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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What you get

The price of sales growth

The ONS retail sales for September look quite encouraging, until one looks below the surface. The headline numbers suggest relatively buoyant demand with yoy sales growth by value +3.4% averaging out the last 3 months. However, this growth has all been driven by online and stripping web sales out gives you a negative yoy sales number. A sale is a sale but when profitability is taken into account, this online-dependent growth will have diluted margins.

While this is the toughest retail market anyone has ever seen, 2016 is seeing a revival in online retail sales growth. With 75% of the calendar year now behind us, yoy online sales growth is averaging 16.6% – by far the fastest rate for 5 years. This is being driven particularly by pure plays and household goods retailers.

A key barometer of retail trading health is promotions. Our Tracker measures price promotions across all the sectors, by company. This week 64% of the entire industry is selling on discount, reflecting weak demand and a customer taught to wait for mark downs before buying.

Against this background one can easily see what was exercising Tesco so much when Unilever tried to raise its prices. Contrary to current City and political thinking, some retailers may try and increase their prices next year when currency hedging runs out but the consumer will literally and metaphorically not buy it. Price deflation in retail will stay until there is a reset of the relationship between supply and demand. However tough trading is now, it’s a picnic compared to what awaits us next year.

Tesco, Unilever and the shape of things to come

The Tesco/Unilever spat over cost inflation is just the beginning. Today, the pound is around 17% below its referendum day value against the dollar. Who knows how the markets will rate the UK economy over the next few years but I don’t know anyone who expects the pound to regain that ground. Given that we import more than 60% of what we consume via retail (food and non-food combined), it is clear that we will be importing a material slice of inflation. So who will take the hit? Tesco have chosen to kick off this huge question in public but it not only impacts every player in grocery but across virtually every sector of the industry.

Politicians and economists have been warning of rising retail prices and that suggests that ultimately the public will have to pay. However, they are unlikely to appreciate the structure of the retail industry and the massive changes that were already taking place pre the Brexit vote. We have now had more than 24 consecutive months of retail price deflation in every sector. During this period, retailers’ cost growth has outpaced demand growth. The vast majority of retailers have been unable to pass these cost increases onto their customers because of competitive pressures. Very few will be able to make price increases stick here either.

Tesco and Unilever will come to an arrangement and share the hit. Tesco is too big for Unilever to ignore. Tesco needs branded product to differentiate itself from the private label discounters, and to underpin choice. And the customer? The most intensely competitive retail market we have ever seen will ensure that the lid on retail prices remains very firmly shut. Price promotions will continue to characterise trading and the industry will have to learn to live with lower margins for the foreseeable future.

** We advise leadership teams in and around retail – get in touch if you think we can help –

Tesco turning?

This morning saw further progress from Tesco. The company is steadily moving away from the various self-inflicted disasters and getting its house in order. At the heart of this is re-establishing credibility and trust across its various stakeholders from suppliers through to customers and investors. Stores look better, less cluttered in terms of signage and POS, and with a cleaner proposition. This morning’s share price hike reflects the City’s unfolding relief that Tesco is turning round, and the company’s announcement of a target UK operating margin of 3.5% – 4.00% by 2020.

This margin aspiration is by far the most interesting element of today’s numbers in my view. Will it be delivered? As mentioned above, the stores look far better and with a clearer message. However, this is from a very low, confused base. There is a blandness about the stores and the offer, and it’s hard to see exactly what the Tesco of today really stands for. The business is caught in the middle, pressured from better priced value players below and more aspirational higher quality players above. The recent Aldi results were accompanied by a clear and unequivocal message – it will not allow the majors to close the price gap to the point where its further market share growth is impacted.

Going forward, Tesco needs to go further in developing a clear personality. Range editing has much further to go – it remains heavily over optioned in the vast majority of product categories. It needs to invest further in product quality, service and the general shopping experience, to put distance between it and the discounters. It needs to regain control of its own competitive agenda. Achieving all of this requires investment and in that context, Tesco’s margin target announcement looks optimistic.

BHS rises again

After attracting massive media coverage for all the wrong reasons BHS is about to reappear as a  trading entity. The Al Mana Group is a Qatari holding company with diverse interests that include retailing and consumer brands. It has operated the BHS franchise in Qatar since 2000 and bought the international business, the website and customer database from the administrators. It also took on the bulk of the BHS management teams from the two divisions. The new BHS International is led by MD David Anderson, a veteran of the business and former M&S exec.

The online offer will kick off with an edited home range and will add clothing soon after. The offering will be an edited version of old BHS built around best sellers. Most of the key suppliers in both home and clothing have been retained, which is a significant vote of confidence in the new business. Management plan a subtle repositioning – targeting a slightly younger customer with better product, improved styling, better fabrics and lower or the same price points.

After the generally very bad treatment of staff from old BHS, it’s great to see new owners backing their belief in the brand by investing in a new incarnation of the business. But will it work? With knowledge from the inside track since 2000, Al Mana must know the brand inside out. The plan to focus solely on online for the UK is sensible and allows them to manage costs more tightly. My understanding is that the international business already performed reasonably well so there is a solid base to work from.

The UK market is entering the most turbulent, challenging moment in its history. A major determinant of success in this market will be how retailers deal with change – simply doing things in the old way wont work any more. Many are in denial and are already struggling. BHS International knows it has to focus only on those parts of old BHS that worked, and to edit and reposition the product offering. The market emerging will be tough but BHS has been able to choose the cards it holds going forward, and that will be a key advantage it can leverage.

** We advise leadership teams in and around retail – get in touch if you think we can help –

Retail will take sterling hit

Primark’s trading update yesterday made it clear that when currency hedging expires it will absorb the higher sourcing costs from the devalued pound. This is a welcome, realistic and clear message to the market. It made some headlines and attracted attention because it appears to be out of step with the concensus. However, in this post-referendum twilight zone where nothing is really what it appears to be, there is some delusional rhetoric flying around. I predict that very few retailers will be passing on their increased sourcing costs – they wont be able to.

This is the most price-promotional retail market I have seen in over 30 years. And it is not being driven by customers, but by retailers. Chronic oversupply is forcing most retailers to discount, whether they like it or not. We have now seen 24 months of price deflation in every sector of retail. Over the 37 weeks of 2016 to date, our Tracker shows an average 66% of UK retailers across every sector have been on sale. Those forecasting a Brexit inflation spike in our economy do not visit high streets – prices may indeed rise but not in the retail industry. At least not until there are enough casualties to rebalance supply and demand.

Primark has been canny getting its retaliation in first but in reality, the vast majority of players will follow them. Only those with the strongest brands and genuine price integrity will have the luxury of customers who readily accept paying more. The majority have educated their customers not to.

** We advise retailers on strategy and analytics. We also track promotional activity across the UK’s key retailers. Get in touch for details


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