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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

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.

M&S, FTSE and deconstructing decline

The fallout of M&S from the FTSE is clearly very symbolic, although the writing on the wall has been getting larger for decades. This business was once a true world leader, not just in retailing but in the merits in paternalistic business management. It set standards others could only dream of. But that was long ago and the decline since has been slow and painful, spanning a succession of leadership teams all of which promised much, spent lots but delivered little. The current team is no different. When a business places more importance on lowering costs than driving sales the alarm bells should be ringing.

The issues of Marks go way beyond getting some fashions wrong or not buying enough jeans. They are systemic – a loss of culture and the values that held it together. This is all about allowing the brand and what it means to simply get lost. The idea of M&S being a family food shop has led to its acquisition of 50% of Ocado – the tail wagging the dog and likely to lead to the dilution of its core food offering as it seeks to integrate the two. The idea that M&S needs to attract young (or younger) clothing shoppers is similarly ill conceived. Shoppers never want to shop in their Mother’s or Grandmother’s stores. Its core customer is now in her early 60s and it is imperative M&S defends its core business before thinking about any layers beyond.

Clothing has been the biggest issue and its decline has been inevitable and totally predictable. For years, the company has sought to alleviate margin pressure by cost cutting. Successive culls of highly skilled, knowledgeable staff led to progressively sub-contracting to third parties the core skills that made M&S the state-of-the-art retailer it once was. Moreover, systematic pressure sent up the supply chain to its suppliers has led to a progressive diminution of product quality. Try finding any natural fibre on the womenswear floor today. Its core customers are not interested in lower prices if it means inferior, irrelevant product.

Marks and Spencer’s decline has been slow and painful. Some might say it really began when Sir Rick Greenbury set his heart on making £1 billion profit, an ambition that was duly delivered in 1997 but at a heavy price, including subsequently his own position. He helped introduce a level of politics in the business that was very unhealthy. His anointed successor was Peter Salsbury – a very able retailer who was not really suited to be CEO – lasted less than two years and was succeeded by the company’s first external appointment as Executive Chairman, Luc Vandervelde, a Belgian retailer secured at great cost for a large transfer fee in February 2000.

Marks’ performance had deteriorated steadily since the £1 billion profits bubble. Together with CEO Roger Holmes, another external appointment, a range of initiatives did restore performance to a degree but there was one symbolic decision which in my view ranks at least alongside today’s fall from the FTSE. Vandervelde and Holmes sold the monolithic Michael House Baker Street head office for £115m. By the time the deal actually completed, Stuart Rose had taken over but the sale of such an immensely valuable asset for such a giveaway price was, I think, disposing of much more than just bricks and mortar.

Archie Norman has certainly injected a leaner, more fleet of foot style of business at M&S. He has also separated food and clothing to a larger than ever extent, a possibly portentous move. Being more agile and moving faster is positive but only if it’s in the right direction. It’s not.

 

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