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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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What you get

Retail Brexit

We are all grappling to assimilate the new reality. So too are the financial markets and retailers. The context is an industry already wilting under the weight of overcapacity. This structural challenge will not go away. However, Brexit will provide a huge diversion and make it easier for leadership teams to make the wrong diagnosese of what’s going wrong and the actions needed.

So what will happen? Uncertainty. No one knows what the implications will be and this will encourage caution. Some spending will be delayed and that in itself will put a brake on an already brittle consumer economy. People will feel markedly less well off. An already thin housing market will see some of that postponed spending I mentioned. This will be self fulfilling – it will deliver the lower prices it potentially promises. So people will feel less wealthy and less optimistic about their future economic wellbeing.

One shaft of positive light in all this comes from looking at spending patterns post Lehman Bros collapse. Back then retail tended to be the most defensive element of consumer spending. I expect the industry to defend its current share of spending well this time too. However, let’s be clear – this will be a robust share of a falling spend. I expect retail sales to fall in the second half of 2016 – even the immediate post-debt crisis period posted a sliver of growth in retail spend. Against rising costs of 3/4% yoy, this sounds worrying, and it is.

As I said, the structural fractures in retail will be made worse by Brexit and the necessary shake out will be accelerated. The need to deal with overcapacity will be materially magnified. Leadership teams need to grasp some very difficult nettles but need the right diagnosese to do so. Blaming everything on Brexit will lead to the wrong conclusions.

BHS, staff and assets

The long and painful collapse of BHS is far more complex than it should be. And arguably, only a small part of it is about retailing. Maybe if BHS had actually been more about selling things the outcome might have been different. The model was out-dated long before Philip Green’s acquisition, and it has never had the investment in strategic change needed to give it a chance of survival. Even if it had, its prospects would have been uncertain in the most challenging market we have ever seen.

Much of the story is really about a time gone by, when online barely existed, retail businesses were full of real estate, supply chains were still mainly centred in Northern England, and consumers were progressively better off each year. Restructuring these asset rich businesses was a huge attraction for corporate traders and PE houses. Cash was king. Selling product was a natural consequence of having product in stores. Open more stores and your sales increased. Strip our cost and your margins did too.

While those days are not totally gone, they are diminishing. Most retailers already have too many stores, and no one to sell them to. Their supply chains have already moved East to the lowest cost producers. Their suppliers have already been squeezed, although many if not most are being further squeezed as I write. Today and increasingly going forward, retailing is about the sales line. You can only drive down costs so far, and the undisputed king in the game is now the customer.

Winning in the most intensely competitive retail market we have ever seen means putting customers at the heart of everything. This means treating staff as an asset, not as a cost. The critical customer relationship is delivered through staff. Making money in retail is much more difficult and challenging this way but increasingly, it will be the only route.

 

BHS … gone

On March 12 last year the deal to sell BHS to Retail Acquisitions was announced, and I posted a Blog entitled “BHS – going … going … “. In it I suggested that the deal was merely a stage in the closure of the business. I wish i could have been wrong. It’s very sad to see a retail business with a long history, 11,000 staff and 22,000 pensioners, disappearing. The last 16 years of that history are now the subject of numerous investigations, mostly looking into issues less to do with retailing and more with business ethics, governance and politics.

On the retail front, the harsh reality is that the business has been struggling for many years. While it always had (and still does) a good reputation for homewares in general and lighting in particular, its key business has always been clothing. And here, over the past 5 years the company’s clothing market share has fallen progressively, by around 50%. The fact that it made substantial losses over this period underlines the point.

Given its trading weaknesses, it is no surprise that the business saw very little investment over the period. BHS was a poor man’s M&S even in its heyday. In reality, it’s heyday was many years ago. The past 15/20 years have seen the value segment of clothing grow from c3% to well over 25% today. The explosion of better retailers from below offering better made, more fashionable and stylish product at much better prices, have finally taken their toll.

I have been warning of the implications of overcapacity for some time. UK retail is vastly over supplied and this is driving fundamental change in industry economics. Losing BHS and Austin Reed is just the beginning. There will be many more casualties over the coming years. Competition is forcing the fundamental reset of supply and demand the industry needs. There is much more pain to come.

** We advise retailers, investors and landlords on retail strategy. For more information get in touch at admin@richardtalksretail.co.uk 

Retail margin giveaway

One of the many fascinating insights to emerge from Steve Rowe’s strategic review for M&S last week was the fact that 40% of Marks’ sales for the preceding year were at discounted prices. These will be by far the highest mark downs in Marks’ long history. However, while this stance might be a record breaker for M&S, it has become the norm across the rest of retailing. Our Promotional Tracker shows that today, 63% of the entire industry is running a price promotion.

Our data show that last year, the most promotional market we had ever seen, is now being eclipsed by 2016. In the 21 weeks of this year to date, 68% of the industry has been running a price promotion on average. The lowest we have found was 57% in week 15, the 3rd week of April. Looking at sectors, food is permanently running price offers and no player can stand aloof. Fashion is currently at 55% – its lowest discount week in 2016 was again week 15, down at 50%. Fashion-related markets like footwear and jewellery (both currently at 38% of retailers) have fared much better. Department stores are this week up at 70%, but have averaged 54% over the year to date.

I have been warning of fundamental changes in industry economics for some time, and this is what we are seeing every day. Price promotions are the inevitable consequence of oversupply. It is not customer- driven but retailer-driven by businesses needing to turn stock into cash. It is devaluing product literally, by reducing prices, and metaphorically, by lowering perceived value perceptions.

Steve Rowe is right to bite the bullet on sales, and ween customers off the price drug. There will be a hit to sales performance for a while but the re-education of customers will bear fruit in the longer run. For the industry as a whole, permanent promotions are a zero sum game. No wonder retail is losing share of consumer spending.

** We are tracking price promotions in detail, by sector and by company. For more information mail us at admin@richardtalksretail.co.uk

 

Sergio takes Debs

So now we finally know who the new CEO of Debenhams is. Ian Cheshire is right to have been picky about the appointment and Sergio Bucher is not an obvious candidate. His background is digital (Amazon) and brands (Puma and Nike), although Cortefiel and Inditex feature early on in his CV. There were lots of candidates with mainstream retail experience who clearly would have been “safer” options.

Debenhams is certainly not one of the industry’s most fashionable retail brands, literally and metaphorically. Nevertheless, it is a big player (£2.9bn sales) and has defended its market shares remarkably well. While performance may have been unexciting, it needs to be judged in context. Its peer group (M&S, Next, BHS, HoF etc) has not enjoyed plain sailing either. The market itself has been depressed, burdened by the growing weight of overcapacity. So what will Sergio inherit?

Debs has a great beauty business which continues to trade very strongly, built around strong brands, mix and supplier relationships. It is the clothing side where the real challenges lie, particularly with womenswear. Designers was a great idea, is now in its mid-twenties, and needs re-invention. The value proposition needs re-engineering. Reducing some discount days is fine as far it goes, but does it change fundamental perceptions and expectations?

This appointment will be just as critical for Ian Cheshire as it is for Sergio Bacher. This is a retail market unlike any I have ever see. The rear view mirror has become almost irrelevant although life being what it is, most leadership teams are using it as their main navigation tool. Sergio is clearly an unconventional choice but he will bring a totally different perspective to the business, and one likely to question and challenge everything. This exactly what Debs needs – reinvention to carve out its own identity and set its own agenda.

** We advise retailers, investors, suppliers and landlords on retail strategy, forecasts and competition. Get in touch at admin@retailtalksretail.co.uk 

 

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