KPMG retail alert: retailers feeling the heat, and they can’t just blame the weather
Despite having worked for over 30 retailers in the last two years, it dawned on me while reflecting over the holidays that for the first time ever I did not enter a single high street shop for my Christmas shopping, and I’m pretty sure I wasn’t alone. The sector is changing at a rate not seen before with a multitude of factors impacting customer shopping habits and underlying retail performance.
While the unseasonably mild weather played its part in disappointing Q4 sales figures, we believe this is a smokescreen for increased momentum in the structural changes faced by the sector. We expect 2016 to be a watershed year for many of the best known names on the high street with store footprints contracting, consolidation amongst peers and perhaps even the return of the Company Voluntary Arrangement (CVA).
With trading updates coming thick and fast, now seems an opportune time to reflect on what we are seeing and what you should be considering.
What are we seeing in the sector?
There is almost too much to comment on in such a diverse sector but there a number of prominent trends:
– Consumer psychology: A recent Bank of England report showed that consumers put an additional £1.5bn on credit cards and unsecured loans in November but they are becoming more discerning. Prepared to wait for a bargain knowing the discounters will blink first in offering discounts (Next was one of the few to resist), the average consumer is prepared to split their shopping between retailers to gain the right blend of value and quality, as the rise of Aldi and Lidl in the grocery space demonstrates.
– Channel shift: John Lewis’ recent announcement that 40% of its sales over the period were online (up 21% on last year) is consistent with the seismic shift across the industry. Retailers have seemingly not yet to come to terms with the balance to be struck between the high street and online presence. Those that do appear to be coming out on top; it was notable that John Lewis like for like sales were up 5.1% in the 6 weeks to 2 January and that 35% of online orders were collected from Waitrose branches.
– Experience spending: A recent ONS report highlights that consumers are choosing to spend a higher proportion of disposable income on recreation, culture and restaurants. Retailers need to adjust by ensuring the high streets they occupy are an experience with a mixture of independents, pop-ups and coffee shops. Out of town outlets, originally designed with convenience in mind but now far less convenient than online shopping, must transform into entertainment zones.
– Increasing cost base: What is innovative is becoming the norm faster than ever. Next’s next day delivery was once market leading but is now seen as a hygiene factor. Retailers are having to invest even more to maintain a competitive advantage while seeing margins squeezed from increased costs to serve associated with the rise of online.
– Consolidation: Competitive pressures are forcing retailers to flex their operating models to the needs of today’s multi-channel ‘savvy shoppers’. Sainsbury’s recent pursuit of HRG is a potential sign of things to come as retailers look to consolidate with sector peers that complement their own capabilities.
Is this the new ‘normal’?
There is no doubt that fierce competition and unseasonable weather has affected 2015 performance but what’s new about that? Other reasons have been mooted such as the ‘Paris effect’ driving shoppers away from the high street but we believe this fails to articulate the extent of issues being faced.
For me, 2015 was a defining year in which consumers became increasingly savvy, managing their purchases around the promotional periods. Consumers have been trained to wait for the sales and with Black Friday here to stay, it is looking more and more like a buyer-driven marketplace.
I believe the new normal involves retailers not just understanding their demographic and socio-economic audience but ultimately understanding the ‘tribes’ and markets of one that they need to reach. “Your market might be everyone but you can’t market to everyone”; personalisation (including targeted discounting) is a must, integral in building and maintaining brand loyalty.
All in all, the sector is more dynamic than it has ever been and retailers need business models that enables flexibility to meet inevitable change and investors or lenders need to know what a good retailer looks like.
What does a good retailer look like?
From my experience, it is very clear what marks the winners out from the losers and their ability to adapt to this changing landscape. Overarching this is a commitment to hiring and retaining market leading people, able to consistently deliver excellence. Here’s a simple checklist:
– They have a simple, easy to explain offering and understand what their customers perceive as value; they have a service offering tailored to these needs and utilise personalisation allowing sales conversion to be influenced more extensively – the use of loyalty card information is key.
– Competitive online and mobile platforms which have yielded a significant increase in sales year on year in line with the market trend; the sales channels are integrated and are truly multi-channel.
– The role of the high street store is understood in the context of a multi-channel strategy although the store portfolio is actively managed and an appropriate balance maintained.
– Discounting strategy is clear; management understand the impact on cashflow, margin and cannibalisation of full price sales.
– Year on year margin has been at least maintained with any top-line pressure offset by a flexible cost base, managed with a firm grip – on the supply chain in particular. This is even more imperative in 2016 when the impacts of the living wage will be felt.
– Inventory levels are well managed with robust demand planning – there is limited legacy stock dragging the business back in the new season. A quick, reliable and cost effective supply chain is a given.
– Operations are streamlined to deliver consistent fulfilment during peak trading periods maintaining brand reputation while the higher costs to serve associated with online and mobile growth are adequately managed.
What next?
In light of the changing market conditions, we recommend that you keep a razor-sharp focus on the health of your retailers, challenging management on their plans to manage through any short term trading difficulties. In particular, I’d recommend scrutinising inventory days, creditor stretch and margin deteriorations as early warning indicators.
But there are also more fundamental issues which need addressing; the pace of change is such that retailers who don’t evolve will die. With Amazon launching one hour delivery in 2015 and stocking non-perishable groceries, is has the potential to be an industry disruptor on a scale not seen since the impact of Ryanair and Easyjet on the aviation industry.
More than ever, time needs to be invested in understanding the disruptive threats and developing a robust counter-strategy. I’d be looking to question management on a number of areas; e.g. what percentage of investment is made in the online and mobile experience, what percentage of their online orders use click and collect, can management concisely describe an understanding of their personalisation strategy? You may even think about mystery shopping like we have to immerse yourself in the experience which is offered.
While 2016 presents many challenges, those retailers who are on the front-foot in confronting the difficulties and who display a willingness to adapt will see the next 12 months bring opportunities to build significant competitive advantage over their less focussed peers.
