People may be watching what they spend, but that hasn’t saved value specialists from collapse. George MacDonald surveys their prospects as they enter another tough year
The credit crunch is biting, consumer income is being squeezed, house prices are slipping – such a dire set of circumstances should be driving shoppers into the arms of value specialists.
But while the mighty Primark manages to steamroller on, lauded for cheap-as-chips garments and real fashion nous, its success is proving hard to replicate. Many low-price stores are desperately feeling the pinch. Cheap goods retail is proving a cheerless spot to occupy on the high street for those that compete on little other than price, as highlighted by a lengthening list of casualties.
Bargain bookseller The Works last week became the latest, but probably not the last, price-led retailer to reach crisis point as it called in administrators. The Works may have 317 shops and, according to the most recently available accounts, annual sales approaching£100 million, but its discount model was not up to the challenge of changed retailing conditions. Similarly, Ponden Mill’s discount heritage could not stave off collapse.
MK One, the value clothing chain backed by Icelandic investor Baugur, reportedly suffered a plunge in sales from£169 million to£118 million in the year to January 27, 2007. And Ethel Austin – one of the longest established names in the sector – had to be refinanced last year.
In just 10 years, low-price and discount retail models have gone from being the next big thing to almost passé. A decade ago, as Marks & Spencer floundered, a new breed of value retailers were regarded as the inheritors of the high street bellwether’s mantle.
The 1998 flotations of Matalan and New Look were followed a year later by Peacocks’ IPO, as eager investors bought into the phenomenon. In the following years, businesses such as Ethel Austin, MK One and discount department store group TJ Hughes were among those snapped up by private equity – as indeed were the three floated companies.
But low prices are not enough today. The strongest of the value groups, such as New Look and Peacocks, have added strings to their bows to ensure continued appeal. The weaker, still almost entirely dependent on price positioning, are at risk of being marooned and eventually submerged by the turned retail tide.
Price will always be one of the most important weapons in a retailer’s armoury. The problem for low-price specialists is the extent to which intense price competition – and its close relative, value for money – has become a mainstream fixture on the high street and retail parks. Whether it is Asda’s well-established George clothing business or the good, better, best model adopted by so many store groups, value is omnipresent.
Verdict Research consulting director Neil Saunders says: “Low prices have become ubiquitous. It’s now a given for consumers and not a differentiator for driving footfall.” This trend is visible in Verdict’s latest Consumer Satisfaction Index, released last month, which shows that price has become steadily less important to shoppers since reaching a peak in 2004.
The ubiquity of value was plain to see at Christmas, as two-for-ones, secret Sales and money-off promotions proliferated. And nowhere has the shift to value been more evident than at M&S, where the price architecture has been overhauled radically by Sir Stuart Rose. Lower prices, as distinct from discounting, were among the reasons M&S suffered a like-for-like sales fall over the festive season. In January’s trading update, Rose reported general merchandise volume growth of 5 per cent and price deflation of 6 per cent.
Despite City horror at the seasonal fall in like-for-likes, Rose was unapologetically emphatic that under his leadership and as a mass-market retailer, M&S would never again lose sight of the wider price environment in the way that it did so disastrously in the 1990s. So ferocious have been some of M&S’s entry price points that at least one big general merchandise group with a value positioning reduced the price of some of its products to match M&S at Christmas.
Off the Scale
The problem for smaller value retailers is that, dwarfed in scale by M&S or other giants such as Tesco, Asda, Argos and even Woolworths – which has hailed its value Worth It! range a great success – they are unable to generate the economies of scale or mirror the assortments on offer.
The case of The Works illustrates smaller value groups’ dilemma. Peter Saville, partner at The Works’ administrator Kroll, cited “ever increasing competition” as well as generally difficult trading conditions as reasons for the retailer’s problems. Anyone who went into a branch of Waterstone’s or WHSmith in the run-up to Christmas would have seen what Saville meant. Both booksellers mounted aggressive promotions on the season’s big titles and both emerged as winners.
In such a fierce promotional environment, there was simply less reason for shoppers to seek out a branch of The Works in order to find keenly priced blockbusters or other titles.
Although Verdict forecasts retail consumer spending growth of 2.6 per cent this year to £289 billion, that is down on last year’s likely 3.7 per cent increase. The discretionary proportion, which is the biggest, at £164.2 billion, is likely to come under increasing pressure.
That might sound like good news for value specialists, but they are not necessarily protected. While low-price stores such as Poundland or Aldi are likely to thrive, retailers in other categories may not, because their product offer – however low the prices – is regarded as inessential.
As Saunders says: “We all need to buy food or household products, but fashion and music, for instance, are more discretionary – it’s harder to hold volumes.” So, as straitened economic conditions push up shoppers’ price sensitivity, it is likely that they will increasingly ask themselves whether they need to buy certain products at all.
Another threat to many of the smaller value retailers is the growth of multichannel retailing. Giants such as Amazon have forced prices down while setting standards in service and convenience, and the bigger specialists – such as New Look and Peacocks – are becoming more active online. Tesco, for example, is now selling its value clothing online. Meanwhile, stores such as Matalan, Ethel Austin or MK One do not have transactional web sites.
The availability of value has resulted in other changes to the consumer terrain. Verdict’s Consumer Satisfaction Index shows that shoppers are now placing greater importance on “added value” factors such as service and expert range editing by retailers. Such changes in shopper behaviour can be hard for low-price retailers to adapt to because, in the main, the economics of their business models make it difficult or impossible to invest in, for instance, high service standards.
Tellingly, some of the value retailers best positioned to thrive are those that have long since made big changes to their business models so that, although key, price is not the sole appeal to shoppers. New Look, for example, makes great play of low prices, but has carved out enviable fast-fashion credentials that distance it from clothing rivals without a similar ability to respond to changing styles. Similarly, Peacocks today is a very different business from what it was a decade or more ago.
Peacocks chief executive Richard Kirk says bluntly: “We realised there was no future in being just a low-price retailer, especially with the rapid expansion of Primark.”
Kirk says: “In 10 years, we’ve gone from being a value retailer with poor service and environment to a fashion retailer with value prices.” Peacocks typically installs between 30 and 50 new womenswear lines in its shops every week. And the development of the Bonmarché chain – which caters for older women – alongside eponymous shops also helps distinguish Peacocks from many of its competitors, Kirk adds.
Changes have been made to the retailer’s shopfit, quality and service and, despite the constant commitment to low prices, Kirk says that “tweaks” to price architecture and fashionability have allowed him to move average selling prices up.
The chief executive of one big value retailer is pessimistic about the outlook for many of his smaller counterparts, some of whom he believes have only been kept afloat by supplier support or extra investment from owners. “They’re small shops – they can’t generate the sales and profits per square foot that you need,” he points out.
Saunders concurs. He observes: “There isn’t enough room for all the non-food retailers, as the grocers eat into non-food and significant players like Primark have the economies of scale.
“If your proposition is one-dimensional, you don’t have much room for manoeuvre and the outlook for a large number is bleak.”