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

M&S further down the cul-de-sac

All very predictable from M&S this morning. This was once a wholly exceptional retailer – these days it is entirely ordinary. Shutting stores is fine, as far it goes. Virtually everyone has too many stores so adding to the planned closures is probably sensible. However, it misses the point.

So much of retail is run on the “build it and they will come” principal. The fact that they (aka customers) have been progressively not turning up has so far failed to change the majority of retail mindsets. So, the reaction is to lower costs. And that is top of Marks’ agenda. They believe that if they can lower prices, “they” will buy more. They wont.

The costs of a business must be defined by its offer, not the other way round. How many stores Marks has, how big and where they are located needs to be governed by the nature of what it sells, and its target market. This simply does not work in reverse, especially in the zero growth market we have today and for the foreseeable future.  The pursuit of lower prices has progressively diminished styling and product quality, eroding relevance and brand values. Evaporating loyalty is the growing price being paid for continuing down this cul-de-sac.

Huge changes among the senior team leaves the business with thin experience and a diluted culture. Where are the M&S cultural values that made it special? Words are cheap but the daily body language of the company’s stores is discouraging. Billions of pounds in lost sales weighs heavily on the big 4 grocers, chasing price instead of defending their own added value in the market. M&S is doing exactly the same in clothing, chasing Primark and others lower. Very few retailers can afford to keep disappointing their customers, and Marks’ wrong direction is consistently doing just that.

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HoF has been a prime candidate for a CVA for more than 20 years. Back in the mid 1990s, the company had at least 20 stores it needed to close. Here in 2018, word is that 20 are likely to be shut in this process. After all these years, is 20 likely to be enough?

The business has been struggling for many years. The list of its issues is very long. Too many stores and an offer that has never been sufficiently different are near the top. For years, the company has seen itself as the alternative to Selfridges. The problem is that this perception has never been shared by customers, or not enough.

It’s fashion brands are generally too second division to match the excitement and exclusivity that makes Selfridges such a magnate. And HoF has failed to develop strong enough private labels to give it a clear point of difference. Some legacy stores in poor locations can be dealt with via the CVA. But a revolving door at the top speaks volumes. Most of its leadership team has changed in the past 18 months or so.

Its weak offer makes attracting footfall very difficult and the business has unsustainably low sales per foot. This is a market where every man and his dog will look at lowering costs – this is a given. The survivors will be those who can increase sales. And in a flat market, that means capturing them from rivals.

Addressing the weaknesses of the company require very deep pockets. Massive investments in top people and the development of genuinely credible private labels are essential in order to then attract the top 3rd party brands that will drive footfall. The kind of root and branch restructure needs much deeper pockets and retail skills. Assuming this goes through, we’ll find out just how much genuine belief the new majority shareholders have in this business. Simply shutting some stores doesn’t address the key issues.

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Sainsbury’s – Asda – further thoughts

My previous Blog was written before Monday morning’s formal announcement with more detail. Now that we know much more, my initial thinking remains. This deal tells us much about the underlying thinking at all the companies involved. And behind the spin, most of that thinking is negative.

It is clear that this is an exit for Wal-Mart, albeit initially a partial one. The terms of the deal involve a very low value for Asda as a trading company. In effect, a dowry has been given to JS. For Wal-Mart to remain partners long term would require them to have massive confidence in Sainsbury’s leadership team to make this rescue deal transformational. This is not plausible. Beyond the next few years it makes me wonder at what point those separate brand identities will merge the operational management supporting them. Surely the economic advantages will become irresistible? The pressures will grow since I find it hard to see how the enlarged group will gain any share, albeit from a higher starting point. So the need to cut costs will intensify.

The strategic thinking here is defensive. However, it seems to me to be financially driven in its thinking. The classical view that greater scale is desirable was behind the acquisition of Argos, and again here. Both Argos and Asda are essentially weak brands. Putting Argos into Asda certainly boosts scale, but the proposition will remain the biggest target in Amazon’s sights. Scale will always be significant in retail but its value is diminishing. Across the industry, all the innovation, disruption and fastest growth has come from smaller, more agile, more dynamic players – Aldi and Lidl in food, B&M and Home Bargains in GM, Primark in apparel. It misses the point to look at that list and say …ahhh, all discounters. Yes, they are. But more than that, each is a brilliant retailer with outstanding commercial skills.

In the retail market now emerging, scale alone wont cut it. Understanding customers (this means much more than simply owning mountains of data) is the critical prerequisite of being commercial. Too many retailers are not commercial enough, something unaffected by being bigger.

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JS + Asda = ??

Retail never stops surprising us. This huge deal has so many as yet answered question. A deal involving Asda is less of a surprise in itself. Readers of my premium content will have read less than 2 weeks ago my analysis of where the market is going and the consequences: ” It looks very much like Asda will be the biggest casualty. Don’t discount corporate activity in UK supermarkets.” What I didn’t foresee was it would happen so fast and would involve Sainsbury’s.

We will know more tomorrow when JS makes a formal announcement to the market. The CMA is clearly an issue. On the face of it, this should not be allowed. However, nor should Booker/Tesco, so some think that has opened a door. I’m not sure why that should be, but the CMA is not famous for logic, consistency or its intimate understanding of its key constituency – consumers.

Will many stores shut, beyond whatever the CMA might require? Imagine a location with 6 supermarkets – the big 4 plus Aldi and Lidl. If the enlarged group shuts the Asda, what proportion of business will accrue to JS? I believe JS will get the smallest uplift. This is a function of target customers. The two businesses are very distinct. Moreover, many overlaps will involve a JS c-store and an Asda c20x bigger – again, chalk and cheese.

The key positives of the deal (beyond the obvious central cost-cutting) are potentially around non-foods and re-inventing Asda. This will create the UK’s biggest non-food retailer, overtaking Tesco. JS is already rapidly injecting Argos into Sainsbury’s stores. Eventually, Argos would be a key element of the Asda offer too. Argos stand-alones are already being shut and this deal would create many more opportunities to resite. On the food side, Asda’s value message has been progressively eroded by Aldi and Lidl. It needs to up its game in food and offer customers a reason to stay loyal. JS has the skills and know-how to strengthen Asda as a food retailer. Beyond foods, JS non-foods have been the strongest in supermarkets in recent times, so there is potential to up Asda’s game here too.

Two areas where benefits will be much more modest are price and scale. On price, there is still some denial in the sector. Aldi will not be beaten on price – end of story. And scale will not help here. Aldi has the price model and the mainstream players do not. On the wider question of scale, there is denial here too. One of the lessons of recent retail history is that being big no longer creates the economic and strategic benefits it once did. Smaller players have hoovered up loads of market share by being better, not bigger. Scale can be an impediment.

We are in the very early days of the restructuring of UK retailing. This will not be the last deal in supermarkets, and there will be much more in non-foods too. Watch this space.

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

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

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