Interest only: would fashion retailers be better off saving rather than investing?

‘Do or die’ sounds like a classic phrase from the Derek Trotter playbook of business advice. We are often told that businesses need to continually invest and innovate or they will wither on the vine. What if they did nothing, sat back and just stuck all their cash into a high interest paying bank account?

Sounds boring, but it could be a clever strategy right now. For those businesses with plenty of cash on their balance sheets, the continued rise in interest rates should make this a tempting option. A major addition to income without risk, while the returns won’t set the world alight, it is better than a potential loss in a consumer market that is being forcibly cooled by the Bank of England.

While business savings interest rates are lower than traditional private bank accounts, a rate of between 4-5% could see significant returns for businesses without lifting a finger. Businesses need to make their surplus cash work hard, especially with higher inflation looking like it is hanging around for longer. For example, Aldermore Business Savings is advertising rates of up to 4.30%. The financial wizards are pencilling in further interest rate rises up to 6%, so this will only increase.

Some businesses have huge cash surpluses. Apple is reported to have $202.6 billion in cash, while Alphabet has $169.2 billion. At interest rates of 4%, could generate an annual interest of around $8 billion and $6.8 billion respectively. In the fashion arena, LVMH declared in December 2022 that it had $11.62 billion ‘Cash on Hand’.

Most of these higher interest rates require a fixed savings account which means locking the money away for a designated time frame. While a business will not want to run out of cash, a clever financial department will be able to maximise returns while not putting the business at risk.

We should expect many cash-rich businesses to declare growing interest payments on their future financial reports.

John Lewis Partnership reported a strong balance sheet in March 2023 with £1 billion of cash available. At a conservative 4% interest, it could have an income of £40 million annually. To put this into context the company spent £32m to support its Partners with a cost of living payment and free food over winter. Which would be roughly the same amount as the interest after tax. John Lewis Partnership didn’t reward its Partners with a bonus in the past year.

Retail is high risk, especially now, with many established names teetering or going under. There will be bargains to be had for brands, if they make sense, so having cash available is a good thing to move quickly and not to have to raise expensive finance.

Obviously, paying down debt is most important as interest rates rise, but putting a significant wedge away at a healthy interest rate and receiving a noticeable lump of interest will be something no business has been used to since the financial crisis in 2008. Before cash on the balance sheet was doing nothing, now brands and business have the opportunity to add interest to income.

Where is all this money coming from? It is coming from the pockets of people and businesses with loans and mortgages. With this in mind, brands could be wise to heavily target and market to the mortgage-free generations at the top and bottom age groups of society; the young still living at home and the older ones who are mortgage free.

On a positive note, the 2021 census marked the first time it was shown that among homeowners, those that were mortgage free are now in the majority. Data showed 62.5%, (15.5 million ) of households owned the accommodation they lived in. Among over-65s, 94% are mortgage-free, according to the official English Housing Survey.

In December 2022, Morgan Stanley found the number of UK residents aged 15 to 34 residing at home had increased to 42%, up from about 35% in 1999. It was speculated that more young high-income UK shoppers are fuelling luxe goods sales to increase their engagement on social media.

Brands that can speak to these two demographics should prove more resilient.

Annual mortgage repayments are estimated to rise by £2,900 for the average household remortgaging next year. In more expensive areas it will be much more. This will effect the demand for big ticket items like cars, holidays and luxury goods. It has already been reported that luxury sales from aspirational shoppers have dried up, particularly in the US.

The continued raising and prolonged higher rates of interest used to lower inflation will create an on-going stark divide in consumers and businesses. Brands who are clever with their cash and tweak its product and marketing accordingly will jump it.