Despite the punishing retail climate, most retailers are still expected to grow. But is the right thing to do? Is it time for a reset of corporate expectations? Is it time for retailers to concentrate on getting better, not bigger?

The UK retail sector is under immense pressure. Sales are flatlining, consumer confidence is wavering and a weak pound has hammered those with international businesses. 

Some businesses have buckled under this pressure and launched redundancy rounds, CVAs or have sought additional funding in a bid to plug the gap.

Despite this backdrop, retail success continues to be defined by growth, either through ever-increasing sales and profits or by expanding into new territories. However, is this perception outdated?

“I haven’t opened a shop for years and years, but I also haven’t closed a single shop. I decided how many stores I wanted and stopped there”

Julian Richer, Richer Sounds founder

Richer Sounds founder Julian Richer certainly thinks so and believes honing and perfecting what the specialist retailer does, rather than opening new stores, has borne fruit in creating a successful and sustainable business

“Some retail problems on the high street are self-inflicted. Businesses that opened more and more stores, signed more and more expensive leases just because they wanted more sales growth were irresponsible, and that came home to roost for them,” Richer says.

“I haven’t opened a shop for years and years, but I also haven’t closed a single shop. I decided how many stores I wanted and stopped there.”

Is Richer’s way of thinking right? Is it time for the retail sector to rethink its relationship with growth, or is the idea of maintaining a carefully curated store estate and polishing your existing offer to a high sheen unfeasible for businesses with shareholders to please? 

Shareholder scorn

Brian Kalms, partner at business consultant Elixirr, doubts whether investors and shareholders could be brought on board with the doctrine of building a better business over a bigger one.

“I don’t think retailers, no matter how well-intentioned or concerned, will upset one of the fundamental tenets of capitalism, which is that investors invest for superior returns and there is a limit to what you can get out of static returns,” he says.

For this reason, Richer believes privately funded retailers will have an easier time of convincing shareholders to back a strategy that rejects endlessly chasing growth.

“It is much easier to run the business privately because you can have a strategic, long-term view, and you’re not driven by half-yearly dividends and quarterly updates,” he says. “So many investors, whether it’s venture capital funds, pensions or individuals, all they care about is return.”

PwC leader of industry for consumer markets Lisa Hooker agrees that privately owned businesses have less of a battle taking a long-term view to business growth. She uses discount retailer Home Bargains as an example.

Home bargains

Home Bargains has been ‘very thoughtful and invested well, but taken its time doing so’

“Home Bargains is a really well-funded, well-managed business that has opened stores that are high-quality and often own the land. It has been really well-measured, thoughtful growth, which matters in the value segment because to be really successful you need to be really good at property and product.

“Home Bargains has been very thoughtful and invested well, but taken its time doing so – I’m not sure it would have been able to do that, in the same way, if it was a listed company.”

However, Pets at Home chief executive Peter Pritchard believes listed companies can find support from shareholders when pursuing a strategy that does not put sales growth at the top of the agenda – though he admits it requires a lot of effort.

Pritchard says talking to investors is “the number one thing I spend my time doing” and concedes that it would “be easier if we had one investor”.

“But that scrutiny makes for a better business,” he insists. ”You get more challenge, more variation and more insights – it’s definitely easier to only need to have the one conversation but I don’t think it’s better.”

Pets at Home, a perennial growth retailer, introduced a new strategy two years ago to prepare it for the future, which saw it invest £28m in price and services to better compete with online rivals.

This approach may set Pets at Home up for the long term but would impact short term growth. As Pritchard said at Pets at Home’s full-year results last year: “Delivering the financial plan does not require adhering to our historical strategic priorities of growing like for like, space and margins”.

“Smart investors look at a business’ outputs but increasingly they are focused on inputs as well”

Peter Pritchard, Pets at Home

However, investors were not convinced, and it was one of retail’s most shorted stocks two years ago.

Pritchard explains: ”We knew our customers valued location, in-store service, our staff and their expertise, and the ability to physically bring your dog to a location, but from an investor point of view that was all too subtle, so we had to demonstrate we could win on all fronts.”

Ultimately, the strategic pivot has borne fruit for Pets At Home. Pre-tax profits jumped 6.1% in its last full year and like for likes rose 5.7%. It has already raised profits guidance for its current year after a stellar first quarter.

“Smart investors look at a business’ outputs but increasingly they are focused on inputs as well. If your input is right, be that customer service, lifetime customer value, customer churn, colleague engagement and CSR credentials, then the results will follow,” he says.

Pritchard argues that the best shareholders are those that assess a business’ strategy and roadmap to fulfilling this vision when considering where to invest, rather than those that are wooed by potentially over-ambitious expansion targets.

What constitutes growth?

OC&C Strategy Consultants senior adviser Michael Jary believes while investors will always want a return on their investment in a business, the expectations around what constitutes growth in a retailer needs to be re-evaluated.

“Growth can be in value, or in quality, or in innovation – not just in volume. Growth can be about ways to create more value with fewer inputs and there’s plenty of evidence that customers will recognise that and be willing to pay for it,” he says.

Seasalt

Seasalt wants to open 100 UK stores in the next two to three years

“In searching for growth, the word ‘retail’ is possibly a constraint. Growth may come from retailers extending into different business models such as platforms, or brands, or wrapping services around products. It might come from internationalisation or from reaching under-served segments through more efficient models.”

One experienced retailer questions one of the most familiar growth metrics in retail – store expansion.

He uses Seasalt as an example. Seasalt is a retailer achieving growth – it notched up a 23% rise in sales last year and pre-tax profit rose five-fold year to £2.1m – and has set a target to open 100 UK stores over the next two to three years.

The experienced retailer is concerned the expansion plan will come back to bite Seasalt in years to come.

“Seasalt is a really good business and relatively small, but when it said [it aimed to open 100 stores] I was deeply worried about that. That strategy, which is exactly what all the restaurant groups followed and led them to overexpand, dilutes return on investment and risks making them look like any other brand.

“It’s not the best way to drive true returns when Seasalt could have lived and breathed [as a] Cornish beachside casual brand, whether that meant expanding into new product sets, holding events, sponsoring surfing competitions – all of those might have been stronger ways to drive returns in the longer term.”

Prioritising profits

With sales growth harder to come by, some businesses are prioritising becoming more efficient to steadily grow profits.

Ian Shepherd, the former chief executive of Game and chief operating officer of Odeon and author of Reinventing Retail, points to WHSmith.

He says: “WHSmith has made great virtue out of declining high street sales. It has sold the message to its investors very well. It’s not a case of telling investors you are not chasing growth as a core KPI, it’s about communicating what that managed decline is in aid of, and in WHSmith’s case it has led to a strong travel division and increased profits.”

But PwC’s Hooker says while driving cost efficiencies and focusing on improving the bottom line may have borne fruit for WHSmith for some time, it was also a tactic they could only take so far.

“WHSmith is probably the poster child for building a better, not bigger business. But you can only do better business, be that around logistics or omnichannel optimisation or whatever else, before you risk running out of road.

“You need to do something at a point that moves the business forward, which is what WHSmith did by diversifying into travel and snapping up new businesses overseas,” she says.

Getting better

For some businesses, it is necessary to refocus on getting better and fixing business models in order to bring future growth.

Kalms says Dave Lewis’ initial focus at Tesco was to improve the business, rather than growing it, and he successfully brought shareholders on that journey with him. 

“Dave Lewis told investors the business had a cost problem and a trust problem and that he needed to fix that before he could fix growth. There are definitely points in a business’ evolution when that tactic is the right one, but it is not easy for the management team to make that decision without support from shareholders,” he says.

“There are a lot of shareholders who are feasting on the carcass of an outdated business model for as long as they can”

Paul Martin, KPMG

KPMG head of retail Paul Martin says the majority of retailers are “managing the business for the highest profitable shareholder return” and may not be able to convince shareholders that deprioritising growth for the long-term sustainability of the business is the right move.

“For that shift to occur, it really depends on leadership and shareholders getting together to really think about what the future could be. At the moment there are a lot of shareholders who are feasting on the carcass of an outdated business model for as long as they can, but sadly businesses are not in the position, or are not brave enough, to make a change.”

The reality is that many retailers will chase growth at any cost. However, for businesses not performing at peak, there will only be so far endless growth can take them before there is no road left to run.

Pets at Home is a business that managed to reset its strategy and temporarily deprioritise growth to make its business model more sustainable and managed to do so before it was on the brink.

Businesses that take similar measures and get management and shareholders aligned with their vision of how to remain relevant to their customer beyond their latest quarterly results will be those that have a long-term future.