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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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Range editing for retail recovery

Retail entered this crisis in bad shape. The industry was bloated with too many stores, too many websites and oversized ranges. The inevitable consequence was deteriorating trading economics. Restarting will be slow and phased. But when the phasing is complete the dust eventually settles, we will have a materially smaller non-food sector.

Many will not make it but being just a survivor will not be enough. The constant threat of extinction is likely to ensure the leadership team’s eye is more on costs than the imperative, revenue. Revenue should determine what costs are in any business. It defines what is needed, what can and what cannot be cut, and where investment is required. And getting this right is about addressing core customers above all others.

Becoming progressively bloated is the result of decades chasing growth at any price. Many need to jettison the fat: far fewer stores, smaller footprints and the central, pivotal issues – edited ranges. This must be demand-driven and is the heart of any retail business – your core customer and what they want and expect to buy from you.

Looking at the state of the retail nation pre-Corona identifies the winners once the dust has settled. They are businesses that entered this period financially strong with distinctive offers like Primark, Selfridges, Costco, TKMaxx, Reiss, B&M, Home Bargains and Hotel Chocolate. All have very clear customer focus which in turn determines ranging. They have resisted the lure of expanding their offers to attract a wider customer base and generate incremental sales. They understand these incremental sales would adversely impact stock turn, inventory carrying costs, availability, and lead to higher mark downs, all hitting margins.

Whatever your current SKU count, you cannot afford slow-moving items your peripheral customers might want. Ignore your peripheral customers and start giving your core customers the attention they deserve. This is the business that your future depends on. Understanding what they want must drive range editing built around the key price points in each product segment.

Choice is not a function of quantity, but of relevance. The tyranny of too much choice is bad for your customers and your financials. A core part of customer engagement is them trusting the retailer to make the initial choices for them. This is a fundamental prerequisite of success in the emerging market.

 

** Optimising range editing must be evidence based. I support retailers and stakeholders in areas like this, and with strategic advice. If you think I can help, drop me a line – richard@richardtalksretail.co.uk

The trouble with retail real estate

Hammerson sells a bunch of retail assets at a massive discount and cuts its dividend. This reflects a massive systemic issue that doesn’t just face landlords, nor indeed retailers. It pervades our economy across the board. A central issue at the heart of the debt crisis was the role of credit agencies. Being the arbiter of risk on behalf of the very businesses they relied upon for their revenues was a blindingly obvious conflict, bound to end in tears. That system and its conflicted relationships remains unchanged.

Exactly the same situation prevails in property. Professional valuations are made by companies wholly dependent on those property owners for their revenues. This is guaranteed to cause fundamental problems, but almost everyone is in denial. In UK retail, over the past 15 years or more we have seen online increase its share of non-food sales from zero to 30%. Over this same period, total physical selling space has actually increased, albeit more from earlier than recently. Meanwhile, online share growth may have slowed but it’s still just over 10% pa.

The key point here is that UK retail capacity growth is far outstripping our very sluggish or virtually non-existent sales growth. This is the central cause of retail distress. Chronic oversupply. The overwhelming majority of retailers have far too many stores, and most are far too big. Oversupply must mean that real estate is worth far less than it was. But this has barely impacted balance sheets.

Inflated values are used to justify bank support and investment cases across the board. The traditional measure of covenant is now totally redundant but still relied upon, with what will be increasingly disastrous consequences. Landlords, banks and investors continue to use outmoded valuation methods and ignore real trading economics and the brand equity of retail businesses. All this is just beginning to catch up with the various players. It’s going to be extremely painful – denial always is.

Ticking clocks at JLP

How long does it take to become an outstanding retail leader? John Lewis Partnership desperately needs one. The clock is already ticking for Sharon White, JLP’s incoming Executive Chair, and following yesterday’s news it is ticking much faster.

Yesterday was dramatic to say the least. Poor Christmas trading came as no surprise. JLP announces its weekly sales figures and it was clear where they would be. Warnings on profits and the bonus were inevitable.

Of more significance is the departure of Paula Nickolds, what it symbolises, and the way it was handled. This was all about the new structure. Sir Charlie Mayfield indicated that it had been an iterative process and that he had the support of the senior team. He may well have at the outset. But somewhere along the road of those iterations, Rob Collins (at the time they were announced) and Paula Nickolds (I suspect gradually over the past two months or so) have both voted with feet and resigned. The ambiguity around her departure reflects badly on the business.

Losing your two top leaders in normal times would be bad enough. But with a new Executive Chair about start, it is much more so. Then magnifying the significance many times further is the fact that the incoming leader (by definition the senior executive in the company) has no commercial background at all, let alone a retail one. She would and should have relied on those two leaders to accelerate her learning about the business and the industry.

JLP faces the most challenging moment in its history. Fundamental structural and cultural issues will fill what will be a huge agenda. The new leadership structure she will inherit will make addressing these issues far more difficult. With seven direct reports, it has essentially fragmented the responsibility of the executive directors and magnified responsibility of the Executive Chair, the person with the least retail experience. At the very time the Partnership desperately needs to be far more commercial, more focused and to greatly increase the speed and tempo of everything it does, this structure almost seems designed to go in the opposite direction.

Meanwhile, that clock is ticking. It is clear that in 2020 the market will get tighter and trading economics will be further squeezed. It will not wait for JLP to bed in a new way of working. Far reaching decisions need to be made now and they must be right. Retail is unforgiving. No brand is owed a living. The Partnership needs to up its game, and quick.

** I support retailers and stakeholders with strategic advice. If you think I can help, drop me a line – richard@richardtalksretail.co.uk

Next – the exception not the rule

In keeping with tradition, Next kicks off the Christmas Trading Statements season this morning and as ever, many will assume it is an indicator for the sector. And as ever, it wont be. Next’s figures are excellent given the market background of soft demand and wall to wall discounting across the sector. But far from being an industry bellwether, Next is almost always a significant outperformer.

While the current retail malaise is impacting all sectors of the trade, none is impacted more than the middle market. 2020 will be the defining year for both Debenhams and House of Fraser. M&S will cede further ground and given this competitive landscape, John Lewis should be hoovering up some incremental business but it is struggling. The major beneficiary of middle market weakness is Next, fuelled by its Label brands platform – in my view the most significant strategic development from the company in more than a decade.

In general, Christmas Trading Statements have always been unreliable and misleading. They are unaudited, vary in definitions and timeframes from one company to the next, and there are no agreed criteria or rules. And that’s before online is considered. Most retailers have growing online businesses. Returns peak at Christmas with gift buying and are rarely accounted for because the reporting periods pre-date most if not all. So the headline trading numbers are generally inflated. Some of those impressive-looking sales will be going back to customers as refunds – not great for cash flow.

Things are rarely what they seem. Next’s numbers will still look respectable once returns are in. But for the bulk of the market, returns will put Christmas trading into negative territory.

 

Discounting for silly season

Talk has always been cheap but never so widely available at such threadbare prices. Black Friday kicks off the silly season of meaningless reports about how successful it has been,  desperately trying to divert attention from what is by definition, an act of industry-wide self-harm.

Clearly, consumers only have a certain amount of money and that spend forward several weeks at a discount remains destructive. What to sell remains an issue. Either you clear mainstream stock or you buy specially – either way you will both dilute your margins and your brand equity. Whatever the claims, special buys are of inferior quality.

Then there are returns. Everyone quoting this year’s sales hike will quote gross ie before returns because they will not yet know. And when they quote year-on-year figures, are last year’s figures gross or net? And have they forecast this year’s returns, and if so on what basis?

The potential damage of Black Friday is being mitigated to a degree by a) extending the period and b) managing down more tightly the volume of offer discounted. But both are sticking plasters that provide limited protection. Once Black Friday ends it will merely be swapped for the next promo as we run into Christmas, discounting all the way, followed by the Christmas Trading Statement season.

Again, we will hear of sales records broken and best evers, press releases featuring sales of (insert product of choice) spanning the earth three times and with a few very notable exceptions, will actually tell us little. These Statements have always been open to abuse but today, with online so significant, they are deeply misleading. They never ever include returns. Retailers with significant, and growing, online sales will necessarily be reporting inflated numbers. And naturally, the topic of margins will not feature at all.

Talk is getting increasingly cheap. My advice is, don’t buy it.

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