Retailers are in unknown territory, but it is areas such as cost-cutting and multichannel that will mark out the winners. Nicola Harrison reports
Retailers have become experts at adapting to tough trading conditions in the past few years as they battled unprecedented economic turmoil.
But this year, some fear, more dramatic change is afoot that will force retailers to acclimatise to a trading environment they have little experience of.
Last week Lord Wolfson, boss of bellwether fashion group Next, stated in stark terms how the retail landscape is changing and how he sees the year playing out, not just for Next but for the sector as a whole.
As he issued Next’s full-year results Wolfson warned: “Retail is going to be different over the next few years. The consumer environment is likely to be dominated by the challenges of global inflation, public sector cuts and limited growth in consumer credit.
“These factors mean that retailers cannot plan for the never-ending growth in like-for-like sales that many have enjoyed over the past 15 years.
“The year ahead will be yet another challenging year for retailers and, if anything, things are likely to get worse before they get better. Retailing will feel like walking up the down escalator - we will have to work hard to stand still.”
However, Wolfson also emphasised that retailers can “still deliver very healthy returns for their shareholders”. But he said: “We will need to think differently about how we manage and grow our businesses. New avenues of growth, innovative ways to control costs and careful management of the healthy cash flows that retailers tend to generate will become increasingly important.”
His comments were followed by figures from the Office for National Statistics that seemed to confirm tough conditions. In February, the ONS reported, volumes excluding petrol were down 1% on the previous month - a weaker-than-expected result. Retail sales by value, excluding petrol, declined 0.4%.
The lacklustre sales performance can be partly explained by falling spending power. The latest Asda Income Tracker showed last week that in February family spending power fell by £11 per week, the largest fall on record. A typical family had £169 per week to spend in February, 6.2% down from £180 this time last year.
Even strong retailers such as John Lewis have seen sales come off the boil. And Sainsbury’s market-beating performance of recent months has levelled - like-for-like sales excluding petrol rose 1% in its fourth quarter.
Sainsbury’s chief executive Justin King said January “showed the normal signs of customers retrenching after Christmas” but observed: “The unusual part is that this behaviour continued into February, and we think it will continue for the whole of March.” King maintained: “We have to take things one month at a time.”
A changing landscape
So are we seeing another kind of transformation in retail now? One in which, as Wolfson says, retailers must get used to the idea of declining like-for-likes and in which ever more ingenious methods of cost control will be needed?
Yes, says Richard Hyman, strategic retail adviser to Deloitte. “The economics of retail are changing,” he says. “It’s the end of the volume-driven retail market everyone’s been living in for the past 15 to 20 years. Like-for-like growth is going to be significantly more difficult to achieve even for strong players. And after several years of relentless cost reduction there will have to be significantly more.”
Hyman is concerned that this year will be “significantly worse” than last and that next year will be “worse still”.
“Interest rates haven’t gone up yet but they will,” he warns. Any rise will leave consumers with even less money in their pockets.
But the real problem for retail, according to Hyman, is that many current retail managers have never had to trade through a market when volumes have not been growing. “It’s a massive, massive challenge,” he says. But it is one that retailers will have to adapt to.
As Wolfson says, cost management will continue to be a focus. Cost cutting has become second nature to retailers now, but after more than two years of stripping expense out, how much more can be done before it becomes self-defeating? Arden Partner analyst Nick Bubb says: “It’s getting hard now. That’s why profits are falling further for retail.”
Hyman argues that retailers must get smarter in managing costs. “Knee-jerk promotional activity is reactive and not proactive,” he warns.
Next has come up with new ways of saving costs, including an initiative designed to curb theft. Next product tags used to contain basic information such as ‘black trousers, size 12’. Under Next’s new system, the tags will contain a unique 15-digit reference number for that particular product which, when scanned, will show whether it has ever been sold.
The new system is designed to prevent shoplifters from stealing clothes then trying to return them for a refund. A Next spokesman called the initiative “completely revolutionary” and said that Next’s policy on taking costs out of the business would not be “about headcount” but about trying innovative approaches that make a big difference.
Other retailers are also looking at ways to be more efficient. Marks & Spencer is overhauling its logistics operation, which will bring cost savings as well as improving factors such as availability and customer service.
Fashion group Aurora is piloting dual-branded shops - it has opened a Warehouse store trading above an Oasis shop in Cheltenham and is likely to do more if successful. The shift reduces property costs - usually the second largest outgoing for a retailer after people.
Retail Week Knowledge Bank director Robert Clark says store chiefs must look at their property portfolios closely. “Retailers have got to cut out underperforming stores quicker,” he advises.
Many retailers are taking advantage of upcoming lease renewals by renegotiating terms or even pulling out of stores altogether. Fashion group Arcadia and floorings giant Carpetright both plan to renegotiate terms or close chunks of their portfolio, and HMV is shutting stores.
DIY giant Kingfisher is ramping up its common sourcing programme across the group, which should bring economies of scale and help drive down prices.
But as well as keeping costs down, retailers need to develop their businesses in order to survive and thrive, and there are many examples of how that is happening.
Avenues for growth
Kingfisher, which owns B&Q, believes multichannel is crucial to its growth plans. Kingfisher chief executive Ian Cheshire calls multichannel the “future of retail”. He said: “It’s the next big investment opportunity for us.”
Last month B&Q revealed it was investing £35m in a new integrated digital platform, which will be fully launched by 2013. A mobile transactional site will debut in the second half of this year, and the retailer is doubling the number of products available for next day delivery by autumn.
It is also expanding its bricks-and-mortar business, going deeper into its existing territories, including the UK, as well as exploring opportunities to open in new international markets.
Despite all these plans to grow turnover through new avenues, Cheshire has not lost sight of like-for-like growth. He says that in the home improvement category there is a great opportunity to woo would-be customers who perceive DIY as too difficult to approach. “There is spend waiting to come into our market,” he says.
Cheshire has attempted to grab some of that spend from fearful DIYers by running home improvement masterclasses in B&Q stores. B&Q wants to encourage people to pick up a power tool with confidence. Classes range from tiling to changing taps and putting up shelves.
Other retailers are looking at completely new revenue streams for growth. Stationer Ryman is expanding its business-to-business arm, while Carpetright has developed its insurance business in recent years and struck deals with housebuilding firms to carpet new homes.
Hyman says that in order to grow, retailers will have to capture market share. And to do that, he says, retailers “need to get much better at selling”.
Clark agrees, but adds that it will be “more subtle” than just straightforward selling. Although he says better training of staff will help, a stronger sales approach must also encompass a more sophisticated approach in areas such as merchandising, as well as better communication with customers online.
He adds that in a world where retailers cannot count on volume or value growth, they must compete in other ways, and that having a “more direct dialogue with ever smaller subdivisions of customers” will be a key theme in this new retail environment.
John Lewis is trying to attract cautious customers by scrapping its 28-day return period and replacing it with a “never-ending refund”. The department store chain wants the scheme to give customers, who are being careful with their spending, more confidence during tough times.
Greetings cards retailer Clinton Cards is to launch a loyalty card scheme in its stores to keep shoppers coming back.
And Clark says that on the property front retailers can making space work harder as well as cut costs. He says store groups should look at “carving sales areas up into different offers”, through concessions, for example.
So there are many actions retailers can take to help grow share while keeping costs under control, but Hyman points out that times have changed so much now that store chiefs can no longer look to the recent past to help inform their decisions, such as when buyers look at how much stock was sold in the previous year as a way of gauging the likely take-up rates in the current season.
“Recent years won’t be much of a guide as to what the future will look like,” says Hyman. “What is most challenging is that those numbers don’t mean much anymore. Retailers will be trading in the dark.”
He says these conditions could be here to stay. “It’s about structural change. The market is mature now. There’s more capacity in UK retail than ever before.”
Clark says UK retail was “always going to be due for a maturing period”, with or without the global recession. He observes: “The UK market has reached a relatively mature level. In the 1990s and early 2000s there was a lot to play for, after pent-up demand after the 1970s and 1980s, when the UK lagged behind continental Europe in consumer consumption. It always had to level off and has now caught up.”
Hyman does not believe that particular sectors will be dramatically more affected than others by the change in the landscape, although any retailer closely connected to housing transactions may struggle more.
And while the next year will be tough, there are reasons to be cheerful. King says April may be stronger due to Easter and the royal wedding, which could boost consumer sentiment.
Clark says the Olympics next year is likely to do the same. And the Budget last week had a few ingredients to cheer consumers, including a drop in petrol taxes and an increase of about £600 in personal allowances - the amount of income people can earn before having to pay any tax.
But retailers will have to wake up to the new reality. Hyman concludes: “The writing has been on the economic wall for some time. It’s very difficult to overstate the significance of this and how profound a change we’re seeing.”
The Consumer Prices Index rose from 4% to 4.4% in February
Cotton prices have soared 131% since March last year
330,000 public sector workers could lose their jobs over the next four years
Falling in february
The GfK NOP index stood at -28 compared with -14 a year before
Like-for-likes fell 0.4% across the sector*
The average family had £169 per week to spend compared with £180 this time last year**