Retail Week reveals the highlights from our latest free-to-subscriber research into forecasts from the UK’s leading retailers. Joanna Perry reports.

retail2012

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Retail 2012 is the new, definitive report on the state of UK retail – produced by Retail Week, in association with Kurt Salmon.

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Talking to 25 chairmen, chief executives and other board-level retailers in late 2011 on their outlook for 2012, one could be forgiven for thinking they had been transported back to 2008, when the recession was about to take hold in the UK. The mood feels similar, but the outlook is even more tempered by the false dawns that have come since.

While retailers in general remain optimistic about the ability of their own businesses to execute as well as possible in the circumstances, their prognosis for the economy and sector as a whole is, at best, neutral.

One point that surfaced from this research is that there will be more retail failures during the year, and potentially some big ones too. Already in 2012, one of the retailers named in the report as being at significant risk, Peacocks, has gone into administration.

However, the financial problems of a few will allow their competitors to outmanoeuvre them, taking market share and perhaps sealing their fate.

Confidence issue

The indicators leading retailers to take a fairly pessimistic view of 2012 were beginning to make for particularly uncomfortable reading as 2011 progressed, particularly unemployment and consumer sentiment figures.

As several retailers point out, the fear of unemployment is almost worse for the sector than the reality of it. Should the UK have those two consecutive periods of negative GDP growth during 2012, the groups who were suffering most in 2011 could feel the pinch even more.

And there were very mixed views on whether the key events in 2012 – particularly the Olympic Games in London – can do much to stimulate consumer demand.

Most retailers we spoke with predicted that tactical behaviour, particularly around pricing, will continue to be evident. Though they are nearly all keen to move the conversation with their customers away from price, many worry that discounting is something that consumers have already become used to expecting. It is a trend that has grown for a number of years, and will not be reversed within 12 months.

However, what came out strongly from the interviews is that retailers feel consumers are extremely savvy about discounts, and can spot a genuine deal from an engineered one.

Online pricing has become particularly tactical and competitive, as it is most transparent to the customer. This has led retailers to a point where they are pricing differently by channel – particularly through the use of online special offers or discounts – even where they believe their customers want them to have consistent pricing across the business.

Cross-channel imperatives

However, the report is not all doom and gloom. From our interviews we were able to get a clear picture that multichannel remains an investment priority for retailers of all types. Tactical developments, especially around mobile and fulfilment, will continue to be popular.

In Figures

23 out of 25 retailers mentioned unemployment as a factor most affecting retail in 2012

16 out of 25 retailers mentioned inflation as a factor most affecting retail in 2012

For most, this investment will be to protect market share, while for a few, significant investment will allow multichannel developments that grow their business. Morrisons is the obvious one to watch, with its non-food online launch slated for the first half of 2012, but there will be others.

Mobile retail has taken off at tremendous speed throughout 2011, and this will continue in 2012. Even retailers that don’t trade online see its importance, because when they walk around their stores they can see customers checking prices on their smartphones and so they know it impacts them too.

In fact, one retail chief executive believes that by the time the economy begins to pick up in a meaningful way, mobile will have changed the way we shop forever. “We have been through recessions before and although this is a very long and painful one, we will get out of it in a year or a year and a half. But when we do get out of it, the consumer will have changed forever because of mobile technology and broadband,” he says.

The web also gives retailers access to international markets for relatively small outlays. By the end of 2012 it will be the norm for retailers of suitable items to sell internationally online, and many more will have developed country-specific sites for the territories where their brands do best.

Property problems

In the UK, several forces at play are making life difficult for those who want to promote high streets, not least the continued growth of online sales, plus the total costs of high street property compared with footfall and sales densities.

The Government’s own figures released to coincide with the publication of Mary Portas’s high street review paint a picture of both retail space and the number of stores declining by 2014, and high streets in secondary towns will bear the brunt of this.

One operations director suggests the Portas report is too late to reverse the decline: “I think the secondary high streets are finished, because you can’t sustain a store in a market where nobody wants to shop. What could happen in a low-rent high street is that new forms of retail entertainment will spring up.”

Retailers at the value end of fashion have found themselves exposed to the problem of too many stores in places where footfall can’t deliver the sales they need to cover their costs. A number we spoke to warned that their store portfolios are likely to shrink during the year, and other retailers said they would reposition stores and look for better rent deals even if they don’t intend to shrink store numbers overall.

However, the best shopping centres are thriving, and several retailers we interviewed were keen to open more out-of-town space during the year. Department stores and the major grocers are looking to open more space, albeit with new formats. For both kinds of retailers, smaller formats that bring convenience, particularly with a multichannel element, are attractive.

Product principles

The tough trading conditions are leading retailers in different sectors to focus on product innovation and product quality. In the same way they believe consumers know a bargain from an engineered deal, they also believe that consumers are more focused on value than ever before, and quality is a crucial element of good value.

Value-for-money products and product innovation – particularly through own-label and private-label ranges – were mentioned by many as being important to retailers’ success in the next year in all parts of the market. Both of these issues are framed by retailers thinking about how they can get themselves out of the cycle of discounting, which that market has entered, and make what they sell less directly comparable in a world with so much price transparency.

“I think it is very interesting how  Kingfisher, Tesco and M&S are investing in innovation capability and almost building their own R&D effort and product development, rather than relying on their suppliers to do that. I think we will do that in 2012,” comments the chairman of a fashion retailer.

The other area where major retailers hope to make a real difference this year is customer service.

Several have continued to invest in staff training during the lean years and even increased budgets where they have run programmes, for instance, to educate their store staff on how to think and act like multichannel retailers. Tesco’s recent pronouncement that it would be investing more in UK store colleagues – after a period when it has been reducing staffing levels – is indicative of a growing feeling that staff are crucial to attracting customers to stores.

Retail employment had started to drop off in 2011, and it is unlikely that there will be substantial if any rises in 2012, despite the renewed focus on customer service and the in-store experience.

However, at the head office level, there are two key areas where the industry reports skills shortages: multichannel and buying and merchandising. In both cases it is not that there aren’t people willing to do these roles, but there aren’t enough with the level of experience and competency to always deliver at a level that their employers would wish.

At-risk sectors

Three of the sectors within retail that our research highlighted as being those most likely to struggle have tales of woe that stretch back several years or more: electricals, entertainment and big-ticket items. However, the fourth, value fashion, has only begun to experience pain relatively recently.

The businesses named as those in trouble are the ones likely to have too many stores. But property costs aren’t the only reasons mainstream fashion retailers are struggling to adapt to the realities of the market. Some are still running their buying operations as though it is the boom years.

And these businesses often have huge debts to service in addition to their fixed operating costs. Several of those we interviewed were bold enough to name names. And the same names came up time and again.

But retailers outside of these four struggling sectors are not immune from problems. And indeed any business with too many stores, poor cash flow and large debts to service will face challenges to survive the year.

The positive upside of this is that retailers that can gain strength by not being weighed down by any of these problems should be able to weather any consumer confidence storm that lies ahead.

Kurt Salmon action points

Retail 2012 report sponsor Kurt Salmon provides action points for retailers based on the findings of the report. We highlight some of the most important to consider:

  • The store will remain your key asset, use it to showcase your brand and generate maximum profitability by addressing issues at  individual store level
  • Have a clear plan for how the supply chain infrastructure and operating model (including stores, fulfilment, planning, IT and sourcing) will evolve to support changing customer expectations, channels, volumes, and economics
  • Consumers are going to the shops less, take a new look at shopping behaviour and tailor your promotion plans to drive footfall in the new ‘downtimes’ and secure your share of the footfall in the peak trading times ie, post pay day
  • Have the facilities to gather feedback from your customers for each of your channels and customer engagement points
  • Adapt your store formats to support your other customer touch points and routes to market. Understand the appropriate level of customer service for each store and channel
  • Develop deep expertise in understanding product specifications and how to re-engineer products without impacting quality and value – this can reduce the cost of goods by up to 12%
  • Provide store managers with the performance management tool kits to manage their teams so they can deliver excellent customer service. Implement a continuous plan-do-review coaching routine at store level
  • Adapt your training programmes to react to the changing face of retail -– merchandisers need to understand how to allocate stock across channels and your store team has the know-how to maximise conversion through multiple channels
  • Develop your distribution and store processes to improve availability – the biggest cause of poor availability is inefficiency in handling product through the retail environment

 

Subscriber exclusive: Download your free report

Retail 2012 is the new, definitive report on the state of UK retail – produced by Retail Week, in association with Kurt Salmon.

Download your free report here