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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Repairing retail body language

This is the week people have been forced to confront what has been writ large on the wall for some time. Retail is being squeezed. Everyone is free to believe it’s just a few weak businesses. It’s just a bit of Brexit fall out. They can also think that a little more bank support, some mandatory discounts forced on suppliers and/or some rent reductions, and all will be well again. After all, retail has always been cyclical and here we are again.

The most surprising thing about this week’s retail events is that so many people are so surprised. Relentless capacity growth, flat demand and cost growth (ex product costs) c4% – these are the key things one needs to know about the current market. So, are these fundamentals going to change anytime soon? The answer is a resounding no. The inevitable  conclusion is that there will be much of this until trading economics are able to support the remaining players in the market.

Most companies struggling are reaching for traditional remedies, some of which I outlined in my first paragraph. This is papering over cracks. Most retailers I know face a common fundamental issue – they are not selling enough product. One way of another, retailers must strengthen their offers. It’s not about lowering prices – it’s about increasing relevance and attractiveness, both of which are defined by the customer. How well a retailer really understands its customers can be judged by the body language of its offer: the cohesion of its proposition, its brand and price integrity. Across the industry, many would have declining scores on these critical counts.

Surviving and prospering in this ever-tightening market is very achievable, but not without addressing and strengthening retail body language.

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Restructuring redefined

Talk of restructuring Poundworld is a good example of the growing gap between the past and the future in retail. The word restructure has always applied to the cost line and the need to make it smaller. This has usually involved exiting leases but sometimes cutting overheads too. For many years, the trading background was characterised by market growth within an economy with some inflation. A lower cost line reset the business and as if by magic, a profitable company emerged. That formula needs to be redefined to work now.

Today\s market is not growing and there is little prospect of that changing for some time. Moreover, massive (and growing) oversupply makes raising prices very difficult. There is very little genuine inflation in UK retail, especially when compared with a depreciated pound. So no help from the wider economy.

By far the major weakness in most retailers today is weak sales. Chronic oversupply is a massive double whammy. Aside from its direct impact, generations of easy retail growth through physical expansion has made most leadership teams focus on costs. The “build it and they will come” of physical immaturity took care of the sales line. Now that this benign market has gone, so many retailers have been found to have sub-prime propositions.

Restructuring the cost line alone will last for X time – months, maybe a year or two. Restructuring must include the sales line. Indeed, it must start with the sales line and go on to define the optimum costs required to deliver and sustain that revenue. An arbitrary restructure of costs is like random surgery.

** We support retailers and the financial community with strategic advice. If you think we can help, drop me a line

Tesco and strategic response

Fascinating to hear that Tesco is to launch its own version of the discount store. Those of us who have been around for long enough may get a sense of deja vu here. In the early 1980s, Tesco dusted off a brand it had owned for some years and used it to launch a discount chain. Then as now, it was responding to the relentless expansion of Aldi (and Lidl). It didn’t last long. Tesco sold the stores and used the Victor Value brand as its entry level label within the overall offer.

Will it work this time? As a principle, I think this kind of strategic response is very weak. The best response Tesco can make is surely to be more Tesco, not to be Aldi. The fundamental weakness of the plan is the need for Tesco to be as good as Aldi at being Aldi. Today’s retail market is awash with disruption. The most common strategic response is trying to match the disrupter in what they are good at. So, we see the crazy expenditure of capital in trying to be second (or fifth or tenth) best at delivery and fulfilment, behind Amazon. We see retailers with full price models trying to discount and match the value delivered by retailers structured to make returns off narrower margins. This is not smart.

By far the best strategic response is to understand exactly what you are best at, and leverage it better. Tesco is better than Aldi in certain key areas – choice and service for example. However, the company’s body language suggests it is weakening in both these areas and planning to follow Aldi’s agenda. Meanwhile, Tesco ties up capital, management time and attention. Aldi will be delighted by this news. A battle on a ground of its choosing, using weapons of its choice. It doesn’t get any better than that.

** We support retailers and investors with strategic advice. If you think we can help, drop me a line

Turnover or margins?

Christmas and the period that immediately follows highlights the choice retailers are wrestling with. Which has priority – revenue or margin. Consumer demand was weak all last year, whatever the increasingly dodgy ONS data says. There is some inflation, more in food than non-food, but underlying demand is flat. Meanwhile, operating costs are rising by c4% annualised. Then there is sterling’s devaluation – only a small proportion has been passed on to shoppers via higher prices – the result of a weak market.

Over Christmas, many retailers have “bought” sales by discounting heavily. They sacrificed margin hoping to avoid issuing a weak trading statement. Full audited annual results will begin percolating through end April, beginning May. The key is that unlike Christmas trading statements, they will a) be audited and b) will include profits and margins.

We are already getting early instalments of the turmoil to come. Numerous profits warnings and many more warnings around onerous leases, mandatory (often retrospective) discounts on suppliers and planned job cuts. Not surprisingly, this frightens financial stakeholders like credit insurers and banks.

Some of those retailers who sacrificed margins to prop up weak sales are now praying Q1 2018 helps repair battered P&Ls. History shows that January-March in the retail calendar is by far the weakest quarter. Moreover, our Promotional Tracker shows that even beyond the January sales, February and March saw 58% of non-food retailers on sale. So those looking for help from the market can forget it.

The answer to all this is costly and painful. Businesses must invest in defending their top lines through more relevant product, better quality, better service and a better shopping experience. Only this can defend and then enhance margins. Retailers need to show more confidence in their brands before they can expect anyone else (customers or stakeholders) to.

** We provide strategic advice to retailers and the financial community – get in touch for details

You call that winning?

These days style prevails over substance. In our industry, this peaks with the Christmas Trading Statements season. Most of the results are now in and guess what? Most of our retailers are winners!! That’s great news. Because for a few moments back there, I thought this was actually the toughest, most challenging, damaging retail market we have ever seen.

Retail is highly fragmented and pressures do not apply equally. Some retailers are far stronger than others, better led, with stronger brands and business models. Looking at these statements in terms of just winners and losers is far too simplistic. Anyone posting plus numbers is deemed a winner, because they appear to not be losers. But in retail, things are very often not what they seem. Let’s take the big four supermarkets – apparently, they all won. But price inflation was c3.5%, market growth was c3.8% and all four announced sales growth below these numbers. Maybe they didn’t lose, but calling them winners is simply wrong.

In non-foods, Next was called a winner and its figures were regarded as really positive. A year ago Next reported awful Christmas trading numbers and the accompanying profits warning sent the shares down by 10%. So beating those figures this year was the very least to be expected from one of our best run clothing retailers. Next did OK, but no more.

Christmas was weak, as it was always bound to be. There were a handful of genuine winners including Aldi, Lidl, Primark, Joules and Ted Baker. But many retailers “bought” their Christmas sales with heavy discounts. This will only begin to emerge either when audited results come out several months down the line, and/or when quarter day end March arrives and there isn’t enough cash to pay the rent.

** We provide strategic advice to retailers and the financial community – get in touch for details

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