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My previous Blog was written before Monday morning’s formal announcement with more detail. Now that we know much more, my initial thinking remains. This deal tells us much about the underlying thinking at all the companies involved. And behind the spin, most of that thinking is negative.

It is clear that this is an exit for Wal-Mart, albeit initially a partial one. The terms of the deal involve a very low value for Asda as a trading company. In effect, a dowry has been given to JS. For Wal-Mart to remain partners long term would require them to have massive confidence in Sainsbury’s leadership team to make this rescue deal transformational. This is not plausible. Beyond the next few years it makes me wonder at what point those separate brand identities will merge the operational management supporting them. Surely the economic advantages will become irresistible? The pressures will grow since I find it hard to see how the enlarged group will gain any share, albeit from a higher starting point. So the need to cut costs will intensify.

The strategic thinking here is defensive. However, it seems to me to be financially driven in its thinking. The classical view that greater scale is desirable was behind the acquisition of Argos, and again here. Both Argos and Asda are essentially weak brands. Putting Argos into Asda certainly boosts scale, but the proposition will remain the biggest target in Amazon’s sights. Scale will always be significant in retail but its value is diminishing. Across the industry, all the innovation, disruption and fastest growth has come from smaller, more agile, more dynamic players – Aldi and Lidl in food, B&M and Home Bargains in GM, Primark in apparel. It misses the point to look at that list and say …ahhh, all discounters. Yes, they are. But more than that, each is a brilliant retailer with outstanding commercial skills.

In the retail market now emerging, scale alone wont cut it. Understanding customers (this means much more than simply owning mountains of data) is the critical prerequisite of being commercial. Too many retailers are not commercial enough, something unaffected by being bigger.

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

Retail never stops surprising us. This huge deal has so many as yet answered question. A deal involving Asda is less of a surprise in itself. Readers of my premium content will have read less than 2 weeks ago my analysis of where the market is going and the consequences: ” It looks very much like Asda will be the biggest casualty. Don’t discount corporate activity in UK supermarkets.” What I didn’t foresee was it would happen so fast and would involve Sainsbury’s.

We will know more tomorrow when JS makes a formal announcement to the market. The CMA is clearly an issue. On the face of it, this should not be allowed. However, nor should Booker/Tesco, so some think that has opened a door. I’m not sure why that should be, but the CMA is not famous for logic, consistency or its intimate understanding of its key constituency – consumers.

Will many stores shut, beyond whatever the CMA might require? Imagine a location with 6 supermarkets – the big 4 plus Aldi and Lidl. If the enlarged group shuts the Asda, what proportion of business will accrue to JS? I believe JS will get the smallest uplift. This is a function of target customers. The two businesses are very distinct. Moreover, many overlaps will involve a JS c-store and an Asda c20x bigger – again, chalk and cheese.

The key positives of the deal (beyond the obvious central cost-cutting) are potentially around non-foods and re-inventing Asda. This will create the UK’s biggest non-food retailer, overtaking Tesco. JS is already rapidly injecting Argos into Sainsbury’s stores. Eventually, Argos would be a key element of the Asda offer too. Argos stand-alones are already being shut and this deal would create many more opportunities to resite. On the food side, Asda’s value message has been progressively eroded by Aldi and Lidl. It needs to up its game in food and offer customers a reason to stay loyal. JS has the skills and know-how to strengthen Asda as a food retailer. Beyond foods, JS non-foods have been the strongest in supermarkets in recent times, so there is potential to up Asda’s game here too.

Two areas where benefits will be much more modest are price and scale. On price, there is still some denial in the sector. Aldi will not be beaten on price – end of story. And scale will not help here. Aldi has the price model and the mainstream players do not. On the wider question of scale, there is denial here too. One of the lessons of recent retail history is that being big no longer creates the economic and strategic benefits it once did. Smaller players have hoovered up loads of market share by being better, not bigger. Scale can be an impediment.

We are in the very early days of the restructuring of UK retailing. This will not be the last deal in supermarkets, and there will be much more in non-foods too. Watch this space.

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

This week across UK non-food retailing, 64% of companies are on sale. This exactly the same as the same week last year and compares with 65% in 2016. What do these numbers say? I believe they tell us that most of the industry is locked in a self-harming spiral. The vast majority are not built to be on sale most of the time. But because they are too weak to trade at full price, they have had to adjust their offers accordingly. This usually means squeezing suppliers, which in turn leads to a lower quality product.

Clothing is a great example. Across the industry, fabric quality has been in progressive decline for some years. Fabric is the biggest cost component in a garment, and when pressure is pushed up the supply chain, the inevitable happens. And an equally inevitable spiral follows.

Fashion is by far the most wants-driven retail market. This week 60% of our fashion retailers are on sale. Selling desire and aspiration to customers with wardrobes already full of clothes is massively challenging when you are simultaneously shouting “discount” at them. After years at these levels and a deteriorating product, no wonder demand for clothing is so weak.

If you cannot believe in your brand, why should your customer? This is all about brands and what they stand for. If your brand is too weak to trade a full price for very long, your future is very bleak. Retailers need the courage and vision to persuade their stakeholders to financially support a return to full price trading. Invest in the top line – that means in staff to sell, and in product quality, handwriting, branding. You will need great support from your suppliers, so treat them like partners, not punch bags. There are no short cuts in this market, but it can still be profitable if you get the basics right.

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

The story of sofa.com is a great example of how and why the old approach to investment in retail no longer works. Inevitably, the news of its forced rescue by its main stakeholder from the clutches of its PE owner is dressed up as about adverse market conditions etc. The reality is this was a highly profitable, well differentiated retail business with genuine potential. A clue to its nature is in its name – a very strong online offer, supported by just one showroom in an off-pitch warehouse in Chelsea.

This is about a total failure by PE owners to understand the DNA of what they acquired. They simply applied old, redundant PE thinking: chuck loads of money at opening loads of stores and hey presto, you instantly multiply sales and profits. Actually, no. You take £5m of profit and turn it into £20m of losses, clearly unsustainable for a business with revenues of £29m. Beyond ruinous losses, turbo charging growth has involved totally ditching the quirky, service-driven brand that had been painstakingly developed by its founders. This is what underpinned the outstanding profits sofa.com made and made it attractive to PE in the first place.

It is ironic that the sofa.com acquired by CBPE Capital was actually in good shape to buck the market conditions that have so hit most of the store-based retailers in the furnishings sector. This is without doubt the toughest retail market anyone has ever seen. It’s not cyclical, but structural. Nevertheless, you can still make very good returns in retail. And there are investment opportunities too. But only if you really understand the market. The old way of retailing (and of growing retailers) will no longer work. Understanding the brand, the customer and the model are fundamental. Simply filling the tank with gas and igniting the throttle will end in tears.

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

Next shines yet another light on the underlying shape of things to come in retail. The issue is the revenue line, not the cost line. And revenues are down, meaning lower profits for the second year running. Store sales are down yet again (-7.9%) and while online is up (+9.2%) the latter is not enough to compensate for the former. Pre-tax profit is down 8.1%.

The company says this is the worst trading year it has seen, that next year will be better, and that it has reviewed every aspect of its business. The first is certainly true, the last point must be, but I am deeply skeptical about the middle one. Next’s body language tells me that it is travelling in the wrong direction, as indeed it has been for some years.

So many retailers mistakenly think lowering their prices will make their offer more attractive. This demonstrably is not true, and their trading performance reflects this. The symbolically worrying decisions around Black Friday, Tesco and car showrooms are distractions that betray an uncertainty about who and what Next stands for these days.

In spite of all the above, Next remains one of the very best run of all UK retailers. It’s control over its costs stands out. And on that count, this sends a warning signal to the rest of the market. Nevertheless, in this market it will take much more than just effective cost management to defend a business. Next looks quite average when it comes to driving sales or even simply maintaining them.

In a week when George Davies is back with yet another launch, I can’t help thinking back to the early days of Next. It was very new, very different, and put its retail money where its retail mouth was. In other words, it was entrepreneurial, totally in tune with its core customer and had the courage to be different. Today’s Next remains stronger than most mid-market players but looks tired and boring.

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