From consumer habits to store refits, sourcing to credit insurance, the recession has brought profound changes to the retail world that are likely to be permanent. Charlotte Hardie reports
Anyone “holding their breath waiting for things to go back to the way they were is mad”, Asda chief executive Andy Bond said earlier this year. Everyone knows that this recession is having a profound effect on the retail sector. But what many are yet to realise is that in a lot of cases it will have changed the retail landscape for good.
Of course, after the recession in the early 1990s many people said the same thing. But there is a fundamental difference with this consumer downturn – not least because every paper you read, every news channel you watch and every commentator you listen to will tell you that it is the worst recession since the Great Depression.
Everyone knows, more to the point, that it could have been avoided. Had bankers been more judicious and had the entire population been more cautious in its attitude towards spending, we wouldn’t be where we are now. And therein lies the difference – everyone, from business leaders to consumers, is changing their habits – be that around business strategy or personal spending.
This time around, not everything will prove to be cyclical. And the sooner retailers’ adapt to the fact that much of what was commonplace
only 18 months ago will never return, the better. Here, we look at the aspects of retail that are gone for good.
The spend-happy consumer
Can’t afford it? No problem – stick it on the plastic. So went the shopping mantra of millions of shoppers during the boom years. The result is a total UK personal debt of £1.5 trillion which has left a very bitter taste in people’s mouths. Consumers have been scarred. Yes, when the economy improves and unemployment goes down people will once again treat themselves more, but they will no longer make frivolous purchases.
There will be no going back to the spending habits upon which retailers have capitalised in recent years – businesses need to prepare themselves for an age of sobriety. Deloitte head of retail Tarlok Teji says: “Generally, we are entering an era of austerity. That’s not eating corned beef out of a can, but it is about being conscious about what we’re wasting.”
Complex management structures
As retailers became more global, they also became more complex, which made trading a business through a downturn even more taxing. Now it’s all about a return to traditional retailing values that will be firmly etched in their minds for good.
Retailers have reacquainted themselves with the four core retailing principles: costs, cash, people and stock. Rowan Bradford of business psychologists Kaisen Consulting says: “When the going gets tough we see seismic shifts in how things are done.” But, she adds, the human brain will interpret the recession in an emotional, not rational way. She explains the notion of “self-attribution” – in other words, many of those businesses that survive the recession well are bound to congratulate themselves on their greatness, while those who lose out will blame it almost entirely on market conditions.
Landlords’ dominating power
There has been a sea change in the world of retail property that will prove very difficult to reverse. As monthly rents and turnover rents have not only become more openly discussed but in many cases achieved, it signifies a major, long-lasting improvement in relations between the two parties. Savills head of commercial research Mat Oakley says: “Things always swing backwards and forwards, but a mature relationship will come out of this. It’s not going to disappear.”
He adds: “I suspect that once the Pandora’s Box of turnover rent and monthly rent payments has been opened it will be difficult to close.”
Other possibilities for the future include the end of the 25-year lease, replaced by a 15-year tenure. More than ever before, landlords are realising they must be more flexible in accommodating retailers’ changing fortunes.
Poor-quality retail offer
The retailers that survive this recession will be the ones that should have survived. The ones that shouldn’t will have fallen by the wayside. The result will be a better retail offer and a more refined high street.
The Future Laboratory director Tom Savigar says: “Those retailers that remain will be the ones that have brand meaning for shoppers. They will represent what people want.” Customer service levels will improve because of the fight for customer spend and the sector will be more cohesive, he adds.
“Retailers will come out of this bruised and battered, and of course it will still be hugely competitive between them, but it will be consolidated,” says Savigar. “They will want to share their war stories and we will find them collaborating more.”
Shoppers are now more principled than ever about their views on businesses. You’ve only got to look at the banking sector to see the public’s fury about those who abuse the rules.
People are aligning themselves with brands that they trust and stakeholder engagement has never been more important. As Teji says: “It’s not like banks where people can walk in and pull their money out, but they can shop elsewhere.”
People will vote with their feet. If businesses don’t meet those principles, they will have no hesitation in spending their money at a competitor. “People are more demanding about standards, and they’re coming together and becoming a lot more vocal – it’s beginning to change the shape of retailing,” adds Teji.
The private equity obsession
The retail sector will never again witness the plethora of private equity deals that were taking place in the market only two years ago. Back then, every private equity house going wanted a retail business on its books. Of course, the deals will continue, but not at the pace of before and they will be far more scrutinised.
OC&C Strategy Consultants partner Richard McKenzie says: “It’s a case of once bitten, twice shy. It got to the point where there were some over-exuberant business plans put together.”
In addition, private equity houses will struggle to get the same level of debt to match the deals that were being made before the downturn took hold, and for those deals that do go ahead there will be fewer remuneration incentives to grow the bottom line so aggressively.
Extensive store refits
If retailers have learned anything over the past few months, it is that it’s possible to get more for less. They have had to rein in expensive refit programmes of yesteryear and focus on other ways to give stores a facelift. Paul Brooks, joint MD of display and shop fixtures supplier SFD, says that rather than overhaul a store’s shell, it is now all in the visual merchandising – a point of sale change here, an acrylic plinth there, and the look can be transformed.
Brooks adds that he now gets fewer briefs for fixed designs. Instead there is demand for designs that can be adapted in the future at minimum cost. Some retailers will always have the money for expensive refurbishments, but most realise that the accompanying hefty price tag is not always necessary.
The store card love affair
The average APR on a retailer’s store card is still staggeringly high – between 25 to 34 per cent. Now that many consumers are resisting the urge to buy on tick wherever possible, few will be happy to pay these eye-watering prices ever again.
Retailers would argue that consumers can pay off their balance in full, thus not incurring any interest while enjoying other benefits such as card-holder shopping evenings, but shoppers will still view these rates as insane. The mere sight of them in the store card contract’s small print will be enough to deter them completely.
As Mike Godliman, director at retail consultancy Pragma, says: “When times were good, people didn’t take much notice of these rates. But unless retailers start to offer a reasonable interest rate, store cards might well disappear.”
Over-reliance on one supply source
Many retailers had a tendency to put all their eggs in one basket when it came to sourcing, and Asia was the popular destination of choice. However for many retailers an over-reliance on one location has come back to bite.
Asian suppliers have been among the worst hit by the downturn and businesses have been going bust all over the region. Consequently, retailers have had the headache of having to quickly find alternative partners. Sourcing from Asia also often involves long lead times, and Pippa Wicks, managing director at
consultancy AlixPartners, says this has posed added problems for retailers, who have had to reduce orders on the back of sluggish sales at home.
There is also the problem of the weak pound, which is set to push up prices for Far East fashion imports as the year progresses.
A failure to embrace online
This recession has proved once and for all that online must form an integral part of retailers’ strategies. People are spending more time at home, more time online and more time browsing potential bargains. PricewaterhouseCoopers retail partner Olivia Gillan says: “People’s purchasing habits have changed fundamentally during this recession.” She adds: “In terms of market share, online is outperforming massively.”
Savigar says this also means home delivery standards will be far superior post-recession. “With online shopping, the doorstep is often the only touch point with the retailer.” He adds that this will lead to an increase in retailers running their fulfilment operations in-house,
giving them more control over their
customers’ experience of their brand.
Shoppers have discovered the bargain delights of Aldi, Lidl, Primark, Poundland et al, and their love for discounters is here to stay. Mike Godliman, director at retail consultancy Pragma, says: “Once customers start to trade down, it takes a long time to start to trade up again.”
Moreover, they are not viewing it as a sacrifice, particularly as the discounters have expanded their offer. By the time the recession is over, the discounters will have capitalised on their expansion.
Last May, TNS grocery market share data showed the extent to which Aldi and Lidl were already prospering. Aldi, for instance, showed a phenomenal 19 per cent growth in sales to take its market share to 2.8 per cent, up from 2.5 per cent the previous year – what’s more, its growth had come almost entirely from new customers.
Overlooking credit insurers
Few retailers gave a second’s thought to credit insurers before the recession, but a lack of cash management discipline led to major problems for those that hadn’t thought it all through. PricewaterhouseCoopers retail partner Olivia Gillan says: “Before, the whole concept of credit insurance was under the radar.”
The demise of Woolworths and MFI has proved that the withdrawal or reduction of credit insurance can be the nail in the coffin for a retail business. AlixPartners managing director Pippa Wicks says: “A lot have been caught out. Credit insurers will be a permanent stakeholder that retailers have to think about.” Retailers’ reliance on credit insurers has also highlighted yet again the importance of keeping cash in the business.