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

M&S numbers in context

This morning’s trading statement from M&S was pretty bleak, but should not have been a surprise. Senior retailers in clothing have been telling me for many months now that this is the toughest market they have ever seen. Indeed, I was forecasting this last year. Even the very strongest players are finding their yoy comps very demanding. Against this background Steve Rowe is initiating change in some fundamental areas of the business. As we know, retailing is a mix of art and science and however brilliant the strategic thinking might (or might not) be, the customer holds every card that counts. So there is some trial and error involved. The critical factor is direction of travel and I continue to think that in broad terms, Rowe is on the right track.

The wider market picture for the 13 weeks covered in Marks’ trading statement is still not clear in terms of data, the ONS having yet to release numbers for June. However, I expect the yoy comparative period figure will be around -5%. So set against this background and taking into account the changes in promotions and pricing, this statement is not quite as awful as first appears.

That said, the numbers underline the scale of the task ahead. Effective business change takes time, especially in a contracting market with far too many players. And therefore setting too much store by one quarter’s numbers risks drawing unrealistic and generally wrong conclusions. Brexit overlays much tougher economics on a retail market already struggling to cope with chronic oversupply. Rowe needs to be given the time and space to make the necessary changes so Marks becomes much fitter for purpose.

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Au revoir Netto?

This morning’s news about the closure of Netto is no surprise. It was a strange one to begin with and seemed like a rather knee-jerk reaction to the increasing stranglehold of the discounters  emerging three years ago. Back then it seemed clear to me that it would require very significant scale to make any difference at all. After all, that was the reason Netto withdrew from the UK first time around.

It has taken Aldi and Lidl almost 20 years of consistent investment to make really significant competitive waves in the UK grocery market. Both companies understand the long game and knew this from years of experience. There is no short cut to establishing the scale economies needed to make limited line discounting fire on all cylinders. Netto first entered the UK around the time Aldi in 1990 but was slower to commit and decided to pull out in 2010, selling its estate to Asda. Its return in a JV with Sainsbury’s was unexpected.

However successful this initiative was ever going to be, it would have struggled to move the performance dial for Sainsbury’s. It was always more likely to be a diversion of focus and attention from what remains the be all and end all for the company – optimising the performance of its core grocery business. Exiting the Netto JV still leaves Sainsbury’s with an even bigger potential diversion – making a success of Argos. Here, the challenge is much less about scale and much more of competitive and strategic weaknesses. Successfully dressing these will take lots of senior attention.

** We provide advice, analysis and forecasts to retail leadership teams, investors and landlords. Get in touch if you think we can support you.

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 out 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.

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