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Retail has always been a highly dynamic industry, intensely competitive and fighting for a share of the wider consumer spending pot. This is an industry used to dealing with a constant diet of change. However, the change we are seeing today is far more profound than anything the past has thrown up. We are now seeing by far the most challenging period in retail history. A reshaping of the industry’s structure and economics is unfolding, and most of the real change is yet to happen.

Richardtalksretail is focused on analysing this change, anticipating the implications, and mapping how the key players across the various sectors are dealing with it. The regular Blogs in this public section of the site are a taster of the much more detailed analysis and forecasts in the premium section, reserved for subscribers.

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Monthly Archives: July 2015

Headwinds on the horizon

The latest ONS retail sales data underline the weakness of industry demand. The forward momentum of growth by value is 1.9% yoy, confirming the slowdown that actually began early in H2 2014. The data also confirm the continued price deflation which dominates every sector. This trend too has been very firmly established, in this case for well over 12 months.

It is clear that retailers are having to give away margin to turn stock into cash. Discounters are structured to work like this – mainstream players are not. The implications for brand equity and customer relationships cannot be overstated.

Anyone thinking this is too gloomy should consider two headwinds. First, the return of interest rates to a level which might be considered historically normal. The second is the National Living Wage. Both will increase retailers’ costs (already rising far faster than sales) still further.

Economists seem convinced we have a really strong consumer economy. Or at least, some do. And so does the Bank of England. I’m not sure that consumers see it this way and they surely are the key players here. What is 100% clear is if they really are much better off, they are clearly not spending it in retail. The competitive scew is tighteneng.

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M&S check out

Last week’s major retail story broken by the FT told of John Dixon’s unexpected departure from M&S. He was inherited by Marc Bolland 5 years back having been promoted through the ranks by Stuart Rose, a fact which probably counted against him. This is less a comment about Bolland and more about corporate politics in general. To a degree, Dixon has been on a hiding to nothing. Having done a conspicuously good job in food, he was switched to GM to turn round the engine of M&S – clothing in general and womenswear in particular. Any success would surely be attributed to Bolland and failure, to Dixon.

I have discussed M&S in detail in the premium sections of this website. Suffice to say here that while I expect margins to improve, growing Marks’ clothing market share is a very much taller order. Indeed, I think that defending it is massively challenging. With John Dixon going, Steve Rowe is being switched from Food (where he succeeded Dixon) to the GM job. Like Dixon, Rowe was given his senior wings by Rose and is also an M&S “lifer”. Again like Dixon, M&S is Steve Rowe’s “family” business. His Dad Joe was a highly respected very senior Exec there for many years.

Steve is a merchant from the old school. A trader. Someone who has selling in his DNA. Retail in general and M&S is particular has far too few merchants. The company desperately needs this fundamental understanding to effectively defend its business. Margin improvement is great but ultimately, every business needs to drive revenue to sustain itself. I hope for Marks’ sake that the parallels between Steve Rowe and John Dixon do not continue.

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HoF and knowing customers

Today’s news that HoF is restructuring to put customers and their knowledge of them at the centre of the company is extremely positive. For decades, retail was a sellers’ market. Demand exceeeded supply and the industry’s players prospered from a highly profitable “build and they will come” strategy. And the customer obediently spent increasing sums from growing real spending power to perpetuate the cycle.

This could never continue for ever but two factors have brought it to an abrupt end. The debt crisis halted spending growth and online accelerated capacity growth. The relationship between supply and demand has changed profoundly and as a result, the relationship between retailers and customers. Except most retailers do not yet fully comprehend this and its inevitable implications.

The industry has for many years tended to pay lip service to the idea of customer knowledge. It has often confused knowledge with having loads of data (Tesco and dunnhumby) and spending lots on market research. Data is only vauable when you know what to do with it. All too often, a retailer’s window on its competitive world sits at a low level in the organisation and insight percolates up tortuously, telling the leadership only what it wants to hear. This is pointless.

Today’s market is increasingly about winning market share to grow. This is shining a light on how good retailers are at retailing – at selling things. Achieving sustainable growth increasingly depends on you understanding better than your competitors the customers you both share. Knowing customers will increasingly be a precondition of growing sales and HoF is certainly ahead of the curve in understanding this.

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Deflation drives vocab shift

As retail price deflation pervades the industry, I am noting a change in vocabulary across the market. Recent examples over the past two weeks have been Sainsbury’s, M&S, Debenhams and Tesco. Financial PRs and Investor Relations departments are very keen to switch the focus away from sales by value and emphasise volumes. Not surprising. Deflation is producing some pretty unattractive-looking revenue lines which look very negative. However, many retailers have what looks like a positive story to tell around volumes.

The backdrop to this has been relentless price deflation which is taking an increasing stranglehold on every sector. Dropping prices to drive sales is giving the market a rather topsy-turvey look, where value growth is muted but volumes look quite respectable. The reality is that growth the latter is not compensating for soft revenues, and there is an ongoing squeeze on margins. The market is very much “buying” the volume narrative, partly because it has always focused on trying to highlight underlying trends. In doing so it sometimes misses the headline sales revenue numbers. The monthly ONS date on retail sales is a good example of this. This is a mistake, especially in a price-driven trading environment.

Getting more customers through the door is great. But if the incentive has been discounting prices, they will have to buy massively greater volumes for you to emerge with materially better revenues. The point here is that discount retailers are structured to lower prices to drive unit sales growth but mainstream full price retailers are not. And these are all full price retailers. They are discounting because without price cuts they are unable to drive the footfall they need. In this market cash is king and is what pays the bills.

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