Following years of unstoppable growth, the value sector is now beset by high costs and falling sales volumes. Rebecca Thomson considers whether the hurdles can be cleared.

After cruising through the first years of the downturn relatively unscathed, the past 12 months have thrown up myriad challenges for value fashion retailers. Not only are costs rising and sales volumes dropping, but debt repayments have started to sting. In January, the problems came to a head for former star performer Peacocks, which entered administration. The move put 9,000 jobs at risk – 3,000 of which were lost after its sale to the Edinburgh Woollen Mill – and brought the value sector’s problems into sharp relief.

“Consumers have seen consistent pressure on their disposable income, and that has reflected in how they spend their money. The clothing market has been challenged to come up with new and innovative product to tempt customers to part with their hard earned cash,” says Tu Clothing business unit director James Brown.

Lynn Evison, partner at consultancy Kurt Salmon, adds: “The whole spend appears to be decreasing on clothing. But overall, some are doing better than others.”

The bottom line is that shoppers are simply buying fewer value fashion items than they used to. Ultimately, this spells trouble for a sector that relies on shifting units at speed.

At every turn, value fashion retailers are facing difficulties. New Look is struggling with a reported debt pile of £1bn, Tesco’s non-food sales have fallen and even the better performers are feeling the squeeze, with Matalan’s like-for-like sales slipping 0.4% in the full year to February 25.

But while some have undoubtedly floundered, others have coped better with the blows the market has dealt them. Primark saw operating profits dip by 8% last year as it absorbed cost rises, but the robustness of the business was confirmed after it posted a 16% surge in sales in the 16 weeks to January 7th. Sainsbury’s clothing line TU, meanwhile, is growing faster than its food offer according to its third quarter trading update, and the grocer continues to gain market share in the clothing market after its partnership with TV presenter Gok Wan helped drive sales over Christmas.

The difficulties caused by a tight spending environment shouldn’t be underestimated, however. “People just aren’t buying as much as they used to,” says Verdict analyst Maureen Hinton.

“It’s had quite an impact on the value sector and anyone with weaknesses in their profitability is going to struggle.”

Which means any retailer with lots of debt, such as Peacocks or New Look, has faced big problems. Retailers who might otherwise be trading profitably are being stung by high repayments.

VAT problems

Last year’s VAT increase and high raw material costs caused problems for a sector whose margins are extremely tight anyway, and the slight reduction of costs in the first half of this year has helped reduce the pressure.

But while these cyclical elements and a retailer’s response to them play a role in determining shorter-term performance, it’s not wobbles in raw material prices that underline the long-term trends at play. Instead, structural forces are at work and it’s unlikely that shoppers will ever return to shopping in the way they did before 2007.

“The way people shop is changing,” says Neil Saunders, managing director at Conlumino. “There needs to be an evolution in thinking to a degree – a lot of what makes a value retailer successful is around innovation and attractiveness of offer, and much less around pricing. Pricing is a given, but it’s what you do to stimulate purchasing that increasingly matters.”

Part of this is down to the resurgence of inflation, Saunders says. Before the credit crunch hit, price deflation in the value sector meant consumers could keep buying more products for the same money each year. This is no longer possible now that inflation is more of an issue. As Hinton says: “Being price-led in an inflationary market gets tough. The best way is to produce products that you can’t compare prices on – you either need to undercut everyone else in the market or have unique products.”

And although shoppers won’t reduce the volume of clothes they buy forever – at some point, spending will pick up – the market is more mature now than it was, making it harder to drive sales volume growth by opening up more space. Saunders says: “Before the recession, lots of new players entered the market and there was a real supply push so more consumers got into value clothing. The potential consumer base enlarged dramatically – you can’t make it any larger now.” So those who are growing are doing so at the expense of their competitors and the overall market itself is not growing.

Given the difficult conditions, it’s no surprise that some have encountered problems. But there is still plenty to be learned from retailers that have continued to perform strongly over the past few months.

Primark and H&M both have lessons to impart. Primark weathered last year’s storm by keeping prices low despite raw material costs rising, while H&M continued to attract shoppers and create excitement with a long line of collections created by high-end labels such as Marni and Versace. “Primark responded very well to the challenges,” says Saunders. “They’ve seen margins squeezed, but they’ve really ridden this very well and they have every possibility of rebuilding margins as inflation becomes less of an issue.” H&M managed it well, he says, by adding significant amounts of value to the proposition with more premium product and designer collaborations.

Primark also has well-presented stores, constantly changing stock and is able to undercut competitors on price, which is what makes it stand out to customers. Plus the value chain has been able to continue to open more space, both in the UK and abroad, which helps it keep driving up sales volumes.

“Primark is strong on price and store environment,” says Hinton. “It could be a mid-market store and that helps with perception. It also has consistently changing stock. It’s obviously finding it tougher now in the UK, but it has an international business and growth options.”

Evison adds that Primark’s internal culture and processes have played a big role in its success. “For it to work well, your processes can’t be overly complicated, and you need to be supported by a reactive supply chain and supply base,” she says. “You need a culture that drives innovation and an entrepreneurial, trading spirit.” Primark makes decisions very quickly and has the necessary culture to drive constant sales, she says. 

Over in the grocery sector, it’s a bit of a mixed bag. Sainsbury’s TU clothing line continues to gain market share – Hinton ascribes this success to its merchandising, saying the clothing department is sufficiently differentiated from the rest of the store. “Sainsbury’s and George at Asda have done well in the way they present their clothing,” she says.

Point of difference

Tesco has found it more challenging, Saunders says. “It’s very poorly merchandised and too low key in stores. It’s not inspirational, and not particularly fashion driven. It has very low prices, but offer nothing else with it to entice customers.”

The grocer’s clothing offer needs a complete refresh, he says, and the company has started working on reinvigorating the F&F clothing line. Hinton agrees supermarkets are not exempt from the need to differentiate their offer. “The thing with supermarket clothing is that after a while you need to start thinking about different ways of offering it.

It’s quite commoditised when you’re walking around supermarkets picking up baked beans – you need to set the experience apart a bit.”

But supermarkets do have the added bonus of guaranteed footfall and good childrenswear lines which people still tend to spend on. Hinton says: “If you are just focused on womenswear it becomes more difficult because [the consumers] are now more considered about what they spend their money on.”

This helps explain why New Look and Peacocks have been particularly affected by the troubles of the past year. Not only are volumes in womenswear falling, but the young fashion market has been hit by its own recessionary issues as higher student fees and unprecedented levels of youth unemployment both act to constrain the spending of those aged 15 to 24.

Saunders says: “New Look hasn’t been able to focus on a strategy to improve trading. If you have too much debt it’s difficult to invest and they do need to invest.” Debt means senior management must spend their time looking at margins and numbers in an effort to pay it back, he says. “It means you don’t have room to manoeuvre to do what’s right to grow market share in the long term.”

New Look has also suffered something of a brain drain, with creative director Barbara Horspool, ecommerce director Dom McBrien and marketing director Joe Irons all leaving in the last year.

Peacocks’ debt meanwhile has been wiped following its sale to Edinburgh Woollen Mill, leaving it free to concentrate on a new strategy, and this breathing space will hopefully give the business the freedom it needs to adapt to a changing environment.

H and M and Peacocks have both learned lessons about adding value to their offers

H and M and Peacocks have both learned lessons about adding value to their offers

New owner Philip Day told Retail Week in an interview this month that he plans to invest £50m in the next 18 months. He said: “Two fundamental things went wrong at Peacocks – it had too much debt which couldn’t be serviced and, secondly, it had moved away from what it was famous for.”

He added: “There is a big difference between offering [value] fashion and high fashion. Historically, Peacocks was very good at core, but it went too far into high fashion.”

The value sector has become a melting pot of problems but, as with much of the retail industry, there are answers for those in a position to find them. It may be necessary to become far more innovative and imaginative, and perhaps in a few years the value sector will have evolved beyond recognition.

But value retailers are renowned for their ability to move quickly and take advantage of gaps in the market. With a bit of luck, an open mind and an ability to take a few risks, they will still be leading the way in years to come.

The problems of value

  • Internal culture It all starts with a retailer’s internal culture, says Kurt Salmon partner Lynn Evison. Processes need to be efficient allowing for quick decision-making, and an entrepreneurial spirit is crucial for driving sales
  • Need to be unique It’s no longer enough be cheap, unless you can guarantee you’re always the cheapest. Consumers need to be persuaded to part with cash, and retailers need to give them a reason to buy. This means differentiating your offer, selling things customers can’t get elsewhere – as H&M does with its designer collaborations – inspiring customers and providing a pleasant environment to shop in
  • Lower volumes Sales volumes have fallen and are unlikely to ever return to their pre-recession levels of growth. Value retailers might want to look at introducing higher-priced lines, giving customers the chance to trade up and improving their own margins
  • Cost rises While the cost of raw materials such as cotton and oil has eased slightly this year, the general trend is upwards. Long-term, very low prices for consumers are unlikely to be viable and value retailers will often need something else to make them stand out
  • Profitability Keeping a volume- driven business profitable is difficult and value retailers are likely to join the ranks of businesses looking to consolidate their property estates. Premium high-street locations are expensive – retailers will need a cost-effective approach to property, such as Matalan’s big out-of-town stores