Blog

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.

If you want to know more, please get in touch.

What you get

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 richard@richardtalksretail.co.uk

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 richard@richardtalksretail.co.uk

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 admin@richardtalksretail.co.uk

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 admin@richardtalksretail.co.uk

Supplier relationships – a key indicator

Is retail necessary? Until not so long ago, if you made or supplied a product you needed to reach customers via retailers. That unique role of bringing the product and the customer together is progressively eroding. And increasingly, the economic question is what does retail add to the distribution chain?

In general, retail is answering this question badly. Increasing degrees of panic characterise company behaviour. Leadership teams have little or no direct experience of managing in a market like this, Few businesses have NEDs with enough understanding of the industry.

A key example of what I’m talking about concerns product, and suppliers. The critical relationship between retailer and supplier has over many decades become increasingly unequal and in more recent times, increasingly adversarial. As retail has become more concentrated, so their power has grown and so has their dominance in the relationship. The mushrooming of online has a twin impact on retail. The first is the explosion of capacity, adding cost but largely cannibalising sales and tightening trading economics. The second, more subtle impact that this still relatively new channel is open to all. Increasingly, suppliers can go direct, bypassing the retailer altogether.

Against this background, retail has continued to push economic pressure up the chain to suppliers. I constantly hear how retailers have no loyalty, buyers are getting younger and less experienced. And they face increasing pressure to deliver great product at lower cost. Suppliers   will look to protect their business by lowering product spec, usually through inferior fabric in the case of fashion. No wonder consumers are falling out of love with an increasingly unattractive product.

The key elements of successful retailing are the product and the customer. Retail cannot afford to push economic pressure onto suppliers any more – the price of inferior product is too high to pay. This is what we are increasingly seeing. The customer wants value but will not find an inferior item more attractive because it is cheaper. In a market where suppliers need you less and less, you need to give them more and more reason to supply you.

** Our GOLDEN QUARTER REPORT analysing Q4 2017 vs Q4 2016 covering 200+ leading retailers is now available. For details contact admin@richardtalksretail.co.uk

Sign up today for exclusive access to world-leading expertise in the retail sector.