We will see the usual cost-cutting but, in general terms, the retail industry is fairly lean and mean as it enters this downturn. There will be a wave of industry consolidation as merger and acquisition activity increases.
Retailers that have been effectively priced out of deals over the past five years by private equity buyers will dust off acquisition business cases, as sellers’ price expectations fall and some have no choice but to sell or face extinction.
As industry consolidation proceeds, expect to hear more of a word that had become somewhat discredited through overuse: synergies will be back on the agenda.
Acquirers will seek synergies in four main areas: headcount reductions, as head office functions are combined; elimination of duplicated infrastructure (distribution centres, call centres, IT systems, head offices and parts of the store portfolio); economies of scale in purchasing; and some acquisitions will provide opportunity for revenue upside, as ranges are consolidated and cherry-picked.
Mothercare’s acquisition of Early Learning Centre, the purchase of World Duty Free by the owners of Alpha Retail and the Co-op/Somerfield deal are harbingers of a likely wave of synergy-driven mergers.
One feature of this downturn is that it is the first that the retail industry has faced in the multichannel age. Expect many retailers to take a hard look at their store portfolios and conclude that they need to chop off the tail.
We will move from a period where mature retail formats have looked for added space as a way of squeezing out a few points of top-line growth each year into an era where they will attempt the reverse – to reduce total selling space year on year to squeeze out an additional point or two on the bottom line. The implications for the property market – particularly for secondary and tertiary locations – are likely to be severe.
Understanding customers and anticipating their response to the downturn will be critical. A general trading-down can be expected, but the best retailers will understand and respond to customers and their needs in a more sophisticated way.
Retailers must sharpen their understanding of the consumer behaviour underlying their raw sales numbers. And, with discretionary investment budgets squeezed, those such as Tesco, which has the data collection and analytics capabilities in place already, will be at a critical advantage.
The most important lessons from previous downturns still apply. Those that really understand their markets and their customers and act upon that understanding can survive and prosper.