteristics, or expanding their universe of diversifying assets.

She gave the example of hybrid securities as an asset class that can "help to cushion but not necessarily hedge". The hybrid sector is an example of areas of "niche" fixed income that should be considered by income seekers, according to Duncan Blyth, senior investment manager at Seven Investment Management.  "It's less binary now and you have to do a bit more work [to get] exposure to different return drivers, and I think that's where you can still get attractive opportunities with income," he said.

He added: "I think we are in an environment where investment returns are going to be lower and I think we have to just accept lower yields in many cases.  "If it is coming from areas like technology, again that is long-term growing dividend streams, then they are also going to be lower.  "I think we are so anchored to historically higher yields, we have to be wary of that and an acceptance of lower returns and potentially lower yields is something we just have to accept."  

Kleinwort Hambros senior fund analyst Paul Hookway urged investors to "be very pragmatic" and think "outside the box" when allocating to fixed income. Buyers need to "understand which part of the curve you are playing and what the structure is", he added. "So we have invested in Financial Credit, which has done very well for us."  Investment grade corporate bonds "play a much smaller role than they have done in the past" in multi-asset portfolios, noted Efstathopoulos.

His team had "turned a bit more constructive on equities" in the wake of the November US election result as well as announcements on Covid-19 vaccines, which Efstathopoulos said allowed investors to "look through some of the more short-term issues and... project with more reliability forward earnings". "A headline would suggest that fixed income is challenged as an asset class, but I would argue that the world is not consistent," said State Street Global Advisors' Yeats. "There are areas where this is more acute, particularly in euros.

But also, I think the yield environment we are in is reflective of the economic environment as well. There has been a huge amount of progress made with the virus but ultimately there are significant risks still out there for investors." For those looking for defensive assets in this new environment, Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management (LGIM), said there was no single answer and he highlighted the changing role of bonds in portfolios.

"Five years ago, people had bonds in their portfolio partly as a recession hedge when equities would tank and bonds would do really well. This has been the benefit of balanced and multi-asset portfolios for a very long time, but this becomes a bit more difficult with yields on the floor. "So in a way, the rise in yields we have seen recently is pretty healthy for the long-term future of multi-asset investors."  

There were still bond markets that could offer "steep curves and higher yields", such as Korea, Australia, and New Zealand, he said. However, these markets are not as large as their European or US counterparts so cannot be a solution in isolation. Nevertheless, "they are definitely interesting markets and would provide some downside protection", van den Heiligenberg asserted.

Some currencies can also offer defensive qualities to a portfolio, he added: "There's obviously probably negative carry when the carry trade does really well, but it would provide some defensive characteristics that you normally would expect from bonds." State Street Global Advisors' Yeats agreed that the US dollar could be a risk hedge "at some level" given the shape of the US treasury bond yield curve, which is starting to look steep by historical standards, while Efstathopoulos suggested the Japanese yen as a cheap defensive option.

Expanding income horizons

For multi-asset investors, searching for income should involve serious consideration of the vehicles through which assets are bought and held, according to AJ Bell's Brennan. "When you buy a bond fund, it can carry on paying the coupon at a higher rate because it's usually based on the purchase yield, which was obviously historically higher," Brennan explained. "On the other hand, equities as we saw adjusted immediately.

But if you bought an investment trust, you can use reserves and you can make overpayments." Investment trusts, and in particular real estate investment trusts (REITs) including healthcare specialists, have been of interest to the Kleinwort Hambros team as good, defensive, dividend-paying options, according to Hookway.  He added: "I think in the recovery you also have to look at those areas that can be out of favour with investors for any reason, principally in this case because they have cut or suspended their dividends.

This is where you have to do your due diligence to assess whether or not they are going to start paying again."  Hookway said there were lots of opportunities to look at diversifiers, moving away from bonds and towards asset classes and sectors with bond-like returns.   "Infrastructure has been mentioned, but also playing some of the secular trends coming out of the Covid recovery, like supermarkets and digital infrastructure companies."

AJ Bell's Brennan also highlighted jurisdictional differences: Luxembourg-domiciled funds, for example, "may be able to distribute yield in a different way to an Irish listed fund". "I think as multi-asset investors, you have to be much cleverer to try and get that smoother profile," Brennan said. "The danger is you switch to just the equities or high-income dividend sectors and then you end up with an unbalanced fund."

Playing the recovery

James Hawkes, a senior multi-asset portfolio manager at Coutts, added that despite the challenges posed to equities and bonds by the events of 2020, "the current economic environment is quite supportive of income investors". He added: "Because of the strong dynamic in play, the vaccine rollout, a lot of support from governments and central banks and then a huge amount of pent-up demand with consumers, I think it does allow you to lean into risk assets and to markets that are actually generating a higher income."

Balanced appropriately within a portfolio, Hawkes said "leaning in" to value-orientated and cyclical sectors could help "offset a more structural reduction in yield". He also highlighted the long-term megatrend of the global transition to a low-carbon economy could produce income-generating assets within areas such as infrastructure. Hawkes said: "It's important to balance off cyclical opportunities and some of the structural opportunities - climate change transition is a pretty interesting one.

Especially for income investors, there are a lot of assets tied into that transition that do generate quite attractive yields.  "[Infrastructure is] historically a great asset for income and a lot of those infrastructure products are tied into the transition. In traditional sectors like utilities, for example, a large number of those companies will lead the way in terms of transitioning, so you can generate quite attractive income there. 

"For us, it's very much about balancing that cyclical opportunity now but also having some of these structural winners in the portfolio that can enhance income." Aviva Investors' Behdenna added: "I think this recovery does provide interesting opportunities for income investors as it is going to be about structural trends, climate change, environmental issues, which are at the forefront of what we do. "Given our exposure to these themes, I think an area like electric vehicles is a very interesting trend for the future, given the investments from the European Union.

"While some of the big names that we all know in the US do not pay dividends, the car makers do pay dividends in Europe in particular. So that is one way to get exposure to what is going to be a green recovery."  Commenting on the recovery environment for investors, Schroders' Remi Olu-Pitan said: "The reason why the narrative is different this time round is that the winners are going to be different from the previous cycle.  I think for investors and asset allocators, we just have to deal with and embrace that there are new winners. 

"It is not necessarily a style but I think we have to look at the market differently from growth and value. I think there is an underappreciated middle of good, stable companies with okay valuations that can deliver.   "I think in an environment where you have cyclical growth and rates rising, whatever happens to inflation, it requires a different way of investing."

Dividends versus coupons

Equity income investors are in a strong position as 2021 develops given strong cash positions and growing positive sentiment as vaccines are rolled out and economies reopen - provided the companies they allocate to have come through 2020 relatively well.

State Street Global Markets' Jones underlined the inflation outlook as positive for equities. State Street Global Markets expects US inflation to tick upwards above 2% but to be kept in check by central bank policy, according to its second-quarter capital markets outlook report. He said: "Given the outlook for inflation [and] the outlook for where I think fixed income yields are probably going, and the degree of cash that is sitting in investors' and households' pockets, that means the capital appreciation properties of equities look a lot more attractive than in the fixed income space at the moment."

Yeats added that the longer-term outlook for global debt levels was "quite concerning" given the amount that governments had been forced to borrow to combat the economic and social effects of the pandemic, such as business closures and restrictions on movement. "Ultimately that at some level has to be paid back," he said.  However, the knock-on effects will not just be felt in the bond markets, Yeats emphasised. Corporate taxes were likely to increase, he said, which would have an impact across company balance sheets. "It's worth remembering that bonds are higher up the capital structure for a reason," he added.

"The whole debate around where I'm going to get my income [is about] understanding that just going up the risk spectrum is not necessarily the right answer," Yeats stated.  "Just remember where you are in the capital structure." While income investing is likely to remain challenging for some time, for those willing to innovate and 'think outside the box', there appear to be many options available.

Whether you're dedicated to dividends or convinced by the coupon, the next few years are going to be an interesting journey.

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UK's cheapest supermarket announced and it's not Tesco, Morrisons or Sainsbury's

Morrison's has lost its crown of being the most affordable supermarket after price comparisons of an average shopping basket for each major brand were compared. Every month the price of a number of items including own-brand products and branded products such as Gordons Gin and Yorkshire Tea are compared between all the major supermarkets. Budget supermarket Asda has now reclaimed its title as the cheapest UK supermarket, following a knock-back from Morrisons last month, reports GrimsbyLive.

Asda clawed their way back to the top spot, being the most affordable supermarket once more for shoppers, with an average basket price GBP7.22 cheaper in March than in February. An online price-tracking website constantly monitors price increases and decreases across seven major UK online supermarkets.

Asda Cambridge at The Beehive Centre, Cambridge

The results have been determined by carefully tracking how each online retailer prices the 43 items outlined in the Government's Consumer Price Index 'shopping basket' on a week-by-week basis. When it comes to price increases throughout the month of March, Gordons Gin (70cl) went up in price from GBP13.00 in week two to GBP16.00 in week three at Morrisons, tea bags (Yorkshire Tea - 240) were available at Asda for GBP4.50 in week two but went up to GBP5.75 in week three, whole chocolate (Cadbury Dairy Milk 360g) was GBP3.50 in Iceland in week four and went down to GBP3.00 by week five.

Sainsbury's was seen to have some of the most regular price changes with pizza (Dr Oetker Mozzarella Ristorante Pizza 335g) going from GBP2.50 in week two down to GBP1.75 in week three, along with their pasta (home brand Penne Rigate 500g) that started out at GBP1.50 in week two but went up to GBP1.95 in week three.

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Changed your mind? There's an 'unsubscribe' button at the bottom of every newsletter we send out. There seems to be a clear pattern in most supermarket's pricing schemes, with a lot of changes being made in week three of the month, which could be down to British shoppers doing their mid-month shop without realising that it is probably the worst time to buy their food shopping as that's when prices change the most often.

Andy Barr, co-founder of www.alertr.co.uk, said: "It is crazy how quickly the tables can turn. "Despite Morrisons knocking Asda off the top spot last month, it didn't take them long at all to regain their title, with Morrisons falling back down to not second place, but fourth - making them more expensive than both Iceland and Tesco throughout March. "Waitrose is still the most expensive, but that isn't too much of a shock.

It is interesting to see Tesco move its way near the top of the charts though, so there are clearly some discounts being made as they were consistently coming out more expensive than Sainsbury's and Morrisons in previous months. You can find local businesses delivering in your area in the widget below: "I wonder if these results will mean Morrisons will be working hard behind the scenes to ensure they are battling against Asda for the top spot again in the coming months."

The online price-tracking website has been tracking the prices of 42 everyday items from the shopping basket on the Office for National Statistics' Consumer Price Index (CPI) since 2019. Included within the list are items such as eggs, milk and bread, as well as non-perishables such as pasta, rice and cereal. The prices across seven of the largest supermarkets are analysed, with discount retailers Lidl and Aldi not included due to the inability for customers to shop full ranges online and not having the same like-for-like branded products that other supermarkets stock.

Own-brand items (or their equivalent) were monitored in the research to give the most unbiased comparison of goods and their prices, with the exception of branded items that all seven supermarkets stocked (e.g., Coca-Cola, Kellogg's Cornflakes, etc.).

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The full breakdown of each supermarket's average basket costs, from lowest to highest over the five-week period in March, were as follows:

1. ASDA - GBP105.42 (-GBP7.22 less than last month)

2. Iceland - GBP114.32 (-GBP1.61 less than last month)

3. Tesco - GBP115.02 (-29p less than last month)

4. Morrisons - GBP117.46 (+GBP4.90 more than last month)

5. Sainsbury's - GBP117.82 (+6p more than last month)

6. Ocado - GBP127.19 (+GBP4.13 more than last month)

7. Waitrose - GBP128.55 (-34p less than last month) To ensure the results across the stores are fair if an item is unavailable or out of stock in one of the seven online stores for a whole week, then the product is dismissed and not analysed within the final basket costs for the month. Items can also be replaced with another like-for-like item, as long as it is in stock across all seven retailers.

However, for the month of March, no products that were being tracked had to be swapped or were out of stock.

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