DRONE ON (AND ON)

In an earlier blog we examined the developments by Amazon in particular with regard to introducing more innovative mechanisms by which to deliver items to its customers. Instead of simply relying on traditional tools such as mail, it has been actively testing out drones as a quicker and more modern means of delivery.

At first glance it appears to be veering a little towards surrealism and science fiction: the notion of hundreds of small drones winging their way around cities, towns and villages conjures up apocryphal visions of air congestion, collisions and mayhem. I thought it might be opportune to see if Amazon has made any further advances with its experimentations and to assess the response of authorities world-wide.

Let’s briefly summarise the proposed strategy by Amazon.

It plans to fly unmanned and battery-operated drones within a range of several miles of an individual distribution centre. They can fly up to a maximum speed of around fifty miles, carry a package of up to five pounds and they promise to deliver a package within thirty minutes of receiving an online delivery.

They presumably anticipate that this will prove, in the longer-term to be a potential game-changer in the relentless quest for competitive advantage in the customer order delivery space. This has relevance given the numerous alternative approaches that supermarkets and other retailers have adopted to try and overcome major and challenging hurdles such as traffic congestion in major cities. A good example of this phenomenon is London. It is estimated that it takes longer now for vehicles to manoeuvre their way around that metropolis than it did fifty years ago.

We should be careful in this discussion not to dismiss such developments as being surreal and idealistic. We should not lose sight of the bigger picture: that retailers in particular consciously seek to drive improvements in overall supply chain efficiencies and in terms of quick response to the perceived demands and expectations of their customers.

It is not just an “Amazon phenomenon” either. Other large operators such as Walmart in the USA, Alibaba in China and DHL in Germany are actively experimenting or actually using drones across many aspects of their respective supply chains.

It is not just companies wither who are embracing the use of drones.

According to Ken Long, research manager at the Freedonia Group, “The consumer market will remain a key driver of overall sales growth for drones, fuelled by technological advances that are making drones easier to fly, and by the reduced cost and improved capabilities of key subsystems, which are helping to make drones more affordable to the average consumer.” (http://blog.marketresearch.com/the-demand-for-drones-in-the-retail-sector)

We are witnessing consumers in general using drones to capture better and more creative photography shots, getting better pictures at sporting events and so on. Specific sectors such as real estate have also latched onto the concept to get more attractive shots of properties that are going to go on sale.

Such developments outside of the retail sector would appear to strongly support the view that in the near future we will be inundated with drones and they will become a way of life for us.

However we have to consider the likely responses of governments and policy-makers to such a development. What is happening in this respect you might ask?

The issue of safety would appear to be at the core of policy in the UK. Amazon are presently testing out drones in Cambridge and the Civil Aviation Authority (CAA) are willing to take an open-minded view during these experiments because they argue that there are a number of economic benefits likely to accrue. Current regulatory policy means that drones are banned from flying within fifty metres of a building that is not owned by the operator and within 150 metres of a built-up area. Likewise the drone must be in sight of the operator at a maximum distance of 500 metres and a maximum altitude of 400ft. Some prosecutions have taken place – mainly to do with individuals operating drones. We can see that there is a considerable gap between what the current regulations allow and what Amazon is contemplating with regard to deliveries of items to its customer base in the UK.

Amazon Prime Air (to give it its correct title) has run into major legislative problems in the USA. There, the government stipulated that each drone must have its own pilot and stay within sight of the pilot. This would raise serious questions about the economic viability of the Amazon proposed model.

There is no doubt that major retailers such as Amazon and Walmart can wield enormous power and influence with respective governments and we should not assume that potentially restrictive legislation will necessarily close the door to the use of drones as a delivery tool.

Amazon is proposing that a drone airspace should be created within a zone of between 200 to 400ft in the air and that the drones should be equipped with anti-collision technology. They also advocate the development of air corridors.

We have previously discussed other potential problems such as safety (what is the possibility of some of the drones falling out of the air?), the invasion of privacy (the possibility of drones constantly hovering and passing by the window of your eight floor apartment?) and the uses which terrorists could potentially make of drones (probably doesn’t bear thinking about). In the latter case proprietary software designed by retailers such as Amazon should prevent an infiltration by terrorists of their technology. However it does not necessarily prevent them from buying drones on the general market and using them for nefarious purposes.

So what can we say about the future potential of drones?

Some commentators argue that the power and influence of key players such as Amazon and Walmart will inevitably shape governments and policy-makers to allow them to introduce drones as a viable mechanism for delivery. This may be exacerbated if there is a possibility that taxes and other indirect income can be generated from some form of collaboration with such companies and organisations.

Others argue that the present difficulties and hurdles are largely insurmountable and will make for operational problems. This will inevitably make them less viable and too costly if they are to comply with potentially restrictive legislation.

One interesting bystander in this discussion does not appear to feature however: the customer!

To the best of my knowledge there is no evidenced-based research in the public domain to provide any indication as to how shoppers feel about the proposed use of drones as a delivery mechanism. There is a potential opportunity here for some research. I am not convinced that there would be a high level of demand for such a service. Apart from obvious issues such as security and privacy, would you or I be prepared to pay the cost of receiving such a service? Clearly it would depend on what the fee would be?

Let’s continue to revisit this topic and I will address it in another blog at the appropriate time.

 

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AT YOUR (our) CONVENIENCE

The word “convenience” permeates across nearly all aspects of daily living as well as in business. Some people may argue that we exist in a “convenience” –dominated world. We do not have the time to study, work and pursue our leisure activities any more. We are in many cases, “time-poor” and anything that raises obstacles in terms of slowing us down, putting systems and procedures in our way and generally making things awkward for us can incite anger and frustration.

Organisations have had to respond by re-thinking how they engage with us.

In the context of retailing, I was reminded of the importance of “convenience” last week when I read an article in Retail Week called “What will convenience look like in 2017?

The reality is that retailers are constantly grappling with ways and means of delivering their business proposition as conveniently and as cost-effective as possibly.

Therein lies the rub in my view.

While they undoubtedly have to address the issue of convenience, it also represents an opportunity to potentially drive cost out of the system so that they can become “leaner and meaner” in relation to their engagements with the customer and in terms of their competitive profile. There is nothing wrong, per se, in reducing costs and becoming more efficient. It can be argued that in such circumstances, retailers can deliver an even more effective value proposition, create more loyal customers and generate more profit in the process.

However there is a tipping point where continued “convenience-related” improvements can begin to work against the shopper and in favour of the retailer.

For instance as we discussed in a previous blog, self-regulated check-outs eliminate the need for store personnel to staff the tills and deal with payments. This can generate savings to the organisation in terms of less staff. However it can upset many customers such as those that are “technophobes” and older and potentially more vulnerable people. It forces the shoppers to perform a task that was previously delivered by the retailer. This can work in the shopper’s favour of course if it speeds up the process and means that they can exit the store more quickly. In many cases it does not achieve this objective. Shoppers take longer to figure out how to start the electronic process on the machine, find it difficult to insert the required notes, coins or banking cards, call over the one retail assistant who may (or may not) be nearby, antagonise shoppers in the queue and generally screw up the system.

Of course it can be argued that such innovations take time for shoppers to adapt and over time, such problems will disappear as they become more familiar with such technology.

Harking back to my earlier observation about the article in Retail Week, what are the main conclusions that it makes?

Firstly it reinforces the often-made point that the traditional late opening hours associated with the corner shop have disappeared and morphed into many retail formats such as supermarkets.

Convenience also extends well beyond opening hours and covers critical issues such as the preferences from shoppers for specific forms of delivery: in terms of both speed and the location of the actual delivery.

The article notes that “customers today are disappointed if the fastest you can deliver something to them is 24 hours”. This highlights the increased expectations of shoppers in many instances.

It is estimated also that in the context of the UK market, 80 per cent of shoppers regard a five-minute queuing experience as being unacceptable – again recognising the changing demands expressed by shoppers.

Such attitudes as these have forced retailers to reconsider the role that the outlet or retail store plays in the shopping process.

A recent study by Retail Week (Smarter Checkouts in a Digital World: 2016) examines some of the responses currently being implemented in order to address the specific aspect of managing convenience in a way that benefits the shopper.

In this context it highlights innovations such as the following:

  • Customer-facing screens
  • Digital receipts
  • Contactless payments
  • Mobile tills

Specifically in the context of contactless payments, Sainsbury’s hopes to have the system up and running in all of its convenience stores by Christmas 2016.

The move by the “Big Four” UK supermarkets into the convenience store space is not without its problems however. One problem is the danger of cannibalising sales across its other more traditional larger formats.

Interestingly and from a consumer behaviour perspective, commentators note that since around 2008 (the start of the global recession in general and the UK downturn in particular) shoppers, the concept of “repetitive top-up shopping” has risen exponentially. This has occurred at the expense of the traditional “big weekly shop” that has been the favoured approach of many households in the UK.

The increase of convenience store openings by the “Big Four” supermarkets at the expense of larger formats also threatens to undermine their overall profitability. For instance it is estimated that it can take up to fifteen stores to generate the same level of sales as a large supermarket format.

The fact that the convenience store format typically stocks only around ten per cent of items that feature in the full-line store.

Thus it can be argued that in the quest to address convenience, such tactics have changed the behaviour of shoppers for the worse (from the perspective and performance of the retailers).

The repetitive top-up shopping also arguably has conditioned shoppers to engage more fully in comparison shopping. This has worked in favour of the shopper in my opinion. In the period since the recession, shoppers (in many cases due to declining real income) have become more value conscious in general and price aware in particular. They are more knowledgeable and more proactive in terms of their engagement and interaction with retailers.

Comparison shopping has forced the large retailers to “up their game” in terms of offering more relevant and competitive promotions and introducing innovative practices that address the issue of convenience.

The above observations identify areas where the shopper has arguably benefited from the focus on convenience.

Those innovations that are based on technology in my view have yet to take effect and resonate with shoppers. This takes me back to my observation about the “tipping point” phenomenon. Shoppers have to become familiar and comfortable with aspects such as contactless payment and electronic receipts and self-administered tills.

Wearing my “shopper” hat, I continue to be frustrated and angry when asked to engage with these remote and featureless tools. I prefer to hand my money over to a sales assistant as opposed to inserting, typing and interacting with technology.

Wearing my retail marketing outfit however I recognise the potential benefits that can accrue to retailers in the form of improved efficiency and reduced costs.

It is the inevitable way of the future and as shoppers we will simply have to put up with it.

FRIDAY I’M IN LOVE

The theme of this blog is about the Black Friday phenomenon that has been around in various guises since the 1930’s in the USA. Traditionally it falls on the day after Thanksgiving Day and is seen by retailers as an opportunity to encourage shoppers to come to their stores and benefit from low prices and special promotions that are on offer on that day. Many companies in the US market also traditionally have given employees a day off to make the celebrations into an extended weekend: Black Friday is seen as an effective initiative to create interest and diversion for people during this holiday period.

Some commentators trace the name to the fact that it is often the first day in the year when retailers begin to make a profit: moving into the black as opposed to into the red. The latter signifies losses.

In theory, and partially in practice, prices are slashed and it is designed to whip shoppers into a frenzy of excitement where they will slash out a month or so ahead of the main Christmas shopping season.

Due to its popularity in the USA, it quickly spread to the UK and other parts of Europe as non-US retailers also wanted to cash in on the extra sales and profits.

With predictable inevitability Amazon also jumped into action and drove a spate of online activity around this date.

As is the case with many aspects of retailing, the large retailers expect much of the transactions to occur via the online medium. In 2016 around twenty retailers will participate aggressively in Black Friday promotions and activities. They range from Halfords and TK Maxx to Asda and Toys R Us.

Inevitably and because largely of its popularity such retailers have actually started the campaigns and promotions well ahead of the actual day itself. On average many of them launched their activities twelve days beforehand. Discounts on regular prices can range from 20 to 50 per cent.

Even more problematic is the extension of the concept of Black Friday. We now have Cyber Monday and Giving Tuesday in addition.

What are we to make of this phenomenon?

As you may recognise from previous blogs I tend to adopt a cynical view of most things in life and with retailing in general. I am particularly cynical with the activities of retailers with respect to pricing and promotional campaigns. We have witnessed the demise of traditional sales periods such as immediately after Christmas and into the months of January and February Traditionally in these months retail trade is slow in many European countries and in the North American market due to the excesses and splurges of shoppers in the period leading up to Christmas.

In the North American market over the past decade or so, retailers have increasingly started sales campaigns and promotional offers as early as the end of October in an attempt to generate footfall and sales. Online retailers such as Amazon and ASOS have consistently run such campaigns throughout the year. Black Friday is perhaps the most publicised attempt to capitalise on early sales campaigns and certainly has attracted much publicity in the general media.

These campaigns in general and Black Friday in particular have had both positive and detrimental effects on business. They certainly have engendered excitement and expectation among shoppers in both the USA, and parts of Europe. This is evidenced by visual clues such as queues of people waiting outside stores overnight, in an attempt to capture the very best possible deals when the doors open.

In the UK John Lewis generated a 15.5 per cent increase in internet sales during Black Friday and claimed to have created sales of £187.7 million in one week.

However a number of myths have emerged about the concept of Black Friday and its supposed effectiveness.

A quick perusal of google will reveal to you a number of articles debunking Black Friday. For instance in the USA market it is commonly assumed that it generates the most sales and footfall in a calendar day. In fact for a number of years the last Saturday before Christmas supersedes Black Friday on both counts.

This article (https://www.msn.com/en-gb/money/shoppingandvouchers/the-truth-behind-10-black-friday-myths/ar-BBmVx5w) identifies a number of myths such as the following ones.

Myth: Stores will match competitor’s prices

Many large retailers have price-matching policies that guarantee they will match (or beat) lower prices advertised by competitors. Read the fine print, however, and you’ll see that most of these policies don’t apply from Thanksgiving through Cyber Monday. Shoppers can try bringing along a print ad from a circular or local newspaper and hope for a generous clerk, but others standing in the interminable checkout lines may not appreciate the attempt.

Myth: Most shoppers score amazing bargains.

Black Friday sales thrive on the illusion of deep discounts. A study commissioned by The Wall Street Journal, however, found that better deals on a wide assortment of products pop up throughout the year — and that includes December. Moreover, the biggest deals often are available in extremely limited quantities, which means only a few folks enjoy anywhere close to the bargains that ads promise. And then there’s this: Retailers don’t just give away merchandise and suffer the profit consequences. According to industry analysts, prices that have been so generously lowered already factor in the target profit margin. Sure, holiday shoppers are getting a good deal, but so is the merchant.

 

 

Myth: High-end retailers don’t participate.

 

 

In addition to department stores such as JC Penney, Sears, Macy’s, and Kohl’s, upscale stores play the price-cut game. For luxury apparel at discounted prices, check Nordstrom, Neiman Marcus, Eddie Bauer, The North Face, and Bloomingdale’s. The big shopping day also may be the moment to drive off in a luxury car. Companies such as Mercedes-Benz, Audi, and BMW often offer Black Friday specials. Some industry analysts recommend waiting until December, however, when year-end prices fall further.

Similar myths have been exposed in the UK market.

A report recently produced by the Which organisation (https://www.theguardian.com/business/2016/nov/16/black-friday-uk-warning-report-half-offers-real-deal-pricing) shows that many items that were promoted on special price deals were in fact cheaper in the months before and after Black Friday. “The study investigated 178 deals from Black Friday 2015 tracking the daily price moves of 20 popular electrical gadgets on Amazon, AO, Argos, Curry’s and John Lewis for three months before and two months after Black Friday.

They found that only 90 deals were cheapest on Black Friday. A Curry’s promise of a £101 saving on a Samsung TV was not as good as it looked, as the £748 price tag was only a pound less than on the eve of Black Friday and it had been on promotion at £699 in September. AO trumpeted a £200 saving on a Vax vacuum cleaner at £99, yet it had been on sale for £69 the previous day and on average for £96.50 in the three months leading up to Black Friday.”

What can we learn from these observations?

Firstly as with many such “apparent” special deals, we need to be careful of their full value and authenticity. Such deals do not always do “what they say on the tin”. This is exemplified in the way in which the “was” price was quoted. Government legislation requires retailers to quote a price is supposed to be the most recent price the item has been sold at for 28 consecutive days or more. In many cases the Which study suspected that this was note happening. Instead retailers were quoting a price which was an older and higher “was” price. While this is disputed by the retailers it nonetheless highlights mechanisms by which retailers can distort the picture and add to the layer of confusion among shoppers.

Black Friday certainly adds to the intrigue and excitement for shoppers. However shoppers should beware of some of the claims and special offers. Retailers in my view have devalued the impact of Black Friday by introducing other concepts as Cyber Monday and instigating special deals a couple of months beforehand. The concept still holds value but is likely to be superseded by yet more gimmicks and initiatives. Let’s see.

IT’S SHOPPING JIM: BUT NOT AS WE KNOW IT!

I have mangled the title of this blog from a misattributed quote from Star Trek. I am referring in this instance to how the act of shopping is constantly changing before our eyes. In various chapters of the text we have discussed the concept of experiential marketing and how it is so relevant for retailers and by implication, shoppers.

Of course the concept is not new: it has been practiced for many years in various business sectors such as the sports and entertainment areas. Many commentators argue that its growing importance has been driven by the ever more sophisticated customers that are out there today. Fired up by higher levels of disposable income (relatively speaking) their expectations levels continue to rise. Organisations, particularly in the services area have to respond accordingly and provide what is often referred to in the literature as an “enhanced and positive customer experience”.

That customer journey is built around four pillars: engagement, interaction, participation and immersion.

In the context of retailing this largely revolves the development and creation of a positive shopping experience – both on an online and physical basis. In this blog I focus on the implications for physical “bricks and mortar” stores and outlets.

In chapter five of the text we examine the nature of the retail selling environment and make the observation that physical stores in many cases have reinvented themselves through the creation of “positive shopper journeys and experiences. This focuses on specific aspects such as store design, layout and atmospherics. I do not intend to revisit them here but I will make a number of observations that have struck me recently as I read about the continued responses of retailers to the concept of experiential marketing.

In particular I was struck by the attempts of a few retailers to enhance the shopper experience recently.

Firstly Diesel, the clothing retailer recently announced a venture which at first glance appears to be so “wacky” that it defies analysis. At the end of October (2016) it introduced a strategy at its new flagship store which is built around a 5D multi-sensory Virtual Reality experience. It designed this concept in partnership with a third party company: Savvy. The latter is a retail and shopping marketing agency. It builds upon an earlier strategy called “Fur you: Fur me” campaign. Through the use of CGI and 3D binaural sound design it creates a world of furry characters. In this virtual world, shoppers can ride around on the back of these creatures, fly through clouds and furry trees. Reality is further augmented by creating features such as windy conditions. Through VR diesel also creates an interesting trapeze experience. The experience also makes use of smell – through the introduction of the scent of candy floss – to further heighten the experience (http://www.eventmagazine.co.uk/diesel-launches-flagship-store-vr-experience/brands/article/1413832).

All very interesting and potentially entertaining you might observe. However what has this got to do with the basics of shopping? Is this a step too far? Diesel clearly embraces the notion of providing a “fun”, entertaining and immersive experience for visitors to its store. Will it encourage or motivate shoppers to spend some money in the store? Or will they see it as a fun place to “kill some time” and provide entertainment for their kids? What target market indeed are they addressing via this new initiative?

Certainly from the perspective of its brand personality it sees itself as a fun brand targeting young people including teenagers It also has a “diesel Kids” range. On this basis it possibly can be argued that this “wacky” approach fits broadly into the brand associations that many of its followers might buy into.

Another retailer – Foyles (A UK book retailer) has also embarked on experiential marketing campaigns, albeit in a more traditional and conservative (relatively speaking) way. It has adopted a strategy which is based on the presumption of “marrying in-store technology with a community-led retail experience” (Retail Week). Its Director of Customer Services notes that their research identifies four segments or groups of shoppers that frequent their stores.

  1. Leave me to browse.
  2. Please help me.
  3. Connect with me.
  4. Immerse me.

The latter two segments might be impressed by some of their initiatives. One such activity is the introduction of motion-sensitive audio visual pads that are scattered around the store and where shoppers can listen to authors reading their works aloud.

Oasis the clothing retailer has introduced a café bar and salon into its flagship store on the Tottenham Court Road in London. It has brought in partners to run both initiatives: “Saucer and Spritz” and “pin and Polish”. It argues that this frees it up to focus on what it is good at – fashion.

I could go on and on with examples – a quick search on Google will identify a number of interesting and perhaps “wackier examples” than I have highlighted. In an earlier blog I mentioned that IKEA had introduced the “Dining Club” concept in a pop-up store in the London area. This affords shoppers the opportunity to liaise with chefs in a café situation and where there is also space for a kitchen show room and an area for cooking workshops. Again it could be argued that this is about as far away from IKEA’s core business (household furniture items) as icebergs in the Sahara Desert.

In defence of such strategies however it can be argued that this is the modern face of retailing in response to the changing preferences and perceptions of shoppers. Younger shoppers, particularly those labelled as “millennials”, want to engage with products and brands; they have a desire to be entertained and find many aspects of traditional shopping to be boring and repetitive.

We have also seen this happening in other sectors such as sport. If we attend some of these events we see a package of entertainment being built around the core activity (the game, competition or duel). Sports such as cricket and rugby have changed the rules to simplify the sport. In the case of cricket it has introduced a couple of variations (e.g. shorter forms of the game) to deal with lower attention spans.

Similarly in the case of retailing we are witnessing many operators redefining what their business is all about. On a broader scale, particular in some regions of the world, we have seen this for many years now in the context of shopping malls and retail centres (discussed in our chapter on retail location in the text). These shopping malls are in many cases “cathedrals” of entertainment: containing features as diverse as indoor skiing slopes, children’s entertainment centres, cinema multiplexes and so on.

It follows that at the micro level of individual retail outlets, retailers also have to grapple with the need to create an immersive and interactive store selling environment. This has stepped up somewhat with the increasing use of technology such as Augmented and Virtual Reality.

We are likely to see more and more of such initiatives over the coming years as retailers constantly strive to be more innovative and entertaining in an attempt to attract and retain shoppers. This might be at the expense of investing further in customer service. Why bother with the latter if shoppers can acquaint themselves with all of the necessary comparative information on brand choices? However this is a topic for another day!

WHOEVER BLINKS FIRST LOSES (WELL MAYBE)

I was reminded of above adage when reading recently about the contretemps between Tesco and Unilever about cost and payments. Tesco is the largest supermarket group in the United Kingdom. Unilever is one of the largest consumer brand companies in the world: with over four hundred brands and fifteen of them generating revenues over £1 billion annually. A clash of the titans, you might say.

Ostensibly the dispute was over cost. Unilever raised the price of its products by around ten per cent in response to a sharp decline in the value of sterling in September (largely caused by post-reaction to the decision of the UK as a result of the referendum on July to pull out of the European Union).

Unilever argued that the value of the pound had dropped by as much as nineteen per cent and they had no option but to recoup their potential losses because it was more expensive now to produce and import their products.

Unilever’s most popular brands include the following: Marmite, PG Tips tea, Colman’s Mustard, Dove, Bactolli Spreads, Comfort Fabric Conditioner, Hellmann’s Mayonnaise and Ben & Jerry’s ice cream: all of them in high demand and favoured by many shoppers in the UK market. In total it supplies over eight hundred products to Tesco. Consequently it can legitimately be described as being a supplier of major and strategic value to Tesco. To reinforce the importance of the Unilever brands research has shown that any one of its brands can be found in the kitchens and fridges of ninety-eight per cent of the UK’s households.

The media in the UK had tended to play down the adverse potential effects of a Brexit exit. The Unilever dispute brought the topic of a decline in the value of sterling to the fore. Widening out the discussion on this dispute to the impact arising from the impact of increasing inflation served to concentrate the minds of shoppers over the past few weeks.

I read the subsequent playing out of the dispute with interest as I feel it provides some interesting insights into the nature of retailer and supplier relationships which we discuss in detail in the text. In particular it highlights the feral nature of such relationships and reveals the psychology that is used by both suppliers and retailers when dealing with that most critical of all topics: pricing and costs. Let’s develop this further.

Prices rise and go down over a prolonged period of time. It is in the interest of retailers to protect their margin and hence profits. They do this by making decisions on what prices to charges and balancing that against their ability to manage margin. They could pass on the full increase to the shoppers or they could take a hit and absorb some of the increase. Indeed many retailers have to do this in order to avoid a sharp drop in sales and revenue.

Suppliers, when hit by cost increases (in this case as a result of the decline in sterling) have a couple of options. They can pass on the full extent of the price to the retailers or they can absorb part of the increase in the cost increase and hope to recoup it over time or cross-subsidise the loss from other brands in its portfolio.

It is difficult to be sure of what happened in the Tesco and Unilever dispute because we (and the media) are not privy to the exact increase that was demanded by Unilever or the increase in costs which they are experiencing as a consequence of the decline in sterling.

So what would happen if they were to hypothetically increase prices in this case by ten per cent? They would most likely face extensive negative publicity in the general and social media from shoppers and (unless competitors followed suit) would conceivably lose market share. It would be very unlikely that a retailer with the dominant position that Tesco holds, would pursue such a strategy.

Apart from the consequences in the preceding paragraph, it would be perceived as having caved in” to a dominant supplier and this would send wrong signals to all of the key stakeholders: shareholders, shoppers and the media. It would also signal that the power-dependency position very firmly rests in the hands of large suppliers.

To reinforce the dangers of total capitulation to suppliers; the “big four” supermarkets in the UK have focused on price decreases in the past couple of years. This is mainly due to strong and sustained competition from discount operators such as Aldi and Lidl and also to try and retain customers and encourage them not to defect to other competitors.

So what did happen?

The media (both general, social and business) portrayed the dispute as a “head-to-head” battle – based on the adage that “he who blinks first loses”. However in my view this is not an honest or accurate picture.

In fact the “sub-text” behind this battle was about reaching a compromise position with respect to the price increases. In all effective negotiations each party will start with a figure that they know cannot really be reached. Each party will also have an acceptable figure below which they will not go but will be prepared to coalesce around in order to achieve a degree of satisfaction.

In this case Tesco came out fighting through its public relations activity as “the people’s champion”. It removed a number of products (de-listed) from the shelves and the online channel – thereby signalling an aggressive “no holds barred” approach to Unilever. By leaking their decisions to the press they immediately captured the “moral high ground” in the eyes of shoppers. They also countered Unilever’s claims for a ten per cent increase by stating that many of the brands were produced in the UK and therefore were not exposed to the vagaries of currency fluctuations.

Arguably Tesco was also in a stronger position to do battle with a supplier such as Unilever by virtue of its size and scale of operations. Some of its struggling competitors would not have sufficient ammunition at their disposal to take on such a dispute.

Unilever was never going win the publicity argument. Any company that proposes increases automatically attracts the wrath of the majority of customer (many of whom do not, or do not want to understand the complexities of currency movements).

As well as some of its brands being produced in the UK, Unilever tends to allow its local country teams to make decisions on price – depending on the structure of the market in terms of competition and on customer affordability. This is somewhat at odds with the rather generic and “one size-fits-all” approach to passing on the price increases.

Share prices of both companies dropped in the immediate aftermath of the start of the dispute. Tesco’s shares dropped by three per cent and Unilever’s shares by 3.4 per cent.

 

After a few days, both sides came to an agreement on the issue of price increases. We again are not privy to the specific outcome: both sides clearly wishing to preserve confidentiality and a “loss of face”.

Rumours suggest that (not surprisingly) Unilever had to give way on the demand of a ten per cent increase. Tesco had to “bite the bullet” and also accept that a price increase of some sort was inevitable.

A cynic (such as me) would strongly argue that this was “much ado about nothing” in the context of it being portrayed as a “defender of the shopper” fighting against an oppressor.

The reality is that over the next couple of years, rising inflation will rise inexorably. Shoppers in general have been exposed to very low (almost negligible inflation for a number of years. Thus it could be argued that their expectation levels need to be changed to make them realise that price increases are and will be back on the agenda in the coming years.

Was this a cynical attempt to “groom” shoppers” to the inevitability of price rises? Yes in my view. What do you think?

In this case arguably the company that blinked first (it could have been either) did not lose.

So much for adages!

 

WALKING DEAD: RISING PHOENIX

Since May 2016 when it became clear that there was little or no hope for the future of British Home Stores (BHS), that venerable British retail brand, the vultures have been lurking. The final stores closed at the end of August and it begs the question as to what happens to all of that physical retail space?

The large pension “black hole” (approximately £600 million) and how the 11,000 employees might be helped in that regard, has captured the main thrust of media speculation. Its previous owner: Sir Philip Green has been castigated for his apparent casual indifference to their plight. Rumours are on-going about various rescue attempts to address the pension issue.

What interests me is what happens next.

Is it likely that anyone will take over this distressed brand and attempt somehow to rejuvenate it? As discussed in one of my earlier blogs on the subject this brand has been faltering and struggling for a number of years. This is partially due to under-investment in the stores and merchandise. A more basic explanation for its struggles lies in its inability to respond to the changing needs of the market – particularly with respect to the lack of distinctiveness of its product range, its “middle-of-the-road” price points and a general dowdiness associated with its physical store formats

Since the announcement of its imminent closure in May 2016, a number of retailers have been rumoured to have expressed an interest in using some of the stores. These include IKEA. In its case it is keen to roll out more of its “order and collection points” and these need to be located nearer to city centre / high street locations in order to appeal to shoppers and workers who wish to collect items that may have been purchased online. This new format also provides the opportunity for shoppers to browse through the electronic version of the catalogue electronically. IKEA can also showcase a limited range of items within the store.

Sports Direct are also rumoured to have expressed some interest in moving into to some stores.

At the end of September a Polish retail brand; Reserved (part of the LPP retail chain) took over part of the 30,000 sq. ft Oxford Street BHS site. It signed a 25 year lease with BHS earlier in January 2016. This is a largely Eastern European operation and operates in eighteen countries with brands such as Tallinder (an upmarket fashion brand) and Cropp (aimed at the young to teenage market). Recently LPP has located outlets in the Middle East (Egypt, Qatar and Kuwait.

While it has a strong presence in countries such as Poland, Russia and the Baltic regions, its long-term goal is to expand its brands across Europe and further afield. The Oxford Street location is seen as an ideal opportunity to showcase the Reserved brand in a prime shopping location in the UK.

It closely resembles Zara and H&M in terms of its merchandise, price points and design. It designs its product range in Poland but the clothing is primarily manufactured in China and India. We will monitor its progress over the coming months here on this blog site.

While the opportunities for a revival of the BHS brand via its physical stores looks remote in the extreme, we should focus more of our attention on the possibilities of brand revival via the online channel route.

This area raises some interesting questions and developments. At the end of September 2016 BHS underwent a relaunch of its online operations. It has identified its target market as the older female (over thirty-five) and who does not have the time to make specific shopping trips to purchase clothing items.

They certainly cannot be faulted for picking up on the inexorable move generally towards shopping online.

It started off with a limited range of items (approximately 500) spread around three categories: lighting, bedroom and bathroom. At the end of October it plans to extend this range to cover Christmas-related merchandise, including a range of hampers and fragrances.

It is further ratcheting up the selection with items in the kitchen and dining categories as well.

It would appear as though it is incrementally widening its product range to become a meaningful player in the online channel sector.

Its new owners the Qatari-based Al Mana Group seems to be determined to resurrect this brand from the grave in an attempt to re-establish it in the minds of shoppers. How difficult is this challenge likely to be? Would it be wiser and less painful to let the brand die gracefully and with dignity? In some ways it is akin to pumping life into a beloved pet that is suffering in its old age.

Undeniably it will be difficult. The BHS brand has suffered over the past fifteen years from a lack of investment in its physical stores. While this alone has damaged the brand, more alarmingly it appears to have lost resonance and relevance with the target market. Its merchandise – particularly in clothing, has failed to keep up with the times and its value proposition became lost in the so-called “new era of retailing”. Relentless negative publicity has not helped either – particularly with respect to the behaviour of its previous owner: Sir Philip Green.

Will its slightly older target market (35+, predominantly female) respond positively to the online offerings?

It can be argued that BHS has one thing in its favour; a residual (albeit relatively small) level of positive perceptions and associations in the minds of its loyal shopper base. A quick review of the media coverage on the BHS demise suggests that there is a lot of sympathy with respect to the overall decline and disappearance of BHS from the high street. Anything is possible – particularly if this level of positivity can be captured and inspired by a relevant product offering on its online channel.

However I would counsel against BHS relying on history and heritage alone in attempting to attract shoppers to its channel. It has to face the challenge of providing a relevant, coherent and consistent value proposition that in some way or other provides a point of differentiation form fellow online and omni-channel retailers that compete in this space. That will not be easy.

All the evidence indicates that breathing life into a dead brand will take a long time. Even brands such as Skoda which were not dead but struggling, took ten years or so to reposition from a “cheap and nasty” car to a mid-range position in the market-place. This happened largely because of the influence and heavy involvement of a successful manufacturer – Volkswagen in key areas such as design and marketing.

Developing a point of differentiation is critical in the chase to be successful once again for BHS. The online channel in fairness allows it to experiment initially with limited ranges so that it can test out designs and price-points with its customers. It avoids the burden of having to maintain and fund a large number of physical stores.

Overall I would have my doubts about its long-term viability. Let’s see what happens over the next couple of years. What do you think?

MY GOODNESS: MY IKEA

Would it be accurate to describe IKEA as the most successful retailer of all time? As of yearend 2015 it generated global sales of £35 billion in global sales. It operates 298 stores in 26 countries. Conspicuously it is not a retailer that “floods” markets with stores: in the UK it has only opened 19 of its “sheds” in the UK in 29 years.

It is simplistic in the extreme to make such a bold statement about any retailer. However it has enjoyed enormous success and continues to drive sales increases despite the changes that have taken place in the retail arena globally.

How then has IKEA continued to succeed and prosper? In this blog we consider the key factors for its success and assess how it has responded to the technology developments.

It has been around since 1943, when it was founded by Ingvar Kamparad and opened its first US store in 1985. A recent article (Shouldberg, 2015; “Is IKEA the most influential retailers of the past 25 years?) identifies a number of its key success factors.

Firstly he argues that IKEA has transformed the way in which we think about household furniture and how we buy it. While previously people saw furniture items as expensive purchase items that were made to last for around twenty year, IKEA debunked that perception and marketed a broad range of items that were seen as clean and simple and most importantly good value. While furniture items can be purchased more cheaply in deep discount retailers, they tend to lack the focus on design and trendiness that IKEA are famous for.

Its vertically integrated approach to sourcing and manufacturing items is also identified as a key strength of the business.

Can this model continue to thrive and prosper? Many giants of the retail firmament have disappeared off the radar in recent years. In the UK the most recent casualty was British Home Stores (BHS).

How is IKEA responding to this so-called “new era for retailing?

I have noticed a couple of initiatives over the past year or so that are worthy of mention and discussion.

IKEA is quickly re-defining the concept of physical space. Once derided by the critics for erecting hideous sheds the size of two football pitches and destroying the environment, it can be argued that IKEA has made a virtue out of the relatively small number of such trading outlets. Similar global retailers are furiously trying to rationalise their store portfolio as more and more shoppers shop online, IKEA has not had the same problem. The small number of large outlets continue to be destination targets for shoppers.

In the last year or so IKEA has introduced a new physical format to its operations: the order and collection point (google IKEA you can see a brief clip which outlines this concept).

In the most recent one at Westfield Stratford City Shopping Centre we can see some of its features.

The store is hidden away near the food area in the centre. The front of the IKEA operation is minimal: with floor to ceiling glass and a steel frame network. It is contained within a 9,500 square feet retail space.

It has a number of display rooms: two bedrooms, a functional kitchen area and a dining room.

The most noticeable feature is that it looks like an Apple store. The majority of the space is made up of Apple computers and IPads. These allow shoppers to browse through the very large number of items on the IKEA catalogue.

Shoppers can order what they want online, pay for the order and pick it up on the next day. Alternatively they can elect to pay a £35 fee to have it delivered to their home.

IKEA advisors are available to provide guidance for the shoppers.

The order and collection point carried a minimum number of items: forty, which can be purchased and taken away by shoppers if they so desire.

IKEA argue that this is a new form of concept store and is meant to be a “point of inspiration” for shoppers. It allows shoppers to engage with the items, albeit on a “virtual” basis.

We should note that in the broad context this is not a new approach. IKEA is actually following the trends of similar retailers in terms of expanding the range of channels through which shoppers can engage with items, evaluate the items and make a purchase.

It can be argued that IKEA follows a logical approach to retail development with this initiative. It means that in existing markets, they need no longer worry about going through the time-consuming and costly process of developing new store locations. Instead they can sell a very large range of (in many cases) bulky items by making use of these much smaller semi physical / virtual retail spaces. The Westfield opening potentially gives IKEA access to over millions of shoppers who visit the shopping centre annually.

It has also embraced the concept of “retailtainment”. This is evidenced by its opening of a pop-up do-it-yourself restaurant and food store in London (Shoreditch) at the beginning of September 2016. This creates the combined concept of a shopping and dining experience.

The pop-up outlet operates for three to four weeks and then closes down.

It combines a Swedish food store, a virtual reality kitchen booth, a kitchenware store and a lecture theatre for workshops which address cookery-based themes. It opens from 10am to 10pm. It also contains a Dining Club, where members can book the venue to host a brunch, lunch or dinner party for up to twenty individuals. A sous-chef is available to prepare the meal. Typically Scandinavian dishes feature such as venison and wild mushrooms.

The motivation for this “innovative” initiative stemmed from a survey of 2,000 shoppers which revealed their passion and enthusiasm for celebrity chefs and TV programmes such as The Great British Bake-off.

In tandem with these initiatives, IKEA plans to open stores in India and Serbia in the coming months.

How do we assess this strategy?

IKEA clearly is integrating its physical and virtual channels in line with many similar operators. Overall it is following rather than driving a trend.

Its initiative with the pop-up store is imaginative and provides it with an opportunity to tap into the psych of the UK shopper. The “pop-up” concept is relatively inexpensive to set up. If it works it can be extended to other areas; if it flops it can be terminated without too much financial pain to the company.

In terms of overall performance IKEA is certainly hitting the numbers in terms of sales and profitability. Recent financial figures reveal that it has experienced an increase of over seven per cent in sales (£34.2 billion) year on year for 2016. It is on track to become the world’s leading multi-channel home furnishings retailer.

So it is full steam ahead for IKEA. Let’s monitor its performance over the next couple of years.

I leave you with one statistic. World-wide, it sells one of its Billy Bookcases every ten seconds.

My goodness: my IKEA!!