I have been covering a rather large range of topics over the last few weeks. Some of them made the headlines again more recently. A couple of examples:
Despite all the execution risks involved Theresa May approved the Hinkley point project. As mentioned in my post published in April, she did not have the hardest role, however: EDF (and the French State) will have much more to lose.
Ecommerce is forming an increasing share of our daily purchases, with 48% of French people said to have made at least a clothing purchase since the beginning of the year. Traditional retailers such as FNAC, Carrefour, Lecler, Darty etc. account for 8 of the top 15 ecommerce platforms in France. On the other hand, the lack of ecommerce capabilities has been highlighted as one of the main reasons for Primark’s disappointing performance this quarter.
In my next post I will address ‘unicorns’, the not so rare anymore start-ups valued at $1bn or more. I will focus in particular on the term ‘valuation’; there are interesting thoughts to have in mind when dealing with this dangerously hot topic.
5. How can retailers use innovation to stop the decline?
To embrace the change rather than trying to fight it in vain, retailers and department stores have started to invest in homegrown start-ups and accelerators. The win-win deal is clear: retailers remain at the forefront of technological innovation applied to their industry while entrepreneurs get instant access to a huge playing field for their products. Unsurprisingly, corporations have become almost as important as VC funds for the funding of accelerators.
As previously mentioned, the online and ‘brick-and-mortar’ worlds will be more and more interlinked and the development and use of multi-channel CRM tools will play a great role in ensuring the coherence of the customer journey. Well-designed and innovative apps, allowing fast navigation, speedy checkout and nicely showcasing products will also boost sales – Asos is often mentioned as a ‘best-in-class’ example in that respect.
6. Should retailers own or rent their walls? Or should retailers simply sell their estate and move to an ‘online only’ model?
For years retailers have been told to own their walls. The cost of purchasing and maintaining their estate more than offset the sum of expected future rents which have been increasing at a fast pace – at least more rapidly than inflation. Furthermore, retailers were making a wise investment given soaring real estate prices across the country and especially in ‘prime locations’. Today, one can wonder if the equation still holds. Commercial real estate is expected to take a hit, crystallised by (but not only due to) Brexit, and rent inflation may cool down as a consequence.
This dilemma is worth considering as the ‘online only’ model represents a very difficult customer proposition which has been mastered so far only by a handful of players, including Asos or Made.com. Raising brand awareness and subsequently developing a brand image without any physical shop windows has proved an increasingly daunting challenge in an environment already saturated with incumbent brands. Furthermore, brands with a fading image lose pricing power – Uniqlo is one of the most recent victims of that rule.
Conversely a brand without any ecommerce operations is overseeing a strong growth driver. Some retail experts explain Primark’s recent under-performance by its absence of online shopping website – in this particular case, such a website would prove economically unprofitable for Primark given its low price points.
7. What will be the impact on the commercial property market?
The impact is still hard to assess. One could imagine that the change in culture, lifestyle and demographics, partly embodied by the rise of online, has made the need for physical retailers less obvious and therefore would expect a steady increase in the shop vacancy rate. Actually, the opposite is true: according to the Financial Times, the proportion of vacant shops fell to its lowest level since 2009.
Two possible cumulative drivers can be brought forward. First, service providers, such as restaurants, cafés and hairdressers, have taken the spots left vacant by retailers. Second, historically low interest rates have facilitated the access to debt and therefore boosted the creation of small business ventures – which this kind of service providers typically are.
In practice, though, bargaining power has started to move away from the seller. Two shopping developments have been sold at a significant discount to their original price – the transaction was completed pre-Brexit – and investment into retail property was down 54% in Q1 16 compared with Q1 15. More generally, brands will increasingly focus on prime locations where their products can be showcased at the expense of ‘tier 2’ areas such as suburban shopping centres whose transactional role will be increasingly filled by online shipments. As a consequence, some analysts believe that the UK market can now be covered with 80 to 100 stores as opposed to 200 in the past.
The UK retail industry is definitely facing challenges and shops have been asked with new roles. As announced, this will impact the demand for ‘brick-and-mortar’ sales locations – and ultimately the equilibrium of the commercial real estate market.
Brexit has recently cast light on the future of the commercial real estate market in the UK. We will definitely tackle this topic in the near future. In the meantime, nonetheless, I thought it was worth getting back to the basics of one of the key underlying markets, i.e. retail, and ask ourselves 7 questions to understand the future of this market. Grocers and ‘non-food’ retailers follow different dynamics, I will therefore limit the discussion to the latter.
As usual, I thought this topic would be covered in only one post. In hindsight, I believe it would be more digestible to cut it in two halves – the second part will follow later this week.
What is the current state of the UK ‘non-food’ retail market?
In a couple of words: not great. The recent misfortunes of BHS and Austin Reed are only the visible manifestations of a deeper trend. Total UK retail sales rose 1.2% on a 12-month average basis, the lowest growth since 2009. According to the latest British Retail Consortium – KPMG survey, in-store sales were particularly affected, falling 1.9% over the three months to June, and 2.2% on a like-for-like basis. The industry has been suffering from constant price pressure over the last decade.
Note : The informed reader will have spotted the ‘ups & downs’ generated by the bi-annual sales periods.
2. Are there winners though?
As in many other countries, online is the most dynamic segment of the UK retail market, although it is not immune to global market slowdowns – the latest BRC – KPMG online retail sales monitor reported a 9% growth of online in June 2016 compared with 18% a year ago. Massive online marketing initiatives such as ‘Amazon Prime Day‘ generate positive externalities for the online industry as a whole.
Looking at particular brands, Next, Ted Baker, New Look and pure online player Asos have reported relatively positive sales trends compared with their competitors.
3. Is it all about price?
No. Earlier this month Primark reported its first drop in like-for-like sales for 15 years, echoing the similarly difficult times Poundland is facing in the supermarket segment.
4. Can ‘brick-and-mortar’ sales still be considered in isolation from online? And can stores still be considered as pure points of sale?
Historically ‘standalone’ retail sales could be analysed using the following formula:
Over the last few months, industry insiders have raised the alarm bell based on a drop in footfall and a very modest increase in average item price (see the clothing & footwear inflation chart above as an example) which have not been offset (yet) by a similarly significant increase in conversion rate (i.e. the share of visiting customers who end up making a purchase) and/or the average number of items per basket.
Unfortunately (or fortunately), one corollary of the previous answer is that this formula cannot be considered as valid any more. This is especially true in the UK where consumers buy more online per head than in other developed economies.
Today stores are increasingly considered as showrooms where consumers get to know a brand and its latest products, hence the refocus on prime locations. The trend is likely to accelerate given the progress made in ‘last-mile logistics’ as proved by Amazon or Ocado. Delivery from a warehouse to the end-customer’s house used to be complicated to plan and very often poorly (if not randomly) executed – actually it is still the case for the vast majority of retailers willing to enter the delivery space. As progress keeps being made in that space, we should see customers going to the shop to get information, then shop online and ultimately be delivered at their door or in convenient locations such as Amazon Lockers.