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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 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.

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.

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

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

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