The news that Ocado is planning a move into dedicated non-food sites for categories such as pets, baby, health and beauty and home and gardening got me thinking.

The news that Ocado is planning a move into dedicated non-food sites for categories such as pets, baby, health and beauty and home and gardening got me thinking.

In the new digital age the physical constraints on a retailer have been removed. Does this mean long-standing, tried-and-tested rules of good retail practice (for instance product adjacencies or ranging etc) are redundant?

Traditionally a retailer would establish a core competency in a specialist area, ideally becoming the category killer, before even considering range extensions.

Arguably Amazon did this with books first while Ocado’s core competency is efficient home delivery – it does not own any brands.

Brand extension can be a sound strategy to leverage the value of a strong brand in another market where it has resonance. But putting a brand in the wrong place can be destructive.

The downfall of George Davies at Next stemmed from the idea that you only had to put the Next name on a product or fascia and it would sell. Ironically it was Davies himself who had previously explained to me why this strategy was flawed – he advanced the theory that, subconsciously, customers have a figure in their head about how much it is right to spend in a particular shop or on a particular brand.

Thus range extensions tend to produce substitutional sales rather than adding incremental sales. They also, of course, run the risk of blurring the image and diluting the brand. Many successful retail brands, such as Ted Baker and The Body Shop, have always jealously guarded their brand integrity rather than chase sales.

Rather than risk the equity of an established brand many retailers choose to make a complete break and build a new one. Gap created Old Navy, but had first tested it as Gap Warehouse. Perhaps the best example of this approach is Urban Outfitters and its sister company Anthropologie.

It can be a slow process establishing a new brand, as Jack Wills has found with Aubin & Wills, but in today’s high-speed digital world the pendulum may be swinging in favour of creating new brands rather than attempting to resurrect tired old ones. Currently, in this context, should DFS sell more than sofas? Should Carpetright be selling beds?

I don’t have all the answers but one thing is indisputable in terms of financial health – being a brand rather than a distributor of other people’s products.

The latter have no defence against price competition and the difference in returns has become very marked. Measuring profitability in terms of EBITDA as a percentage of sales, brands (such as Next or Ted Baker) characteristically earn a 15% to 20% per cent return whereas ‘commodity’ retailers (such as Kesa or HMV) struggle in low single figures.

This is a gap that can only get wider. I worry about the financial models for many of the new ‘pure’ internet players – Amazon and Asos may be able to break the mould but even they may need to buy their own brands.

  • John Richards, Retail Consultant, McQueen