I’M NOT FATHER CHRISTMAS

Not my words. Rather a view expressed by Mike Ashley at a recent government enquiry into the running of the company which he founded in 1982: Sports Direct. It has specialised in selling sports apparel, footwear and equipment and as recently as 2014 it was valued at over £4 billion.

It’s key to success has revolved around the retailing of two categories of brands. Over the years it has bought out a number of so-called “heritage” brands such as Slazenger, Dunlop, Lonsdale and Donnay. Sports Direct refers to these products as group brands. In addition it sells a ranged of what it calls “3rd party brands” such as Nike and Adidas. In the case of the group brands it sells them at very low prices. Cynics would say that this is a clever way of luring shoppers into the stores or its online channels, only to tempt them with the higher-priced international brands.

It has not paid any great attention to the layout of its stores and the presentation of its merchandise. Working on the principle that any investment in such areas adds to the cost, the appearance of its outlets often resembles a jigsaw that has been disturbed. Indeed it recently encountered problems with one of its suppliers: Adidas, who were unhappy with the way in which their products were being displayed.

However the economic downturn in recent years presented an opportunity for Ashley. He slashed prices on his group brands and maintained a constant flow of shoppers through his stores as his competitors struggled.

Sports Direct is an interesting company to study. We often discuss the importance retail store and brand image (see chapters two and chapter six of the book). Central to much of the debate on branding is the importance of creating a favourable overall impression in the mind of the shopper and the ability to develop brand associations that resonate with the criteria which influence shoppers.

We also talk about the need for retailers to build the brand and achieve strong levels of brand equity.

How does Sports Direct stack up on these fronts?

In the past couple of years it has been the recipient of vitriolic comments, observations and assessment in the media. Let’s look briefly at some of the issues that have arisen.

Much of the negative commentary has revolved around the approach of Sports Direct to working conditions and human resource management.

Its large warehouse in the East Midlands of England in particular has featured prominently. It has been referred to as a “gulag”, Dickensian in both appearance and in its treatment of its workforce and all in all a hellish place to work.

Sports Direct prides itself on its ability to manage the logistics function in as cost-effective manner as possible in its attempts to move thousands of items to its stores and customers via a range of different channels. The key is to manage costs resolutely; some would say ruthlessly.

It employs a small number of individuals directly and the vast majority are recruited through the use of agencies. Zero hour contracts are an essential feature of the arrangement with the workers. This means that an individual does not know how many hours per week he/ she is likely to work. It raises questions about uncertainty over their respective positions in the company and even more critically can cause major problems for individuals over getting access to mortgages and bank loans. If people are sick there is no pay. Likewise of people want to take a holiday, they do so without any pay. In short such as situation provides no security for the individual worker.

Sports Direct does not engage with any unions and its critics argue that workers do not have any access to independent representation over working conditions or any on-going problems that may ensue at the workplace.

Lurid allegations feature in the media over the company’s relationship with the workforce. It has been accused of operating a “six strikes and you’re out” policy, with no mechanism for appealing such decisions. Such “strikes” applied in situations where workers spent too long in the toilets. CCTV cameras monitor workers. The concept of personal development of the workforce did not appear to exist. Workers faced being “named and shamed” by the supervisor over the tannoy system if they were not performing to expectations.

At a recent parliamentary enquiry into the practices of Sports Direct Mike Ashley appeared to acknowledge that much of this happened but that he was unaware of such practices. He suggested that he would do something about it.

In recent weeks the company has proposed to allow worker representation on the board and to ensure that minimum wages would be paid.

You might well ask if this sustained negative publicity has had any effect on the performance of Sports Direct. Do shoppers care? What has been the impact on financial performance?

In the latter case the EBITDA (earnings before interest, taxation, depreciation and amortization to you and me) is projected to be around £300 million, down from £318 million in 2015.

At a recent shareholders meeting there was widespread revolt against the chairman Keith Hellawell. However the owner; Mile Ashley who holds around 55% of the shares, supported him.

There is no real evidence (at least that I could find) to suggest that shoppers have deserted Sports Direct in their droves. As is the case with other issues such as the environment and unethical behaviour with suppliers, many people appear to selectively “screen out” such issues when it comes to making a purchase. If a deal can be had in a Sports Direct store or on its online channel, then many of us will make the purchase without any real consideration given to negative shoddy work practices or apparent evidence of bad behaviour.

On the contrary some commentators argue that in the current UK economy where there is a very low level of unemployment (around 4.9%, down from 5.6 in 2015) workers have a choice as to where they can work. If they are unhappy with working conditions then go elsewhere.

It can be further argued that if the government allows zero contracts then owners such as Mike Ashley are almost duty bound to deliver their value proposition through taking advantage of the prevailing market and work conditions.

In my view this is not a satisfactory response. Typically workers with low skill levels and education do not have the potential flexibility or job mobility. Many of the workers with Sports Direct are migrants who are dependent for their position on contractors or agents.

There is some evidence to suggest that Ashley is rethinking strategy. He has stated that he wants to open more up-market stores and focus more fully on the “flannels” range of merchandise which commands higher prices than much of his range. He has even begun to mention the concept of brand equity. Adidas and Nike have refused to allow their premium ranges to be stocked in Sports Direct. JD Sports, a main revival, is beginning to make inroads.

It will be interesting to see if Sports Direct can overcome this barrage of negative publicity and make some of the changes that might set it off on a more positive spiral.

While he may not be Father Christmas he does not want to be perceived as Mr Scrooge in the longer-term.

 

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