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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.

If you want to know more, please get in touch.

What you get

DTC and private label

There is nothing new about either private label, or brand owners missing out retailers and selling direct. But both are very much on the rise and these two trends say much about the underlying shift in retail trading economics. Vertical integration was not invented by Inditex and Zara. In fact many apparel and footwear retailers in the UK started out as manufacturers, they bolted on a few stores and over time, the retailing became more core than the making.

As retail evolved, the skills required to make it successful diverged increasingly from manufacturing and helped by the growing need to find low cost production, the two tended to part. Some brands have long wanted to miss out retail for reasons of economics and control. Nike have always had a clear view of how their products should be retailed and that view has not always been shared by their retail partners – their “difficult” relationship with Sports Direct here is a case in point. Consumer electronics is a market that continues to be dominated by brands and Apple is a spectacular example of going direct.

DTC clearly has a radically different economic model in which the retail end of the chain will often be part of the marketing spend. No longer sharing the margin with a third party retailer is a massive attraction. However, a retail operating model is needed irrespective of who owns the brand. You still need to manage inventory, forecast demand and manage price and mark down effectively. To a large extent, you still need to think and act like a retailer.

On the other side of the fence, I believe making money retailing other people’s products will become progressively more challenging. Shrinking trading economics are driving progressive growth in grocery sector private label. Clearly, when a market is dominated by the same brands, retailer differentiation becomes more challenging. Putting your own stamp on your offer helps set you apart and own brands in food are currently at record highs, and rising.

In fashion, private label has long been a big part of our market. But it will get bigger. Squeezed margins make it very difficult for the numbers to work – this is a major factor driving the existential threat to department stores on both side of the Atlantic. There are always exceptions to almost any retail rule – Selfridges has the skills to truly add value and do for brands what they cannot do for themselves. But most others are fighting a rising tide.

Owning the product is clearly a very different model. You need to be exercising control all the way up the supply chain. And, of course, you have to get much better at retailing. Managing inventory becomes much easier if you have the skills to determine the nature of that stock and match it precisely to what your customers want. With so many more moving parts, operating model optimisation is essential. Too many retailers make do with a jigsaw of bits which do not talk to each other, held together by sticky tape. In a world of progressively diminishing returns, this will be increasingly life-threatening.

DTC and private label are two sides of a very similar coin. Both retailers and brands need greater control of their destinies and are increasingly bypassing each other. Nevertheless, they are ultimately both focusing on the need to better engage with consumers. Leveraging digital assets to maximise squeezed trading economics will be fundamental to both.

If you want to discuss this content or think a conversation might be helpful, do reach out to Richard.hyman@tpc-group.com

The future of retail

The future of retail is now. Survival and prosperity will be governed by whether, and how well, retail engages with these critical issues. Business models need rebuilding. Cost cutting alone is buying time. Retailers will have to invest to be fit for purpose, so costs will need to increase. Those without the vision and courage to meet these challenges head on are living on borrowed time.

I got together with Kalpesh Tanna, specialist retail and hospitality lawyer, to map out the critical issues. We will be arranging a small closed forum for a detailed discussion of these themes in due course.

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

Locked down and pent up

The big day in retail has finally arrived. For an industry which relies on the numbers generated from daily trading to inform actions, today will have been full of mixed messages. But the overriding one will be that this will be a long and painful road back to anything that might resemble equilibrium.

Experiences of lockdown have varied hugely, and so too will be recovery. Some have been desperate to go leisure shopping while others will take lots of coaxing and reassurance before entering the fray. A consensus of the CEOs I have spoken to were expecting c50% of normal footfall today. My feeling is that few will have achieved that. Many of the stores I have checked out had far more staff than shoppers, and queues were extremely rare.

Clearly, the industry is desperate to reopen and there is certainly a feeling today that a major step forward has been taken. However, no one should be in any doubt about the economic consequences of Covid-19 which will only now begin to unfold. Even at 50% footfall, no apparel retailer can make any money at all and are likely to generate very material losses. While transaction values are likely to be higher, that will not compensate for fewer transactions.

Moving to 1 metre distancing would certainly shift the economic dial but modestly, and not enough to turn those losses into profits. This is especially so when much higher returns are factored in, the result of limited access to changing rooms. On the cost side, delivering staff and customer safety will have increased costs. The end of the “cost holiday” enjoyed triggered by opening (having to pay staff, landlords and suppliers) sets a return to normal costs alongside a return of materially less than normal footfall.

Anyone relying on consumers to rescue our economy must be living on a different planet. The public has survived several months going without all sorts of non-essential products and services. Persuading them back, with growing uncertainty around employment and remaining uncertainty around health, will be a monumental task.

Accelerated retail

As we edge towards reopening much of UK non-food retailing it is worth preparing some warnings. The first few days will feature queues of people flocking to stores up and down the country. Talk of sales records will abound. And the relief will be palpable. We all desperately need to feel that normality is around the corner.  But no one should mistake relaxation with a return to where we were. Nor mistake early behaviour with anything that might be sustainable.

While social distancing remains central to staff and customer welfare it will be virtually impossible to trade non-food stores profitably. There will be much lower footfall. Even if average spend rises, it will be unable to compensate for fewer transactions. Costs will be higher from the need to manage footfall inside and externally, and installing safeguarding equipment, screens, sanitisers, cleaning etc instore. The reality of these new trading economics will be set against the gradual end of the very significant “cost holiday” over the recent past. Once retailers have to pay their staff, landlords and suppliers again, viability going forward needs to be judged against lower revenues, a very painful prospect.

The coming 12-18 months will be very hard to read. Against the background of a deep recession, UK retail is set to become much more polarised. Online will be much bigger than it was, growing share from 30% pre-Covid to a little over 40%. This will itself massively increase physical cost of sales and the need to shut physical capacity (already chronic pre-crisis) will be greatly magnified. A much bigger online market will make retail as a whole even more price driven than it already is. And it will act to push margins down further.

This rather apocalyptic outlook will certainly spell the end for many retailers no longer fit for purpose. But it certainly does not mean the end of successful retail businesses. Those retailers who came into this crisis strong will be the winners longer term. Those with clear offers and focused leadership, able to be self-challenging and truly embrace change, not just talk about it, will make good returns.

Much of what happens over the coming months will be misleading. Reading between the lines will be essential. Covid-19 has removed lots of seats around the table and when the music stops, many will be left standing. A leaner, fitter for purpose retail industry will emerge with more room for the winners to thrive.

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

 

 

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

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