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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

Amazon food – the nightmare scenario

An already very bad dream just got worse for Britain’s food retailers. Their world has already been turned upside down, the major players very much responding to the the tune of the discounters. There are too many stores, and having failed to learn how to be good enough at selling non-foods, the economics of large stores in particular are often compromised. We have now had 12 consecutive months of price deflation, averaging around -7% yoy across the total product offer. And the first 6 months of the year saw the total value of spend down on last year. So waking up to find that Amazon is about to enter the UK market is less than welcome news.

Some might take comfort from the fact that Amazon seem to be entering the UK market very early. After all, its various food retail trials across the US are still exactly that – trials. The company has clearly yet to master the challenges of a totally different market to the books, music and films it is built on. Some may think they will never make money in food but this misses the point.

There is clearly no growth in the food retail market right now, nor will there be for some time. The value players are investing massive sums in growing their businesses and this alone will deliver them market share growth. That growth might be a bit slower than it has been in recent years, but they will be winning more share than they already have. Amazon will be another mouth to feed and however challenging it finds food retailing, it will take market share from existing players. Even before the market has learned to deal effectively with the discounters’ disruption, Amazon will emerge to create still more.

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Retail leaders in demand

However important leadership has been in the past in our industry, there is no doubt it is becoming much more so. The past 18 months have seen the stakes raised significantly with many moves at lots of our leading retailers. Last night’s news from M&S is just the latest. Leadership is becoming more precarious. Given the greatly enhanced scrutiny leaders are under, and the rate and scale of change they are grappling with, the pressures will at very least remain as frantic as it has been. In fact it will more likely ratchet up still further.

This is the most challenging retail market we have seen for generations. The pace of change has never been faster, and is gaining momentum. The rear view mirror has become almost irrelevant for navigating, and the future shape of the market, even in the short term, has become much more difficult to see. Rampant price deflation across every sector reflects an industry whose fundamental economics are changing. So alongside greater scrutiny is the reality that in my opinion at least, leaders are actually in less control than they have been in the past or are expected to be now.

Not surprisingly, the skillsets that worked well in the past are far less applicable now. Today’s market needs leaders who can grow the sales line. That can deliver genuine growth, not just the promise of growth in a fanciful series of stories. These skills are in short supply. Being good at leading, managing and operating are simply not enough any more. The next 18 months will see more changes at the top, involving some of our leading retail names as well as some hoping to be leading tomorrow.

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Retail USA – future shape of UK?

It is commonplace to overrate the parallels between the USA and UK, driven by history, culture and language. Retail is no exception, the similarities largely outweighed by the differences. I have been following both industries for 30+ years and while many differences remain, there are  now some compelling  trends pushing us closer.

The US market has been chronically oversupplied for many years. Relatively low barriers to entry have produced a permanently crowded market. Too much supply has ensured that price tops the agenda and has done so for decades. US retail has spawned many new, compelling formats but strikingly (and inevitably), the vast majority have been price-led. Catalogue showrooms, warehouse clubs, non-food GM category killers like KMart, Wal-Mart, Target (each subsequently adding food as an afterthought), fixed price discounters, and big box category killers like Home Depot and Best Buy. And then there are the Outlet Centres which dominate every US metropolitan market, teaching consumers they never have to pay full price.

The result of all this is wafer thin net margins in US retail, in spite of their relatively much lower operating costs. This is the shape of the future landscape of UK retail. Naturally, the structural UK shape will be different but the economic end game will look increasingly similar. We have now had price deflation more than long enough for it to represent a dangerous drug very difficult to ween customers off. UK retail margins are under growing pressure. Obviously there will be exceptions to the rule but for the industry as a whole, this is a one way ticket.

** More detailed discussion and analysis of US retail and its leading players in the Premium content of richardtlksretail.com

Headwinds on the horizon

The latest ONS retail sales data underline the weakness of industry demand. The forward momentum of growth by value is 1.9% yoy, confirming the slowdown that actually began early in H2 2014. The data also confirm the continued price deflation which dominates every sector. This trend too has been very firmly established, in this case for well over 12 months.

It is clear that retailers are having to give away margin to turn stock into cash. Discounters are structured to work like this – mainstream players are not. The implications for brand equity and customer relationships cannot be overstated.

Anyone thinking this is too gloomy should consider two headwinds. First, the return of interest rates to a level which might be considered historically normal. The second is the National Living Wage. Both will increase retailers’ costs (already rising far faster than sales) still further.

Economists seem convinced we have a really strong consumer economy. Or at least, some do. And so does the Bank of England. I’m not sure that consumers see it this way and they surely are the key players here. What is 100% clear is if they really are much better off, they are clearly not spending it in retail. The competitive scew is tighteneng.

** Detailed forecasts around sector economics are available in the Premium subscription sections of Richardtalksretail. Get in touch for details.

M&S check out

Last week’s major retail story broken by the FT told of John Dixon’s unexpected departure from M&S. He was inherited by Marc Bolland 5 years back having been promoted through the ranks by Stuart Rose, a fact which probably counted against him. This is less a comment about Bolland and more about corporate politics in general. To a degree, Dixon has been on a hiding to nothing. Having done a conspicuously good job in food, he was switched to GM to turn round the engine of M&S – clothing in general and womenswear in particular. Any success would surely be attributed to Bolland and failure, to Dixon.

I have discussed M&S in detail in the premium sections of this website. Suffice to say here that while I expect margins to improve, growing Marks’ clothing market share is a very much taller order. Indeed, I think that defending it is massively challenging. With John Dixon going, Steve Rowe is being switched from Food (where he succeeded Dixon) to the GM job. Like Dixon, Rowe was given his senior wings by Rose and is also an M&S “lifer”. Again like Dixon, M&S is Steve Rowe’s “family” business. His Dad Joe was a highly respected very senior Exec there for many years.

Steve is a merchant from the old school. A trader. Someone who has selling in his DNA. Retail in general and M&S is particular has far too few merchants. The company desperately needs this fundamental understanding to effectively defend its business. Margin improvement is great but ultimately, every business needs to drive revenue to sustain itself. I hope for Marks’ sake that the parallels between Steve Rowe and John Dixon do not continue.

** More detailed analysis and forecasts of M&S and its competitor sets available in the subscription access Premium content of richardtalksretail.

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