Retailers are adjusting to the new post-recession market, which means never allowing their businesses to stand still. By Joanna Perry
Last year saw some significant changes in the Retail Week Power List, and the subsequent 12 months have seen many more power shifts. At the same time, external influences such as input prices, VAT, geographic disparities in consumer spending power and the continued uncertain outlook are making for a bumpy ride. With this in mind, when we invited a group of retailers to the House of Commons to take the temperature of the industry, we expected much of the conversation to concern tough trading.
But while retailers have one eye on the problems they already face, mindful of the fate of those who have been myopic, they are also looking out for new threats and opportunities.
Conservative MP Nigel Evans opened the discussion, describing some of the challenges his own family’s retail business has seen of late, not least the rising cost of fuel.
Carpetright group commercial director Martin Harris said: “It’s the start of my quiet season. There has been a marked downturn because of VAT and things like rising fuel costs. We are seeing less and less travelling to out-of-town sites.”
Harris pointed out that the cost of out-of-town property in the UK is still out of kilter with the rest of Europe: £20 to £30 per sq ft, compared with £6 per sq ft on the Continent. He said any retailer trying to expand is going to get some store locations wrong, and in the UK they are penalised for trying to expand by having to pay rates on empty stores when they misjudge demand.
John Lewis Partnership finance director Marisa Cassoni agreed that the cost of fuel is influencing traffic to out-of-town stores, but it is less of an issue for stores in urban areas. However, such issues, combined with the property costs Harris spoke of also impact John Lewis. “The economics of running a full-line department store mean that it is quite difficult to run with 330,000 lines [in a new store]. So we are going for smaller stores,” Cassoni said.
Meanwhile, the effects of the crunch are only now beginning to be felt by The Conran Shop. Financial director Debbie Wooff said: “Our like-for-like sales were up last year. Prior to this year, if you had a mortgage and were secure in your job then you had more disposable income.” In 2011, and with quickly rising inflation rates, this has changed and Wooff said it’s tougher for a business like The Conran Shop. She was particularly keen to see the housing market pick up again.
Special offers and promotions have been a strong feature of all parts of the retail industry in the past couple of years. And though retailers talk of a desire to move away from discounting, it still drives the volumes many retailers crave.
“In food, we see that customers expect to be rewarded for loyalty,” said Cassoni, pointing out that though Waitrose customers’ basket spend is the same, they expect more for their money.
Similarly, TM Lewin chief financial officer Mike Trotman described the shirt retailer’s recent trading: “March footfall was down and April was noisy with the royal wedding, weather and bank holidays. But they do respond to a deal and footfall and conversion goes up.”
Evans noted that ecommerce is one of the bright spots of the market. He said that while the internet is
dramatically changing the way the UK does business, UK retailers are spearheading that change, rather than waiting to have change forced upon them.
One example of this is the speed that UK retailers have rolled out their offer to international customers online. Cassoni said John Lewis is opening up its website to certain international audiences to make sure it understands the markets.
AlixPartners director Nick Bradley added that the web is crucial for international growth: “One retailer I’m working with is delivering across Europe, and it only sells on a UK website and only accepts Sterling. It is not too difficult to get a footprint into these territories.”
TM Lewin has also been able to use this burgeoning online international market to offset some of the domestic pressures its business faces. Trotman said: “The challenge we all have is big movements in input costs. Either you have to raise prices or sell more. We’re looking at pushing international pretty aggressively; about 50% of our internet sales are overseas.”
American Express director of business insight Jason Quirk said spend online and from tourists coming to the UK have both been strong during the past 12 months.
Harrods CRM director Chiara Varese said the tourist effect is mixed: “From international travellers such as Chinese or European customers, spend is strengthening. Tourist numbers are holding up but the average spend is not as good. And internal tourism is decreasing, probably due to the internet and petrol.”
However, American Express’ data takes the industry’s belief in the higher value of multichannel shoppers one step further. Between 2007 and 2011, the percentage of shoppers buying three or more categories online doubled to 22%. Quirk explained that not only do multiple category online buyers spend more online, and more frequently, they also spend more offline too.
The service dilemma
Quirk said some internet retailers have raised the bar in terms of customers’ expectations. To match this, the in-store experience must stand out, for example, Kingfisher Group now runs DIY courses to deliver additional value to its customers.
And despite the pressures retailers face, there was support in the room for retailers offering real service. Bradley said Majestic Wine’s efforts to bring people into its stores to learn about wine, similar to the butchery courses offered by London independent The Ginger Pig, give customers a more discerning taste, and so a reason to keep coming back.
And Skillsmart Retail chief executive Anne Seaman pointed out that the growing importance of multichannel retail is having an impact on training, as store staff need to be able to deliver great service.
She said keeping store staff up to speed with the developments in the multichannel and service experience is an issue. “What we need is to invest in a higher level of skills, and [for staff to] have a bit more understanding of the whole retail offer.”
Trotman added that though it is tempting to try and drive traffic through deals, “we’ve got to emphasise great quality a bit more, and the value it offers. But not everyone is going to make it”.
Bradley floated the question that many retailers seem to be asking: “Does the topline matter as much as it used to, or is it the bottom line and cash generation that’s important?”
Once topline growth becomes less of a focus then how many stores a retailer needs is the next obvious question.There was agreement that more space is not required.
Instead, retailers are being challenged to use their existing assets better, something Bradley referred to when he pointed out that retailers must now think scientifically about what they do with the stores they have to facilitate growth.
Such scientific thinking means retailers must always analyse what they think will come next - what will be a threat to their business, and where the next opportunity lies. Adapting to the quickly changing environment and customer demand is perhaps the biggest challenge of all.
Bradley gave the example of HMV Group as a retailer that found the pace of change in its markets wasn’t possible to imagine or anticipate: “In 2007, it drew up a strategy to sell a wider product range through its stores, turnaroundWaterstone’s and do more with live music - and it worked for three years.” HMV Group then decided to carry on
with this strategy, but it didn’t continue to work in a market that had evolved rapidly.
If the first wave of retail business failures in the recession were caused by long-term business problems, then the second can be characterised as a failure to step up to quickening pace of change. One only need look to the meteoric rise of some of the most forward thinking retailers in this year’s Power List to see that, at the very least, keeping up with the crowd is crucial.