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.

 

THE WHEEL GOES ROUND AND ROUND

In retail marketing academia, as well as life in general, there is a tendency to dismiss or “poo-poo” old theories, concepts and opinions. Something that is new and trendy is seen as inherently relevant and useful. In my view this can be fallacious and dangerous. While some theories and frameworks are naturally replaced by paradigms and concepts due to advances in technology or major shifts in consumer behaviour, some retain the same resonance now as they did “all those years ago”.

Recently I was reviewing the continued progress and development of the so-called “discount retailers” such as Aldi and Lidl. Many commentators attribute their continued success and growth to the deep global recession that took place in Europe over the past decade: some argue that it is still happening in a virulent fashion.

There is evidence that such retailers, particularly Aldi, are moving away from the “hard” discount positioning strategy that has been their mantra since they were founded. “Hard” discounting reflects the focus on low prices and on brands that are private labels or are not that well known to shoppers in a particular location.

However Aldi and Lidl have made significant changes to its product range and its pricing strategy in recent years. In summary they have begun to move upmarket in an attempt to attract wealthier shoppers who traditionally have eschewed the opportunity to shop at their outlets. This might be an unfair perception of so-called “wealthier shoppers”. For instance many such consumers have had to tighten their belt in recent years due to a decline in real income. Some have been forced to try out Aldi and Lidl. Many have been pleasantly surprised by what they have seen there. Although brands might not be that familiar to them, the taste, quality and price, when combined have led to favourable impressions. It could be argued that this segment of shopper has experienced a change in perception of such retailers as a result.

Lidl has responded by setting up a “concept store” in the Republic of Ireland. This is a major shift in terms of store design and layout. No longer in this instance, is the shopper confronted with the Spartan conditions that are the preserve of the traditional discount store: basic shelving and merchandising, a cluttered feel to the place and a lack of staff to provide hep and guidance. In this format, the aisles are wider, more shop floor personnel populate the floor and surprise, surprise, and they are friendly and knowledgeable. They are there to help the shopper! It opened a similar “store of the future in the UK a month after its introduction in Ireland.

We are now witnessing more subtle shifts in approach across Aldi and Lidl stores. We are seeing wine cellars, baby- changing facilities, longer tills so that people have more time to unpack their items and self-checkouts.

In Italy, Lidl has produced an “Italiano” range in order to tap into the psyche of the Italian shopper.

In Germany, Lidl has introduced a new generation of stores which focus on value as opposed to the more narrow area of price. It highlights choice, quality, product ingredients and freshness and uses expert endorsed quality wines.

Aldi has placed a stronger emphasis on organic items and increased its range in this category substantially. It has also added a number of Fairtrade products to its range under the banner of “Fair”.

In the United Kingdom, a recent survey published by the consultancy firm Him, has shown that Aldi and Lidl are increasingly attracting more and more shoppers from the AB socioeconomic category, with figures showing an increase of around thirty per cent. Interestingly an increasing percentage of these shoppers are using discount retailers for their main shop as opposed to “top-up” shopping. This would appear to reinforce the view that they are making a greater appeal to this segment and significantly overcoming any snobbish and / or negative perceptions.

Both retailers are also beginning to increase the number and range of items in their stores. This appears to go against one of its basic principles; namely that it carries less than half of what one might expect to find in the traditional supermarket: 12,000 – 15,000 items as opposed to 35,000 – 40,000 items.

In summary we appear to be witnessing a “sea-change” in the respective strategies of Lidl and Aldi. The old shibboleths of low prices, low-to average quality merchandise, spartan store designs and so on, appear to be augmented by a move to a more “mid-market” to “up-market” positioning exercise. This, it could be argued is potentially taking them from a clearly articulated positioning strategy to a more mainstream “supermarket” position.

What are we to make of these developments?

Gainsayers will argue that this potentially will damage them in the longer term. They will lose their point of distinctiveness and become part of a wider and more homogeneous group of mainstream supermarkets. They will be replaced by existing hard discounters who will capture their position in this segment of the market. They will send “mixed signals” and messages to their loyal customers. By trying to appeal to a wider number of groups and segments, they will get lost in the “fog” of confusion.

Conversely it can be argued that they are following the natural law of “evolution and revolution”. This view suggests that all companies: retailers included, have to adapt and respond to changes in the environment. By remaining static and resistant to change signals complacency and torpor. Occasionally companies have to take major and radical decisions (revolution) and embark on a strategic direction that leads to a major shift away from traditional and established building blocks of success. Look at retailers such as BHS and Woolworths. They certainly failed to adapt sufficiently and they have now “left the building”.

I would suggest that we look at the “Wheel of Retailing” theory. This proffers the view that a retailer typically enters and makes progress in the market by going in with a low-price, low-margin strategy. As it becomes established in that market, it is faced with the challenge of widening its customer base. It also its product range and increases prices and margins. By becoming successful it naturally attracts competition. Over time it is usurped by one or two of these protagonists and loses its position in the market. In the “worst case scenario” it goes out of business or is taken over by another retailer.

Does this sound familiar?

Although this theory has been criticised by commentators: it is based on anecdotal rather than research-based evidence, it appears to stand the test of time.

We certainly can see some resonance in the manner with which Lidl and Aldi are adjusting, refining and implementing their current strategies.

As long as Lidl and Aldi avoid going too far in terms of more upmarket and higher priced product – in other words, retaining a balance, then they should continue to prosper in the short to medium-term.

We should remember at all times that the key principle of retail success revolves around retaining a coherent, consistent and relevant value proposition. If that is diluted too much, the retailer will lose its loyal customer base and more worryingly in the longer term, confuse the overall market-place. New entrants and formats will supersede existing concepts and we witness the wheel going round and round. At some point, old formats will reappear in various guises and provided they are relevant at that time to the shopper they will re-emerge once again.

Hence the value and contribution of the concept of the Wheel of Retailing!

TIME TO SAY GOODBYE

No, I am not giving up on these blogs (fortunately or unfortunately – depending on your point of view). I am using the title of a famous song most notably recorded by Andrea Bocelli and Sarah Brightman, to capture some thoughts on the continued debate over the future of the high street in the United Kingdom. For those of you outside of the UK, I would ask you to reflect on the standard of retailing that exists in the prime areas of your city or town.

As we know from our discussion on the high street in chapter eight of the book, the high street in many cities and town has undergone major decline over the past couple of decades. Some commentators argue that it is irreversible and a reflection of the changing patterns of shopping behaviour and preferences. Others think that certain initiatives can inject a major improvement and draw shoppers in their droves back to these areas.

I was enthused to reflect on this aspect of retailing when I read of yet another organisation that has been set up to “rejuvenate the high street”. This new body is called “SaveTheHighStreet.org” and has been established by organisations who rejoice in titles such as Future High Street Forum, Tech City UK and google Digital Garage”.

We have seen many such initiatives and projects in the UK over the past ten years or so. As mentioned in chapter eight of the book, Mary Portas, a well-known retail expert and commentator was commissioned by the government to undertake a major review of the state of play with high street locations. She generated a wide range of recommendations; some of which were acted upon by the government and others which were dismissed as the product of someone who had an agenda and used the investigation to put forward her own idiosyncratic views and opinions.

Regardless of how you might view Mary Portas, she highlighted practical areas which contributed in no small measure to the decline of the high street. These included: the difficulties and costs of parking for shoppers in these areas, the high business rate charges, the high rents associated with acquiring premises, the run-down nature of such areas and the high levels of anti-social behaviour in town and city centres – particularly at night. When combined, these factors have led to a negative picture of the high street. Unfortunately for retailers such an uninviting and intimidating environment has led to a fall-off in shoppers.

It is not just the environment surrounding the high street and prime city centre locations. We have witnessed the inexorable march to the tune of online shopping. As discussed in previous blogs, retailers – particularly the large ones, have invested heavily in complementary online websites in an attempt to develop an omni – channel strategy.

Put simply, many city centre, high-street locations are not the most attractive places to be during the day or at night. Dilapidated buildings, charity shops, beggars, lousy buskers and the ever-present danger of being “jumped on” by chuggers (people representing charities who are desperate to get you to sign up) can at best be intimidating and at worst totally off-putting to potential shoppers. Most city centres and high streets are reporting a decline of around ten per cent in the number of visitors to such locations in the previous year in the United Kingdom. Shops are closing every day.

To be fair this decline cannot be fully explained by the unattractive nature of such locations. The stalling economy, doubts over Brexit and a lack of growth in real incomes also have contributed in no small manner to this position.

The ever-present high costs associated with locating in the high street are deeply off-putting to retailers. In the United Kingdom also contribute significantly to the decline of the high street.

Large retailers tend to require large box locations; something which many high street locations cannot provide due to their traditional designs. The move to out-of-town locations, where retailers can build or lease such sites is more popular.

Mary Portas advocated a broader view of what can be done with the high street. Part of her recommendations revolved around a need to make such locations more popular to visit in terms of treating them as an entertainment hub. Street markets, music, themed festivals, encouraging local artisan producers to operate there and more imaginative use of pop-up outlets appeared in her report.

Certainly such initiatives would appear to address some of the negative perceptions that we highlighted in earlier paragraphs. They work on the principle that such events and activities act as a magnet for drawing people into such locations. The pleasant and “community” atmosphere can encourage repeat visits and stimulate people to make purchases from an eclectic group of varied retailers.

Have a check in your own city or town to see if any such initiatives are taking place? If you are visiting other parts of the world, reflect on what is on offer in central locations in such cities.

So, what are we to make of these developments and trends? In my view the move to treating high street locations as centres of entertainment and fun provides a point of difference that is not easily replicated at out-of-town locations or online. Quirky, traditional, artisan-type retailing offers choice to shoppers in a more positive environment. Regular theme-based events e.g. around Christmas, Halloween and Easter, or around sporting events, can generate a community-driven atmosphere that can build up a regular coterie of loyal shoppers.

However this has to be juxtaposed against the rapacious, greedy nature of local authorities and government. In the United Kingdom, local bodies are encouraged to generate their own income as central government cuts back on investing in the city centres. To be fair, local authorities have to seek ways of generating income. Business rates and parking charges are typical sources of “easy” revenue. However there is a “bigger picture”. If these charges are too high, retailers will struggle to survive and close. Shoppers will go elsewhere in the face of unsustainable parking charges and fines.

A balance has to be achieved. More far-seeing local bodies and authorities should recognise that a vibrant high street will generate more income for everyone in the longer-term than through the punitive charges they currently impose in many cases. Any short-term financial gain in my view is tempered by the long-term damage that high costs does to the sustainability of such locations.

As we noted in chapter eight, online shopping will continue to grow. However many shoppers also value the experiential aspect of the shopping task. While we will continue to witness a high degree of “churn” in terms of retailers moving in and out of the high street, initiatives such as those highlighted earlier will help to provide a vibrancy to the high street that is missing in many cities and towns.

Reverting back to my opening paragraphs in this blog, Savethehighstreet.org also intends to provide help and support to the small independent retailers in terms of coping with and using social media strategies as well as giving guidance on the issue of data collection and management on their respective shopping databases. In other words it will introduce them to some of the tools and techniques that have been adopted by the large retailers. This form of mentoring, while unlikely to make major inroads into the problem, should nevertheless help to establish some retailers on the high street.

Maybe it is too soon to say goodbye. I am willing to suspend my scepticism and cynicism and see if these initiatives will have an impact.

FLY ME TO THE MOON

The title of this blog is taken from a song delivered by that hoary old crooner Frank Sinatra. I was reminded of it recently when reading about the continuing developments within Amazon with regard to their work on mobile air deliveries i.e. drones. Its more technical term is the use of Unmanned Aerial vehicles (UAV’s).

Within the United Kingdom Amazon received clearance from the UK government and the Civil Aviation Authority to test out the use of drones as a mechanism for delivering items to its customer base. The overall aim of Amazon is to be in a position to deliver parcels within thirty minutes of the placement and payment of an order.

The permission is contingent on a number of restrictions; most of which are obvious and focus on issues of health and safety. These include the avoidance of obstacles and flight patterns and how they are operated. The basic idea was proposed by Amazon as far back as 2013 and it has been working on the concept ever since.

What is the specific value proposition?

Amazon is striving to develop drones that are capable of delivering a parcel of up to 25kg in weight over a distance of around ten miles. This could be to the home, office or a specific designated pick-up location (depending on the preference of the shopper and safety concerns)). In essence it takes the concept of mobile delivery to a new level. Up to now, retailers have experimented with conventional transport modes such as lorries, vans, motor bikes, bicycles and walking to the location. Taking to the air is seen as a potential game-changer in terms of speeding up the process of delivery. It also potentially overcomes the challenges of driving to the destination via potentially horrendous traffic jams and congestion experienced in many of the major cities and centres of high urban population.

How practical and achievable is this development?

In terms of health and safety for instance it doesn’t cause any potential difficulties in terms of collisions with planes: the UAV’s do not fly above 400 ft. However there are some practical issues to be overcome.

Current legislation within the UK means that such drones cannot be flown within 50 metres of a vehicle, person or building. It has to remain in line of sight and within 500 metres of the pilot.

How do you deliver to customers who live on the tenth floor of an apartment block?

In terms of customer service it could be argued that it is the essence of low –touch; indeed non-touch. The customer does not meet or is not greeted by a representative of the retailer, nor is there a friendly smile or tangible reassurance if there are errors with the delivery.

On a more practical level is there any evident demand from shoppers for such a service?

As I have noted in the book, the problem with mobile marketing is that there is an ever-present danger that companies can abuse their strong position (from having so much data on the individual’s shopping patterns) that they invade people’s privacy. Imagine a scenario where you have stepped out of your shower and are caught by a UAV passing by as you look out the window.

Do most people expect or want deliveries within thirty minutes? Will the sky be swamped by hundreds of drones flying this way and that way to deliver and drop parcels?

The short answer is that I don’t know. As a shopper such activities are likely to irritate me and as long as I have a firm indication of the delivery period then it is unlikely that I would want my weekly Tesco shop to arrive within thirty minutes.

From a more cynical perspective is this typical of companies who become obsessed technology and allow their research “boffins” to play around with very innovative but ultimately irrelevant designs? A classic case of being “R&D-led” as opposed to being “customer-led”?

Other practical considerations come into play. The nature of the items to be carried via such UAV’s is very restrictive. For instance it cannot carry “white good” items such as refrigerators or cookers.

However the concept is viable in terms of technology: currently Amazon is partnering with appropriate organisations who specialise in this field at a location outside Cambridge (a technology hub). The vast majority of items stocked by Amazon are less than 5 lbs in weight. In a sign that there must be something substantial behind the concept, companies such as Google, Flirty and Wal-Mart have also applied to US regulators for permission to engage in similar testing procedures to that of Amazon.

Amazon have actually been beaten to the punch by Seven Eleven. This retailer recently used a drone to deliver a customer order in Reno, Nevada (to a customer located within one mile of the store).

What are we to make of it all? Science fiction gone wrong? A logical incremental development in mobile technology? The face of the future? The lunatics taking over the asylum?

Firstly we can assume that governments will adopt a very cautious and risk-averse approach to the granting of licenses for the use of UAV’s. This will be driven by the ever-increasing risk of terrorism activities that are happening in many parts of the world. Sadly the concept of using drones is something that fits into the plans of terrorists in order to disrupt 9at best) or cause material damage (at worst). It is highly unlikely that we shall see hundreds of drones clogging up the lower air space and resembling conventional traffic congestion.

Secondly I presume that there will be a premium price for the use of such services – particularly if there are such major restrictions on the use of drones.

Thirdly it is more likely in my view that instead of delivering to the home or the office (and if permission is granted) retailers like Amazon will deliver to a designated and secure landing zone at a “drop-off / pick-up” point. Such a facility is likely to resemble a warehouse type construction and the shopper will have to make his / her way there to pick up the item. In some ways this defeats the original proposition of being able to deliver to the customer within thirty minutes. It also adds a layer of complexity to the proposition.

Fourthly practical issues such as hi-jacking (people re-directing the drones to another site or taking down a drone) would have to be fully tested in order to eliminate / reduce such risks.

Fifthly while it could be argued by idealistic environmentalists that it may reduce the number of vans and motor bikes in congested areas, this is unlikely to happen in the foreseeable future. It could equally be argued that this development simply transfers such congestion to the air.

Finally it can be argued that the use of drones would be better served in the context of inventory and warehouse management within the supply chains of companies in general and retailers in particular. Imagine the benefits that could accrue from the speedier and more accurate movement of inventory around a warehouse or distribution centre. This could to real efficiencies and savings for the company. This could be passed on (unlikely perhaps in its entirety) in the form of lower prices to the shopper.

It will be interesting to see what happens over the next couple of years.

Fly me to the moon

 Let me play among the stars

 Let me see what spring is like on

           Jupiter and Mars…………

La La La La La La La La……..

BURPBERRY: SOME HICCUPS

Recent developments and travails at Burberry raised a number of thoughts and questions in my mind about the role of the CEO is shaping and developing the direction of a company or organisation.

First by way of background are some details about Burberry.

The company was established in the UK in the middle of the nineteenth century and over the years and decades became established as the traditional face of luxury UK fashion. With its eponymous trench coats and distinctive styling. It opened its first store in central London in 1891. In more recent times it has become a global retailers with a number of different routes to market such as branded stores, franchises and concessions in many of the main cities.

It also benefits from a Royal Warrant issued by the Queen. This is an extremely important marketing tool as it reinforces the concept of luxury and has the official approval of a critical organisation which influences and shapes some people’s perspective of aspiration and exclusivity.

In the past couple of decades Burberry had experience a number of “highs and lows”. In the latter case it bore the brunt of much fun and humour as it attracted the attention of counterfeit operators who sold the traditional check garments for very low prices on market stalls. Many of the so-called “chav” celebrities were also to be seen wearing Burberry. This issue was addressed over a period of time by reducing the check appearance on many of the items and focusing instead on factors such as quality, style and positioning.

The growth experienced in economies such as China sparked off a very large demand for luxury items and brands in general. Burberry, with its long-established and traditional image and heritage benefited from this surge in interest in luxury. This heritage factor has consistently been reinforced by the consistent use of actresses and actors over the decades to promote the brand. These included Humphrey Bogart, Pierce Brosnan, to more recent people such as Emma Watson and Carla Delevinge.

It was not just China which provided the surge in growth of sales for Burberry: the Gulf region, Russia, India, Brazil and other fast-growing economies also developed a healthy appetite for luxury in general and Burberry in particular. The Asia-Pacific region in particular generated over 40% of overall sales. In 2013-14, an overall growth rate of 18 per cent was generated. This dropped to a decline in sales of two percent in 2015.

The decline in growth of these economies caused a major hiccup in performance and overall profitability and forced Burberry to reconsider its overall strategic direction. Luxury tourists to centres such as Hong Kong and Singapore are in decline and this “cash cow” has dried up to a large extent. It is not all doom and gloom however as Japan is holding up well in this luxury centre and Burberry is performing satisfactorily there.

Notwithstanding the overall decline in sales from China, Burberry still remains confident that the sheer size of the “middle-class” market there will continue to generate new customers.

Burberry had introduced some changes to its overall strategy. We will focus on the managerial ones but briefly will consider the other changes in direction.

It has embarked on an overall cost-cutting exercise to generate savings of around £100 million. This revolves around reduced staffing, a reduction in the number of sku’s carried – rumoured to be around 20 per cent and a focus on more localised products. It also plans to improve the overall store experience for shoppers.

From my perspective the changes at the top raise some interesting issues about the overall role, importance and influence that individuals can play in shaping or in this case possibly re-shaping the future direction of an organisation.

I would suggest that when we look at a retailer such as Burberry, with its focus on fashion and luxury it becomes even more challenging and interesting. Why?

Well fashion immediately raises issues about the attitudes and perceptions of the target market to the product offering. Fashion can be ephemeral: it does not have the long-lasting impact that other more traditional brand tend to have. Although it can be argued that this is not the case with Burberry, which has lasted since the middle of the nineteenth century. The creative and design challenges are arguably difficult to address with full confidence. Can you teach creativity? In the fashion retail sector it is critical to attract the right people to run the business. However someone who has a proven track record of running a traditional business may lack the necessary empathy or “feel” for what constitutes fashion and what is appropriate for a well-established luxury brand.

Let’s briefly consider how Burberry has addressed this issue.

In July 2016 Burberry replaced Christopher Bailey with Marco Gobbetti, who was previously the CEO of the French luxury brand, Celine. Bailey moves to the position of President and retains his position as the Chief Creative Officer of the company. Both of them will report directly to John Peace: the Chairman.

Arguably the decline cannot be attributed directly to the work of Bailey. The macro-economic vagaries of key markets would have happened anyway. However as is the case most notably with football managers, the “buck stops with them”. Fashion retailing, like sports is a “results business” and someone has to carry the can for poor performance.

In this revamped organisational change, Bailey will be allowed to continue with his focus and expertise on issues such as brand development and overall creative design. Gobbetti will focus on the overall issue of strategy and corporate culture. Gobbetti has proved himself as someone who has delivered in luxury fashion with the overall performance of Celine during an eight year period with them. He brings his overall expertise in strategy development to Burberry and arguably frees up Bailey to concentrate on what he has been good at; namely design and creativity.

It can be argued this merging of talents should generate a synergy that ultimately can lead to improved performance in sales and profitability across Burberry. The old adage of “2+2=5” applies. Or does it?

The cynic in me suggests otherwise. We would appear to have two strong personalities coming together with particular views about the way the business should run. Bailey has had a lot of success up to the recession in key markets and the overall drop in sales and profitability. Has he been “shoved upstairs”, like a successful football manager that a club is reluctant to get rid of? Creative people tend to have big egos and are difficult to work with.

Companies like Burberry come under pressure from shareholders when profits fall. To some extent, personnel changes are inevitable, like the case of football management.

When Peace made Bailey chief executive in 2013, he provide him with a very generous remuneration package which was subsequently heavily criticised by shareholders. Part of it included a retention bonus to be spread out over2015 – 2018, irrespective of how the company performed. The new deal predictably has been reduced and is heavily performance-driven.

It will be interesting to see how the new management structure might work. Will we see some synergy or will we encounter ongoing battles between the individuals? Let’s wait and see (hic)

 

I DON’T BELIEVE IN IF ANYMORE

Roger Whittaker: a well-known singer and songwriter of the 1960’s and 70’s penned a song called “I don’t believe in if anymore”. I have taken the title and misinterpreted it somewhat to capture my feelings and thoughts about the recent decision of the UK population to vote to leave the European Union.

Since the referendum results came out in late-June, the media has been more than pre-occupied with the views of all sorts of experts, gurus, commentators and so on, about its impact on the future of the UK. The usual suspects: politicians, economists, business consultants and prophets have been to the fore in this regard.

What about the impact of Brexit on the retail sector? I will try to capture some views in the following paragraphs, albeit with a sardonic and cynical perspective; grounded in decades of experience of listening to such “experts” on various subject matter.

Much of the commentary since the referendum has been based around the word “if”. If certain things happen e.g. a severe decline in the value of sterling, continuing uncertainty and the challenges of “doing a deal” with the EU, then certain things may (or may not) happen. The usual jargon and clichés are used by such writers and commentators. The simple answer is that we don’t know what might happen. Much of the contributions reflect biases and prejudices that are not necessarily objective and indeed in many cases are doing damage to the well-being of the economy.

The facts are as follows. Politicians, business-people and consumers, for the most part, dislike any change to the way in which they do business and operate in their every-day lives and transactions. For most of us, the natural reaction is to reject or turn our backs against transformative processes or decisions. This is evidenced in the commentary that appears almost daily in the general and social media.

Irrespective of the “rights or wrongs” arising from the decision to leave the EU (and it is not my intention to declare any personal views here), it is TOO EARLY to make any definitive statement about where the retail sector will be in the sort, medium or long-term. This should be the default position at the beginning of any discussion on the impact of Brexit.

In February 2016, the Centre for Retail Research presented a reasonably objective view of the likely impact of Brexit. (www.http://retailresearch.org/brexit.php). It is worth reading to gain a reasonably clear insight into the ley issues that may or may not play a significant impact on the retail sector.

I highlight a few observations in the next couple of paragraphs.

The issue of tariffs comes to the fore in much of the discussion. Clearly when the UK leaves the EU it is likely to have to deal with various tariffs imposed by countries in the context of international trade. However in the forty to fifty years since the advent of the EU, international tariffs in general have fallen to as low as 5 to 6 per cent in nearly all cases. In this period, we have seen a move to market liberalisation and a greater emphasis on creating a positive climate for foreign trade globally. Previously closed economies such as India and China have opened up considerably in the last ten to fifteen years. In this context, tariffs, while still around, possibly are less likely to present such insurmountable barriers as was the case in the past.

Free movement of labour is a key issue in any negotiation with the EU. It is one of the essential pillars behind the rationale for a European Union. All we can say at this stage is that much will depend on the tenor of the negotiations that will take place over the next couple of years. It is likely to be used as a key bargaining chip by the UK government negotiators. For key markets such as the automotive industry, German car manufacturers are likely to press for a favourable negotiation to allow them to have continued access to the lucrative UK market. Again, we don’t know what may happen here.

Early indications suggest that it will be impossible to prevent free movement of labour. This was acknowledged by many of the “leave” advocates shortly after the results of the referendum. People can still come in and out of the UK, albeit without the necessary benefits such as permanent residency rights that currently exist for EU people. It is also likely that deals will be struck with various countries. Again it is too difficult to make any predictions.

The decline of sterling has already happened in light of the referendum result. This is totally unsurprising. The stock markets hate uncertainty and react accordingly. Over the first two weeks since the vote took place, the value of sterling has declined by about 10 per cent in relation to the dollar. It may go further and will certainly fluctuate at key points in the negotiation process in the next couple of years.

The Centre for Retail Research notes that sterling has probably been over-valued in the past couple of years anyway and that any readjustment downwards leading to a lower exchange rate may not necessarily be a bad thing.

If the pound continues to devalue it can be argued that it will make the UK an attractive place for visitors to shop and boost the retail sector over the longer-term. Again we don’t really know the extent of the lowering in value of the pound and too much speculation is dangerous.

In terms of legal protection for retail workers, it is unlikely that we shall witness major changes. Retailers are probably going to stick with the established legislation that is already in place. In terms of EU directives and standards, again it is unlikely that retailers will deviate substantially from existing legislation – particularly if they wish to continue to do business with established customers in EU-base locations.

With regard to the VAT tax, it is likely to remain in any post-EU situation. It is a critical source of revenue of the UK government. While it will no longer be tied to any attempts by the EU to harmonise such as tax, it is likely that it will not deviate significantly from other European countries. If pressed, I might argue that it may go up slightly on certain product categories because the general UK VAT rates are among the lowest within the EU community.

Enough of this speculation!!! I am beginning to create “what if” situations and doing precisely what I claimed at the beginning that I would not do!!

In summary it is dangerous and stupid to engage in too much speculation. Much will depend on the nature and tenor of the negotiations that will take place in the coming months and possibly years. There will certainly be “give and take” and “horse-trading”. Both sides (UK government and the EU) have strengths and weaknesses. Retailers will adjust and adapt to situations that emerge. We will still survive. Let’s kick that word “if” to touch!

FRESH AND EASY

The title of this blog refers to an attempt by Tesco to enter the North American market with its “Fresh & Easy” format about eight years ago or so. After rolling out over three hundred stores, eventually Tesco decided that it was not a viable proposition and closed down the operation. It was written off as a failure.

I was reminded of this case a couple of weeks ago when I read of the recent attempt by Amazon to spread its ever-increasing tentacles further by launching its Amazon Fresh grocery service in the UK market at the beginning of June 2016. This represents its first major attempt to directly compete with the “Big Four” food supermarkets in this market: Tesco, Asda, Sainsbury’s and Morrison’s.

What is the nature of this value proposition and how does it differentiate itself from the opposition?

In the initial phases Amazon plans to deliver to over 69 postcodes in the London and greater London geographic area. It plans to carry around 130,000 sku’s, deliver within four hours and will carry well-known brands such as Coca-Cola, Kellogg’s and Danone.

Its stated aim is to focus on “low prices, vast selection, fast delivery options and customer experience”. It plans to offer substitutions for items that are currently not in stock, plus an automatic refund. By comparison, Ocado offers around 48,000 items, Morrison’s, 22,000 and Tesco 70,000. In a move that is potentially a winner, it offers same day delivery on all orders placed before 1pm. This is likely to put its competitors under pressure if they seek to match this promise.

In terms of price, Amazon promises an ever-day-low-price approach. This avoids a direct guarantee of offering the lowest price available on any particular item but none the less highlights Amazon’s competitive approach to pricing.

Essentially the value proposition is a further development of its “Amazon Prime” offering. In the latter case, Amazon shoppers can pay an annual subscription fee of £79 to benefit from an online TV and a delivery service. “Amazon Fresh” extends this delivery concept into the highly competitive area of grocery retailing.

Currently the online grocery sector in the UK is projected to be worth around £17 billion between 2015 and 2020. By contrast sales in physical outlets is projected to decrease by around 3% to around £70 billion in the same period. It can be argued that the new business model proposed by Amazon will allow it to capitalise on the continued swing towards online shopping. It can also capitalise on its existing expertise and knowledge of the rudiments of efficient supply chain management and delivery options.

In addition to the annual subscription of £79, shoppers will also pay a fee of £6.99 per month in order to receive unlimited deliveries more than £40. This takes the annual cost to the tune of £162.88p. For shoppers who do not use the full range of “Amazon Prime” services, this might be perceived as being an expensive option. By contrast one of its competitors, Sainsbury’s charges a fee of £60 per annually.

Some people argue that in a sector which exists on very tight margins (often as low as 1-2%), Amazon might struggle to generate profits. The counter-argument is that is notoriously successful as managing profits across its existing product offerings.

Other commentators posit the view that Amazon has had little success against giants such as Wal-Mart and Safeway in the North American market with a similar proposition. In this instance, the “big guys” successfully maintained their market shares.

On a more positive note, Amazon is likely to move quickly across the UK in terms of its geographic coverage. As stated earlier, it currently operates in only one region (albeit a large one from a population point of view). Larger cities such as Manchester and Birmingham provide similar opportunities. Amazon Prime already covers a wide ranges of regions and cities in the UK such as Liverpool, Birmingham, Manchester, Leeds and Portsmouth.

Amazon also has the potential to work with local suppliers and provide a more customised approach that reflects regional tastes and preferences. Currently it deals with a number of established brands (mentioned earlier) as well as Morrison’s own label items (around 2,500 items in total).

What are the challenges?

Amazon has built up an enviable success story through its ability to deliver a vast range of items to its customers having achieved excellence in the functionality of managing the supply chain. Can it do the same in the fresh food sector? Some commentators argue that this area creates challenges to the supply chain and delivery because of the nature of fresh food (much shorter product life cycles and wastage. It is also directly “muscling in” on a market that had been dominated in the UK (and indeed in many developed economies) by a small number of powerful and dominant retailers. How will the “Big Four” respond? Also factor in increasingly serious operators such as Aldi and Lidl and you have potentially a venomous cocktail of competition.

Already it is estimated that Amazon is experiencing some problems in its delivery system by using cool boxes instead of refrigerated vans. If this is not addressed, it is likely that shoppers will complain and possibly revert back to their previous mode of shopping.

Another key question is what do shoppers actually want? Is it low price? Quick delivery? A mixture of both? Quality? Ultimately this will determine the success or otherwise of the intervention of Amazon in this highly competitive market. As mentioned earlier, the North American experience suggests that while Amazon has made a small impact, it has not seriously threatened the established players to any significant extent.

Amazon’s value proposition however cannot be dismissed easily. For instance it offers shoppers a much wider set of items (130,000) than the completion. Because of the wide and varied choice, it potentially satisfies those shoppers who wish to complete their full weekly shop in one go. It is competitive on price, when compared to the others. It can also potentially benefit from its existing scale of operations and its undoubted capabilities in the area of supply chain management and implementation.

It also begs the question as to whether we will see other third-party logistics / supply chain operators entering into the market and effectively acting as conduits in providing shoppers with an increasingly varied set of delivery options and choice. Will we see the emergence of powerful and dominant supply chain integrators over the next decade or so?

For now we can keep a “gimlet eye “on how Amazon evolves in this sector. Will it do it in a fresh and easy, fresh and cheap, fresh and slow way? Let’s see!