UK retailing is now entrenched in a trend of declining profitability, though many – particularly the investment and landlord communities – remain in denial.
This emerged on the horizon years ago when it became clear the race for space, augmented by the still growing online channel, was adding capacity faster than consumers could grow their spend.
We know competitive pressures impact everyone, but the effects are far from democratic. Some feel the pain far more than others, and this can be seen in results, distress and the general pattern of leadership and decision making across the sector.
Recently, two very different retailers have highlighted for me a fundamental dilemma. What does an optimal net margin look like?
“A strong retailer should set its net margin at a level it can defend competitively”
A man from Mars might think business is business – surely optimum margin is the highest number you can deliver? But this is short-sighted. A strong retailer should set its net margin at a level it can defend competitively. Let’s look at the two retailers in question.
First, Tesco. We all know the appalling mess Dave Lewis inherited and there is no doubt he has done a terrific job in putting the company back on solid ground, structurally and operationally. However, back in October 2016 he promised the City he would restore Tesco’s net margin to 3.5%-4% by 2020.
Last week, Tesco delivered its latest results and they were very positive, reflecting a further big step towards recovery. Margins are now 3%. But Lewis’ margin delivery date is imminent and I believe this is behind Tesco’s decision to axe, or materially reduce, its service counters.
The rationale is that they are expensive to man and run, and customers are less than enthused by them. I believe this thinking is weak.
Tesco’s future fortunes depend on how well it differentiates itself from Aldi, Lidl and other value players. Service counters are central to that. Having trimmed costs somewhat in recent years, their ability to deliver attractive service counters has diminished.
The company should have had more belief and instead of cutting, invested more in its core point of difference. I believe 3.5%-4% is an uncompetitive margin in today’s UK grocery market.
The battle for the leadership of Superdry has been won by Julian Dunkerton. In the long, very public and acrimonious war of words, much was made of the fall in Superdry’s net margin from 19% in 2013 to 12% today. I don’t know any other mid-market UK apparel retailer today sustaining margins of 12%, let alone 19%.
From my perspective, a clothing retailer pitched at 19% is leaving itself competitively wide open, with no wriggle room at all. It is pitching its prices far too high and the minute there is even a small drop in its brand cachet, or one or two styles fail to fly, it’s in trouble.
“Pitching margins and prices right is critical. They need to be sustainable”
It will be forced to discount, tarnish its brand and a cycle of decline will be hard to arrest.
Pitching margins and prices right is critical. They need to be sustainable. They need to take the pressure off you having to promote more than is comfortable for your brand. And getting prices right optimises your stock turn, a more critical metric than ever in this market.
One of the very best retailers I know has told me the first thing he is thinking when he looks at a potential new product is how cheaply he can sell it. He could easily make more money short term by charging more. But he is a long-term player.
He is making a direct investment in future footfall by, in effect, making an implicit promise to his customers – to be totally transparent, fair and deliver outstanding value. And they come back in droves.