As it ramps up its own-label offer, the department store retailer has sacrificed sales to boost margins. George MacDonald asks if the strategy has paid off

This year, Debenhams chief executive Rob Templeman said last week, is one in which the department store group will be judged upon profit improvement.

Profitability of course is the criterion on which any business will ultimately stand or fall but Templeman had a particular reason to highlight Debenhams’ push to ramp up the bottom line.

The retailer has, over the past year, put much of its energy into improving gross margin. To do that, it has been willing to sacrifice sales as it increases the proportion of own-bought product, which is driving margin enhancement.

It is a bold strategy, begun during some of the toughest trading conditions many in the sector can remember. But as store chiefs ponder how the year might turn out - with job losses likely and tax rises threatening turbulence to come -the question some ask is, will the plan work as is hoped? And if so can they replicate the approach?

Last week’s update was in the main welcomed by City analysts, although there were some raised eyebrows over Debenhams’ like-for-like sales dip, which had apparently accelerated towards the end of the 42 weeks to June 19, when the decline was 0.4%. But the retailer said its gross margin for the year was likely to be ahead of the 80 basis points improvement previously guided.

Templeman said there had been a 1.5% hit to like-for-likes in the period, partly because of the allocation of more space to own-bought lines. While the retailer reported market share gains in menswear and kidswear of 20 and 40 basis points respectively, it said: “Womenswear continues to be impacted by lower own-bought sales densities.”

On the surface some of the numbers might appear worrying but the reality is otherwise, most observers believe. The change in like-for-like sales was within the range indicated by Templeman as the programme originally got under way and partly resulted from fourth-quarter disruption as trading space was reconfigured to reflect the switch towards own-bought.

Templeman was confident about performance and said the womenswear impact was not unforeseen. “It is where we expected it to be and we’ve flagged it before. As we anniversary the space moves [in September] we expect to regain market share in womenswear.”

The right stuff

Industry watchers say Debenhams is following the right retail course. Singer analyst Matthew McEachran says the own-bought initiative is “a good plan” both in maintaining Debenhams’ appeal in the short-term economic climate and long term strategically.

He says: “Yes, in terms of execution it has had disruption when it was taking out the old concessions but it was never going to be without issues.” The 1.5% drag will disappear, he points out, leaving Debenhams with comparatively immature space that will bring improving sales densities.

So can other retailers follow in Debenhams’ footsteps? The reasons why they might like to, such as the margin gain, are obvious. AlixPartners director Don Murphy says: “Debenhams has been the Nadal of department store retailing. Track its margin - it’s been quite astonishing and it’s not smoke and mirrors.” He says that retailers generally have been caught between Primark and Tesco, and have discounted “to keep the top line afloat”. Now, as trading conditions toughen, that is no longer an option because it jeopardises profitability and survival.

Deloitte strategic retail adviser Richard Hyman observes: “If you are a retailer with a track record of successful own-brand development it gives you wriggle room in this climate that most people can only dream about. Assuming you have that strength and deliver sufficiently high volumes you will be able to defend your margin.”

Hyman’s point about track record is crucial. A shift into own-bought by a retailer from a standing start or with limited experience is not likely to bring similar benefits as expected at Debenhams.

Early doors

Debenhams was early into own-brand, an initiative that predates the present company leadership but which has been backed and developed by them. In its public company incarnation in the late 1990s it was an innovator with the launch of brands such as Maine New England and has kept up the pace - while in private ownership and since being refloated - with its stable of designers including John Rocha, Jasper Conran and Matthew Williamson.

Similarly, it has snapped up cheaply defunct brands that retain consumer resonance. Last year it bought Principles and last week revealed it had agreed in principle to acquire 115 Faith concessions in its stores from the footwear specialist’s administrator.

In its last half-year, to February 27, Debenhams reported: “Own-bought products continued to outperform concessions. Designers at Debenhams was again the strongest performing category with sales of £282.1m, up 17.7% compared with the prior year.”

One observer says: “Debenhams is the leading exponent of private-label department store retailing in the UK.”

PricewaterhouseCoopers chief retail adviser Christine Cross says: “Debenhams is being bullish but it has earned the right to be - it is growing own-brand.” And, she says, Debenhams has treated its labels like third-party brands, “with space in store, celebrity endorsement, advertising and marketing - it hasn’t treated them like a cash cow”.

The extent of experience has enabled the retailer to develop a comprehensive and well constructed offer. McEachran says Debenhams has a pyramid-style brand structure with, for instance, Ben de Lisi at the top end and Mantaray bringing mass-market appeal.

It is also important to remember that the shift to own-bought forms part of Debenhams’ wider strategy. In addition to developing its brands Debenhams has been improving its stores, improving product and improving its multichannel operations.

Such measures are essential to establish and maintain the credentials of own-brands, says Booz & Co principal Jason Gordon. Retailers need to ensure they put oomph into their brands through more than just the product. “Marketing, price perception, where you put product in stores, freshness of display - it all impacts brand equity,” says Gordon.

Own-label appeal

Other retailers are increasingly focusing on the opportunities own-label can bring in improving margin and business generally. Debenhams rival House of Fraser, for instance, is reported to be on track to deliver a 7% sales rise in the six months to July.

Own-brands, such as Linea, Episode and Kenneth Cole are understood to have been a key driver of the uplift. McEachran says: “It [House of Fraser] has got the branded stuff firing on all cylinders and now it can focus on own-brand too.”

And Superdrug, the health and beauty specialist owned by Far Eastern conglomerate Hutchison-Whampoa, drew attention to its potential in the field. Accounts filed at Companies House for the year to December 26, 2009, showed operating profit of £6m compared with a loss of £2.4m the previous year on flat turnover of £1.08bn.

Among priorities for the current year Superdrug reported: “The business will continue to focus on value through working with suppliers on attractive pricing and promotions but also by remaining loyal to its heritage of great own-brand products.”

Own-brand looks likely to remain a central weapon - in some cases, the key one - as retailers battle to ensure continued consumer appeal and bolster profitability. However, it would be dangerous for chains to overestimate their products’ appeal.

For some, the prospect of using own-brands to boost margins would be almost impossible at the moment. McEachran gives the example of JJB Sports, which is in the midst of a turnaround. He says: “JJB couldn’t do it because the customer wouldn’t recognise it [a JJB own-brand]. You need the big international brands in place and performing first.”

And own-brands on their own are unlikely to be sufficient in many cases. Shoppers want more than own-label. Gordon says: “Customers come in expecting a certain branded portfolio. If you move too far you run the risk of losing core customers. You have to ask customers [what they want], look at behavioural data and act at any hint of a problem.”

Murphy also wonders whether the focus on own-brands will ultimately harm the retail “eco-system” because concessions traditionally gave new brands the chance to establish themselves and refresh the retail scene, and they now have fewer opportunities.

Cross points out some prominent retailers, best known for their own labels, are moving in the other direction. Marks & Spencer, for instance, now sells some branded food and technology products. Next and New Look are both selling brands as well as their own product. The “sweet spot”, she says, is to have both.

The exact mix, and the margin enhancement that can be won, is still to be worked out by many retailers.

WHSmith: No margin for error

Outside fashion, the retailer probably best known for focusing on margins - and which has made a point of jettisoning unprofitable sales - is bookseller and stationer WHSmith under the leadership of Kate Swann.

Exclusive product has been part of the equation at WHSmith. The retailer drew attention to its success of exclusive ‘bookazines’ at the time of its prelims last October, but in its case changes to the product mix have been the big driver of improved profitability.

At its interim results in April the retailer reported that gross margin in its travel shops increased by about 190 basis points “through better use of space,

good category mix management and further buying improvements, resulting

in more sales in higher margin categories such as books”. Similarly, less lucrative high street categories, such as entertainment, have been downgraded.

Swann’s magic has impressed the industry, but observers have questioned the sustainability of the approach.

She has consistently confounded her critics but now, as the general trading outlook becomes increasingly dark, some are asking the question again. One observer says: “You can only take that approach so far. Sooner or later you need a strategy to grow the top line, which it hasn’t been able to do in an easier climate than we’re coming into now.”