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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: January 2018

Turnover or margins?

Christmas and the period that immediately follows highlights the choice retailers are wrestling with. Which has priority – revenue or margin. Consumer demand was weak all last year, whatever the increasingly dodgy ONS data says. There is some inflation, more in food than non-food, but underlying demand is flat. Meanwhile, operating costs are rising by c4% annualised. Then there is sterling’s devaluation – only a small proportion has been passed on to shoppers via higher prices – the result of a weak market.

Over Christmas, many retailers have “bought” sales by discounting heavily. They sacrificed margin hoping to avoid issuing a weak trading statement. Full audited annual results will begin percolating through end April, beginning May. The key is that unlike Christmas trading statements, they will a) be audited and b) will include profits and margins.

We are already getting early instalments of the turmoil to come. Numerous profits warnings and many more warnings around onerous leases, mandatory (often retrospective) discounts on suppliers and planned job cuts. Not surprisingly, this frightens financial stakeholders like credit insurers and banks.

Some of those retailers who sacrificed margins to prop up weak sales are now praying Q1 2018 helps repair battered P&Ls. History shows that January-March in the retail calendar is by far the weakest quarter. Moreover, our Promotional Tracker shows that even beyond the January sales, February and March saw 58% of non-food retailers on sale. So those looking for help from the market can forget it.

The answer to all this is costly and painful. Businesses must invest in defending their top lines through more relevant product, better quality, better service and a better shopping experience. Only this can defend and then enhance margins. Retailers need to show more confidence in their brands before they can expect anyone else (customers or stakeholders) to.

** We provide strategic advice to retailers and the financial community – get in touch for details admin@richardtalksretail.co.uk

You call that winning?

These days style prevails over substance. In our industry, this peaks with the Christmas Trading Statements season. Most of the results are now in and guess what? Most of our retailers are winners!! That’s great news. Because for a few moments back there, I thought this was actually the toughest, most challenging, damaging retail market we have ever seen.

Retail is highly fragmented and pressures do not apply equally. Some retailers are far stronger than others, better led, with stronger brands and business models. Looking at these statements in terms of just winners and losers is far too simplistic. Anyone posting plus numbers is deemed a winner, because they appear to not be losers. But in retail, things are very often not what they seem. Let’s take the big four supermarkets – apparently, they all won. But price inflation was c3.5%, market growth was c3.8% and all four announced sales growth below these numbers. Maybe they didn’t lose, but calling them winners is simply wrong.

In non-foods, Next was called a winner and its figures were regarded as really positive. A year ago Next reported awful Christmas trading numbers and the accompanying profits warning sent the shares down by 10%. So beating those figures this year was the very least to be expected from one of our best run clothing retailers. Next did OK, but no more.

Christmas was weak, as it was always bound to be. There were a handful of genuine winners including Aldi, Lidl, Primark, Joules and Ted Baker. But many retailers “bought” their Christmas sales with heavy discounts. This will only begin to emerge either when audited results come out several months down the line, and/or when quarter day end March arrives and there isn’t enough cash to pay the rent.

** We provide strategic advice to retailers and the financial community – get in touch for details admin@richardtalksretail.co.uk

Supplier relationships – a key indicator

Is retail necessary? Until not so long ago, if you made or supplied a product you needed to reach customers via retailers. That unique role of bringing the product and the customer together is progressively eroding. And increasingly, the economic question is what does retail add to the distribution chain?

In general, retail is answering this question badly. Increasing degrees of panic characterise company behaviour. Leadership teams have little or no direct experience of managing in a market like this, Few businesses have NEDs with enough understanding of the industry.

A key example of what I’m talking about concerns product, and suppliers. The critical relationship between retailer and supplier has over many decades become increasingly unequal and in more recent times, increasingly adversarial. As retail has become more concentrated, so their power has grown and so has their dominance in the relationship. The mushrooming of online has a twin impact on retail. The first is the explosion of capacity, adding cost but largely cannibalising sales and tightening trading economics. The second, more subtle impact that this still relatively new channel is open to all. Increasingly, suppliers can go direct, bypassing the retailer altogether.

Against this background, retail has continued to push economic pressure up the chain to suppliers. I constantly hear how retailers have no loyalty, buyers are getting younger and less experienced. And they face increasing pressure to deliver great product at lower cost. Suppliers   will look to protect their business by lowering product spec, usually through inferior fabric in the case of fashion. No wonder consumers are falling out of love with an increasingly unattractive product.

The key elements of successful retailing are the product and the customer. Retail cannot afford to push economic pressure onto suppliers any more – the price of inferior product is too high to pay. This is what we are increasingly seeing. The customer wants value but will not find an inferior item more attractive because it is cheaper. In a market where suppliers need you less and less, you need to give them more and more reason to supply you.

** Our GOLDEN QUARTER REPORT analysing Q4 2017 vs Q4 2016 covering 200+ leading retailers is now available. For details contact admin@richardtalksretail.co.uk

Christmas unwrapping …

As the trading statement season chugs along, it’s all panning out in a reasonably predictable way. The stronger players have done well. Today, Ted Baker released numbers most others can’t even dream about. Meanwhile, Debenhams’ early profits warning has been greeted with alarm in some quarters, in spite of its recent relatively disappointing trading performance pointing downwards. The same story applies to Mothercare, again warning on profits. Then there is a middle group delivering OK results – Next, Morrisons, Sainsbury’s among them.

Many try to read patterns into these numbers that are not really there. Tech: online is stronger so exposure to online must be key? Yes, but that’s missing the point. The key is the brand – the offering, its relevance and how effectively it’s executed. When one looks at the star performers so far they all have big ticks in these key boxes.Along with Ted,  Aldi and Lidl have posted fantastic figures, underlining how they continue to eat market share. The fact that this is largely driven by new store openings also misses the point: market share growth comes at the expense of the competition so it’s a double competitive advantage.

Unlike the growth markets of the past, this one is getting ever tighter so the strong prosper at the expense of the weak. This will dominate the rest of the reporting season. Generally, those retailers who have been trading strongly in the preceding year will do so over Christmas. And the reverse is equally true. Most figures that appear to confound this will usually be explained by changes in reporting periods and/or weak/demanding comparatives.

There is still much more to come. M&S, Tesco, JLP and ABF (Primark) are among those who will attract the most attention. My advice would be to resist reading too much into any. Tesco is looking stronger and will be respectable. Marks will not be quite as bad as some think, but the underlying trading performance will remain lacklustre. JLP will show signs of having to run faster to stand still, as per most preceding months. And Primark will demonstrate that you can still retail successfully without a transactional website, if you tick those boxes I mentioned earlier.

** Our GOLDEN QUARTER REPORT analysing Q4 2017 vs Q4 2016  covering 200+ leading retailers is now available. For details contact admin@richardtalksretail.co.uk

Next up …

With the first trading statement now out, many are rushing to revise their view of the retail temperature. My advice is … don’t bother.

What we have learned (aka been reminded):

  • Next is one of our strongest retail brands – it is therefore NOT a bellwether
  • It’s statement is always the most detailed, thorough, and with an insightful narrative
  • The company had a better Q4 than the Black Friday and Tesco decisions suggested (makes both even more surprising and perplexing)
  • Store performance is weakening progressively and …
  • … online continues to grow

What we have not learned (yet):

  • As online grows, returns become a higher % of total sales so …
  • … what impact will they have once netted out …
  • … the headline sales increase will certainly net lower
  • What did Next learn from Black Friday – will it join the promotion lemmings this year
  • In a market as tight as this, a big player doing modestly better means many others must have done worse

Next has been a very unusual retailer for many years. While most of its peers struggle with cash flow, Next generates much more than it deems sensible to reinvest in its ongoing business. Share buybacks have been a company staple for years. However, when a company announces slightly better than expected numbers, and that it intends to spend £300m buying more of its own shares, a positive market reaction is guaranteed.

Very few others will be able to report figures like these. A year ago, Next’s trading statement resulted in a 10% fall in its share price – the comparatives were undemanding. These numbers are certainly better than expected but should be treated with caution, and certainly not taken as an indicator of what lies ahead.

** We advise retailers on strategy and track promotional activity across the UK’s key retailers. Get in touch for details admin@richardtalksretail.co.uk

 

 

 

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