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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

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

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