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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

Devaluing offers

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

sofa.com – a PE case study

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

What Next tells us

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

Managing retail expectations

Another day, another raft of negative retail news. Even so, it’s clear that the market still thinks this all may be cyclical, or a few weak businesses. This is structural and systemic. I have been warning for some time the end of “build it and they will come” was nigh. Generations of demand exceeding supply has reversed, with massive consequences.

Virtually no retailer will be able to post trading results as good as their own historical ones. Forget year-on-year performance. Companies should be judged against their peers. Are they winning or losing share? This will determine whether they will survive this turmoil and if so, what shape they’ll be in. Relying solely on a CVA, or any other cost-focused process, is nowhere near enough.

Appearances can mislead. The symptoms of most ailing retailers appear to be around the costs. Reducing rents, impose discounts on suppliers and get rid of some staff – most of this misses the point and in doing so, simply delays the inevitable. Weak sales revenues is the major cause of retail distress. Retail propositions that worked OK in a growth market are found wanting in a static one. And this static market will remain so for some time.

As I have been arguing in recent Blogs, any restructure in this market must begin with the top line. In any business, your cost line must surely be dictated by what is required to drive the revenue line? So common sense says that revisiting the fundamentals of a business, only the sales line can tell you what costs should look like. Simply randomly cutting costs and leaving the proposition where it is treats the symptoms but ignores the root causes.

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

Covent Garden comp shop

Covent Garden is an increasingly important Central London shopping location. The area’s retail has been gradually spreading out beyond the core piazza, the roads flowing from it and of course Long Acre, and now covers a much larger area. Rents have increased strongly although not everyone can continue to justify paying them. Opposite the tube station on Long Acre is a 20,000 foot M&S, predominantly selling food. The company announced its impeding closure 6 months back, triggered by prospective hikes in rent and rates.

My weekend visit to the area found varied levels of business. Most stores were rather more quiet than they need to be. Even Ted Baker, among the very strongest fashion brands, was not exactly heaving on Floral Street. H&M has a huge investment in the area. Last year it relocated its core brand to an 18,000 foot building on 4 floors on Mercer’s Walk (off Long Acre). This is a good store, even if each trading floor is relatively small.

Meanwhile, H&M’s latest brand Arket opened its second UK store last year. It is on Long Acre, almost opposite its not really very old brands And Other Stories and Cos. I wonder whether the company is able to effectively develop each brand when more keep being added to the roster. None of the H&M brands was very busy. To be fair, few of the fashion stores in the area were notably busy, with one major exception.

The major exception was TK Maxx which was packed to the rafters and doing incredible business. This is a retailer which keeps a low’ish profile but clearly has a deep understanding of its target customers and how to address them. The company’s Long Acre store is very conspicuous: a no frills discounter in a high rent, high end location. In the toughest, most over supplied retail market we have ever seen, TK Maxx continues to literally and metaphorically do the business.

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