New chief executive Simon Calver explains how a focus on ‘basic retail’ will restore Mothercare to health.
New Mothercare boss Simon Calver was so determined to turn around the famous retailer that he tracked down the headhunter responsible for recruiting the role to tell him why he had to get the job.
As a new father, he knew the brand and where it was going wrong. The UK business had lost its way, the online offer was not good enough, and it was seen as poor value for money in a market in which the supermarkets and Amazon were making headway with much cheaper price tags.
Calver has promised that in three years he can restore the retailer’s fortunes and has revealed his masterplan for doing so.
“Everywhere I look I see opportunities for this business. We don’t have the luxury of time, however – we need to get straight into this,” he says.
“This is not a plan that is based on like-for-like sales growth or margin increases,” Calver admits. “This is based on us managing our cost base much more successfully and taking out the unprofitable stores.”
The retailer is slicing £20m from of its central costs. It has already revealed it will axe 110 stores as it shrinks its portfolio to 200 shops and is in consultation with 160 staff as it aims to slash head office costs by 16%.
“We need to think like a start-up on costs,” maintains Calver. “We need to prioritise our expenditure. This is an area in which we have control.”
The retailer is also set to negotiate better terms from suppliers to reduce its operating costs in its bid to become a “lean” business. Mothercare has already started tightening its working capital, cutting 12% from its stock pile over the last year and Calver promises there is more to come.
The maternity specialist is also focusing on making gains through sourcing. It aims to “leverage more scale” where it sources directly, according to Calver. Mothercare is also working with its third-party suppliers to make savings and hopes to sway them with the promise of overseas exposure.
However, cost cutting costs is not enough believes independent analyst Nick Bubb, “just as the much-vaunted ‘property strategy’ over the last three years, of closing high-rent high street stores and moving to lower rent out-of-town stores has been powerless to prevent the erosion of Mothercare’s bottom-line”.
The virtues of change
In what he calls the “virtuous” sourcing circle, Calver will invest the gains he makes from better sourcing and supplier terms into lower prices. He believes this will lead to sales growth resulting in higher buying volumes which will, in turn, lead to even better supplier terms.
Undoubtedly price is an area that has let Mothercare down. Consultancy OC&C found that only 43% of customers feel that the retailer’s value proposition is strong. “Mums are visiting, just not spending,” says Calver. “Clothing prices have been a reason not to shop at Mothercare.”
Mothercare has not kept up in an increasingly competitive market place. “We’ve been squeezed,” Calver says. “You’ve got the top-end specialists who have done a good job at connecting design and fashion to mothers, and at the lower end, with much less emphasis on quality but low entry prices, we have supermarkets.”
The retailer will refocus on its good, better, best pricing architecture and is, on the whole, lowering prices. On average clothing pricing will fall 10% from the autumn.
Calver says as well as helping Mothercare become more competitive, the shift will lead to fewer promotions in store and greater clarity about its proposition for the customer.
JP Morgan Cazenove analyst Gillian Hilditch says the change will help Mothercare to more effectively compete against rivals. However, she warns that the competitive environment is likely to get harder from here on in.
She says: “A number of players in the sector have already guided that they will reinvest cotton gains and the roll-out of Kiddicare could introduce further pressure.”
The high margin clothing category is one the retailer wants to expand over the next three years.
Mothercare UK managing director Mike Logue says there is a clear opportunity in the category because the retailer has lost share. However, he insists that at this stage there will not a dramatic change to the amount of space devoted to clothing. “By getting prices right and improving fashionability we will get [share] back.”
The retailer is also vying to increase its own-brand offer across all categories and striking up more exclusive deals, both of which will bring a margin gain. It is focusing on developing its own innovative products, taking a leaf from rival Mamas & Papas’ book, and is about to launch buggy range Movix and new nursery ranges.
Unsurprisingly Calver, previously of Lovefilm, is eager to develop the maternity specialist’s online capability and there are lots of wins to be had. Mothercare’s online sales were flat in the year to March 31 compared to the 16% growth the online market experienced throughout 2011.
“What I learned at Lovefilm is that you either lead online or you’re left behind – and Mothercare has been left behind,” Calver says.
“It’s not just about having a website, it’s about having the right products and prices and right search and recommendation functionality.”
The retailer launched its new UK website on May 1 and has already seen traffic increase 20%. Calver says it is focusing on testing the site, tweaking it daily, and is building in customer relationship management so it can keep the customers it acquires and target those who decide not to purchase.
Calver says he also wants to launch affiliate programmes to boost online sales. However, he is quick to point out that it’s not just about online, he wants to create a “joined-up” strategy between online and in-store.
“Over 80% of people who buy home and travel products research online,” he points out Some observers had expected more store closures in Calver’s turnaround plan, but the new boss insists 200 UK shops is its ideal footprint.
He says: “Two thirds of the population will be within a 30-minute drive of a store. We will still have the largest baby/parent national reach out there. We also have 200 collection points, which will be a growing part of our business.”
He is also looking to fill the gap that its 110 store closures will leave through wholesale. Mothercare already partners with Boots, for which it has designed its Mini-Club range, and sells in Debenhams, Argos and Amazon. However, Calver says it is “just beginning to scratch the surface” of what is possible in wholesale.
Back to basics
Although Calver’s focus is on returning the UK to profitability, a booming international business of course plays a big part in his new strategy. The retailer is to accelerate its expansion and is adding 150 stores this year.
The international operation has been growing 17% to 18% a year but Calver believes it is now at stage to step up that growth to 20%.
He says: “It takes time to set up but now, in some of those markets, we’re ready to accelerate. Saudi Arabia, India, China and Brazil are ready for acceleration.”
Online also offers a big opportunity for Mothercare internationally and the retailer’s new web platform allows it to be flexible with currency and language, meaning an overseas roll-out is in the offing. Websites have already launched in Ireland, Kuwait and Russia and an Indonesian site is to go live in the next few months.
Calver acknowledges his plan isn’t rocket science and is founded on “basic retail” principles, but he says that is fundamental to a turnaround.
He says: “What we’re doing in terms of the efficiency of this business is significant. It’s not about reinvention, it’s about what customers want from the store and that’s keener pricing, better value and consistent service and a great store environment.”
Conlumino analyst Matt Piner says Calver’s diagnosis of the retailer’s challenges is “spot on”.
Piner says: “Taking costs out of the UK operation, reducing store numbers, moving into high growth international markets and improving online are all necessary steps.”
However, he points out that cost-cutting, developing a multichannel offer and improving customer service is a “notoriously difficult path”.
But if Calver can get over those challenges, he could bring the maternity specialist back to health.
Piner says: “If Mothercare can persuade investors to get on board for the long term and successfully implement its plans despite its lack of cash then it stands a chance, but it is certainly facing a turbulent few years.”