THE BOOKER PRIZE

The end of January 2017 witnessed a major acquisition in the world of UK grocery retailing. Tesco, already holding around 28% of overall market share of the grocery sector acquired Booker: a large wholesaler, a supplier to thousands of convenience stores, symbol groups and a range of pubs, restaurants and fast food chains. The cost of this deal amounted to around £3.7 billion.

What are we to make of this acquisition? What is the rationale behind Tesco’s strategy and above all who will it benefit (apart obviously from Tesco)?

Let’s firstly try to put the Booker Group in perspective and context. As of early 2016 it recorded sales of over £5 billion. It’s operations are quite diverse and range from running a number of cash and carry (wholesale) businesses through to a number of well-known convenience brands such as Londis, Budgens and Premier. It’s “bread and butter” business is that of supplying private labels and branded goods to convenience stores, leisure outlets, restaurants and so on. This covers thousands of different lines. It also provides catering services to a wide range of restaurants, pubs and fast food chains. The restaurant chains include Wagamama, Premier, Prezzo and Carluccios.

A wide range of well-known convenience store brands operate under franchise agreements with Booker, buying in its goods and services.

These include more than 3,200 Premier branded stores, 47 discount stores operating under the Family Shopper brand, 1,500 Londis stores, and 120 Budgens shops.

By any standards of measurements this represents a major acquisition for Tesco and provides it with an entry into sectors where it is currently under-represented (small convenience stores) and where it has no prior presence (“out-of-home” food, catering and product services.

How does this deal stack up? At first glance it would appear to be heavily weighted in favour of Tesco. It is gaining access to new and growing sectors. It widens and deepens its presence in the convenience food sector and provides it with an opportunity to drive synergies and efficiencies in its supply chain management and structure, as a result of moving closer to suppliers (effectively becoming a wholesaler as well as a retailer.

This latter point is in my view a crucial one. Increasingly retailers are forced to drive lower prices and negotiate better deals from suppliers. This acquisition at first glance would appear to leave Tesco in a stronger position to (putting it politely) negotiate better prices from suppliers or (less politely) put the squeeze on suppliers more forcefully. In light of uncertainties due to pending Brexit decisions and happenings, this may be critical in the medium to longer term.

Some commentators put forward the view that in the longer term Tesco can generate savings of up to %600 million annually as a result of the efficiencies and synergies generated by the acquisition.

What has been the industry reaction to this acquisition?

One view is that it could be a “game-changer” in the food grocery sector in the UK. This mainly revolves around how Tesco can manage its supply chain more profitably and cost effectively. The wholesaler role brings it closer to the “mother lode” which is represented by the suppliers. In an increasingly uncertain environment any potential leverage in this area can leave Tesco in a more dominant position.

It also introduces Tesco more fully into the growing “out of home” food sector. It is estimated that the UK food market is worth around £195 million annually: of which £110 million is spend on grocery store and online food purchases. The remainder: £85 million is spend on food which is consumed “out of home”. This covers the phenomenon of eating out in restaurants, fast food chains, pubs and coffee shops. As we noted earlier, Booker owns well established in this sector such as Wagamama, Byron Burgers, Prezzo and Carluccios.

It is also argued that Tesco could use some of the excess space in its physical stores to convert to “cash and carry” selling space – thus reinforcing its move into the wholesale sector.

The acquisition also provides Tesco with the opportunity to develop its e-commerce business: for instance the acquisition of so many small convenience stores also opens up more flexible and adaptable policies with regard to “click and collect” options – an area which is growing rapidly in terms of shopper behaviour and preferences.

Interestingly it also would appear to indicate that Tesco is re-focusing its efforts on its domestic market: for many years now it has been preoccupied with international expansion and development. This move suggests that there is still further scope for driving increases in sales and profit in the UK.

The closer relationship with suppliers and the potential for increasing power and dominance in those relationships with respect to price in particular, arguably leaves Tesco in a stronger position to compete more aggressively with the pesky discounters such as Aldi and Lidl. For the past few years, the latter retailers have made inroads on the “Big Four” food retailers. This leaves Tesco potentially ahead of its main competitors such as Sainsbury’s. Asda and Morrison’s.

From a strategy perspective it highlights the potential importance of the concept of “first mover” advantage. Any initiative that generates a point of differentiation and creates a potential position of strength, it can be argued, is a positive move.

Synergies between Tesco and Booker can possibly be generated by the “marrying” of Tesco’s skills as an effective supply chain management operator allied to its management of technology in general and “big data” in particular”. It will acquire Booker’s skills and competencies in addressing sectors such as “”out of home” food and providing a range of services to the leisure and restaurant sectors.

Likewise Booker gains access to Tesco’s skills and resources. In theory it is a “win-win” for both parties.

Booker’s current presence with over 125,000 independent food stores and around 450,000 pubs, restaurants and coffee shops, when combined with the presence of Tesco’s operations is likely to attract the attention of the Competition authorities in the UK.

One such quango: the Grocery Code Adjudicator may be called upon to deliver a verdict on whether or not this acquisition is likely to create an unfair advantage and do damage to the small independent retailers. Crucially this body has no power to intervene with wholesalers. Which might provide a loophole for Tesco.

It is possible that Tesco and Booker may have to relinquish some of their outlets to comply with potential judgements by the competition authority. This remains to be seen.

In summary is this a good move for Tesco?

The general consensus would appear to be quite positive – albeit with some concerns being expressed over the extent to which it might create an unfair competitive advantage.

It explicitly recognises that shopper patterns and preferences are changing – convenience and “out of home” eating being two major drivers. Tesco has addressed these changes with its acquisition of Booker. This is reinforced by the estimate that the convenience sector is projected to grow by around £4.5 billion over the next four years. The growth in delivery requirements e.g. we can see this with the emergence of operators such as Deliveroo and Ubereats is addressed in Tesco’s acquisition.

Maybe it has captured the ultimate prize.

Let’s see what happens!

 

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GOODBYE SPORTS DIRECT: HELLO SELFRIDGES!

Retail positioning is an issue of significance which we discussed in chapter two of the text. It is a concept which is central in shaping the impression, perception and attitude of a shopper about a particular retailer and its brand essence and brand associations. We highlighted a definition of positioning which in the context of retailing was identified by Arnott (1992) as “the deliberate, proactive, interactive process of defining, modifying and monitoring consumer perceptions of a marketable product”

We also noted that differentiation is at the heart of positioning. On what point or points of differentiation do we as a retailer focus on in order to capture a piece of the shopper’s mind? More importantly will this be sufficient to encourage shoppers to come to our stores or online websites and even more critically form some degree of loyalty or attachment in the form of return visits on a regular basis?

Re-positioning refers to situations where the company wants to change its image and create a different perception in the minds of its shoppers. This task is challenging and make take some time to achieve, depending on how entrenched and fixed the perceptions and attitudes of shoppers have about its existing approach.

I was reminded of this issue when reading recently about the travails of Sports Direct, that well known (some might say infamous) UK sports retailer.

Founded in the early 1980’s by Mike Ashley it has grown to become one of the most successful retailers in the UK over the past fifteen years or so. It has built its success around the core proposition of offering shoppers a wide range of sports brands at heavily discounted prices – in many cases consistently beating competitors such as Allsports and JJD sports in the process.

In many ways it resembles brands like Ryanair: very successful and appealing to a wide range of people but suffering from a number of negative perceptions at the same time. This is most marked in the store layout and overall shop environment. A visit to one of its stores in the past few years would reveal an outlet that is crammed “to the gunnels” with merchandise, with little emphasis on appearance and presentation.

Some commentators have described it as a “market stall” experience. The outlets constantly refer to bargain prices, large discounts and “closing down” sales. When combined these initiatives create a strong impression that the shopper in in line for major benefits in the form of low prices that cannot be matched elsewhere. TV programmes have queried the validity of such claims, providing some evidence that the heavy discounts are not what they appear to be.

The overall impression is that of a retailer which has based its success on some dubious practices. This is reinforced when other media coverage has identified poor practices in the workplace, with some staff being paid below the national minimum wage and also evidence of draconian work practices.

In addition the company has been accused of poor governance and recently reneged on a promise to appoint an independent auditor to oversee the ways in which the company has been run. It had originally agreed not to use a company of which Sports Direct was a client, to carry out this exercise. It has since gone back to this company to carry out the review.

Let’s look more closely at its strategy.

Over the years Sports Direct has acquired a number of brand and added them to its portfolio. These include brands such as Donnay, Dunlop, Slazenger, Everlast, Lonsdale, Karrimor and Kangol. Almost without exceptions these brands were originally well-known and recognised on the high street but has become “tired” and somewhat outpaced by newer and more innovative brands – particularly in a market where consumers are always looking for new choices. Many of these brands were acquired for a low price and this helped when putting an overall strategy together of “piling them high and selling them cheap”.

Since 2014, Ashley has pursued a strategy of selling of some of these older brands. For instance towards the end of 2015 they sold the Dunlop brand to a Japanese company: Sumitomo Rubber Industries – at a good profit to Sports Direct.

It also carries a number of so-called “third-party” brands such as Nike and Adidas. They have encountered some issues with these branders on areas such as merchandising and the display of these brands.

Ashley feels that his company has to go more upmarket in an attempt to remain successful. Profits have slumped over the past couple of years – mainly due to the apparently unending stream of bad publicity and press coverage.

This this end, Sports Direct have introduced a number of initiatives.

It has invested more full in staff training.

It has focused on improving the layout and merchandising within its stores in order to get away from the “market stall” perception.

It has developed a new brand called “Flannels” – a more upmarket brand and has collaborated with sports celebrities such as the Olympic Rower, James Cracknell, to create designs.

In April 2016 it purchased a prime property in Oxford Street London. Rumours suggest that it wishes to establish a flagship “Flannels Store” there.

It has bought a small share in Debenhams (around. 5%). This is seen by many commentators as mechanism by which it can get concessions in its range of stores – thus addressing the need to create a more upmarket feel to its product offerings.

By divesting out of some of its acquired brands, Sports Direct hopes to invest more time with the third-party brands and develop its more upmarket ranges.

Mike Ashley want to position Sports Direct as the “Selfridges of Sports”.

Worryingly it records very poor image ratings among its customers and the general public. This is not surprising – given the welter of bad publicity.

For instance in a survey of thirty retailers it came twenty-fourth on metrics such as quality, reputation and impression.

What are we to make of these initiatives?

I would say that the challenge of moving the brand to a more upmarket position will be a challenging and arduous one. If people hold a very strong and entrenched view about something, it is difficult to change dramatically, certainly in the short-term. One has only got to look at brands such as Skoda to see how long it took to change perceptions and to achieve the desired position in the minds of potential customers.

The initiatives highlighted above will only succeed of senior management invest enough time and resources in such activities. Better relationships with third-party branders and higher end retailers are critical in this attempt. Currently there is a great deal of wariness and suspicion flowing around between these parties.

More importantly is in in danger of alienating its core customers? These shoppers look for and expect bargains, value for money and discounts. Will this re-positioning exercise attract the desired new customer?

What do you think?

YOU CAN’T STOP THE FUTURE

This blog marks the beginning of 2017. As such I thought it might be useful to contemplate possible developments and trends that may (or may not) kick in or move rapidly than before over the coming twelve months.

It makes sense to me to continue to look forward – not back. However I will make an exception in the case of the retail sector. Momentous developments such as the vote to exit the EU in July in the case of the United Kingdom will spark off a number of developments into the future – most likely stretching far into the next decade and not just the next year. On-going developments in technology will also continue apace over the coming months.

The word “uncertainty” appears in many commentaries and articles on the implications arising from Brexit for UK and European retailers. In a previous blog I addressed some of these issues and do not intend to rehash them in this blog. Suffice to say that many trends and developments will be directly and indirectly affected by the fall-out from the Brexit referendum in the UK.

An article published in Retail Week provides us with some indicators as to how the winds are likely to blow in 2017. I thought it might be useful for us to look at the trends identified in this article (https://www.retail-week.com/eight-trends-retailers-should-look-out-for-in-2017/7017163.article).

Many of the eight trends identified by the author are likely to be directly shaped by the state of the overall economy in 2017. One of the major initial consequences of the Brexit vote was a decline in the value of sterling relative to the other major currencies. The net effect of this is to shove the costs of sourcing materials and products for retailers. In turn this has a direct impact on prices for the shopper. Unfortunately this is likely to follow an upward trajectory. A perusal of the newspapers since the autumn will generate numerous references to price increases – most notably in the battle between some of the major food retailers and some of their suppliers over the issue.

To some extent shoppers in the UK have been protected from sharp rises in prices. Some retailers have absorbed some of the additional costs which they have incurred, with a view that they want to avoid excessive negative publicity in the press. Others have avoided decisions in this area because they have utilised currency hedging policies. The latter have mitigated their exposure to cost increases.

However the bad news for shoppers in 2017 is that many of these hedging policies will run out soon and then retailers will have to take cost increases more directly into account.

This means that they have to address the following questions. Do we add on the costs to our prices (thereby having direct implications for shoppers? Or do we absorb some of these costa through reduced margins. Some retail sectors may have greater opportunity to pursue the latter strategy – if margins are sufficiently large to allow them to do so. Many sectors however work on tight, miniscule margins and there is little “wiggle room” for further reducing margins, without throwing the retailers into serious financial difficulties.

The issue of worker’s pay and pensions is also one that is increasingly coming to the fore. High profile retailers such as Sports Direct and ASOS have become embroiled in publicised cases, where workers appear to have been treated badly in terms of pay and working conditions.

BHS, largely through its previous owner, had disappeared off the high street and more worryingly left its workforces with no pensions.

The onus will be on retailers to act in a more socially responsible manner – or otherwise face punishment, if they fail to address pay and working conditions. This will also increase their cost base and most likely have an impact on the price that shoppers will pay for their goods.

As I write this blog, the media highlights the high levels of debt incurred by British society. Unsecured lending to household went up by around £2 billion in November 2016: the highest level since 2005. Householders owe £67 billion on credit cards. This coupled with increasing uncertainty over Brexit and inflation is likely to have a negative impact on retailing during 2017. Much of this splurge on credit cards was most likely stimulated by the raft of sales and promotions introduced by retailers well ahead of the Christmas season e.g. Black Friday.

The Retail Week article highlights the continued and growing impact of technology on shopping in general and the consumer experience in particular.

In particular it highlights advances in virtual reality, augmented reality and biometric recognition. The key point here is that none of these technologies are necessarily new or particularly innovative: they have been around for a number of years. However what is important is the fact that as retailers become more familiar with their potential uses and become more comfortable with the technology, opportunities for exploitation are going to grow exponentially.

Virtual and augmented reality has direct implications for the utilisation and demand for physical space. We are increasingly going to see greater use being made of “virtual” space. This in turn will reduce the need for as much physical space as is currently being used by some retailers – particularly in the clothing and fashion centre.

The article points to the need for “fair credit” to be provided by retailers. This is going to become more prevalent in response to pressure for policy makers to be more transparent and accountable to shoppers in terms of what they can reasonably expect to pay for items. Retailers in some sectors (such as consumer durables, white goods and the car industry) might spot opportunities to be more creative in this area.

The Internet of Things (IOT) refers to refers to the ever-growing network of physical objects that feature an IP address for internet connectivity, and the communication that occurs between these objects and other Internet-enabled devices and systems.

The article highlights that developments in this area will become more strategic in the coming year. In particular shoppers will become ever-more connected to retailers. Indeed retailers will also be able to leverage some efficiencies with their supply base. This should lead to more accurate forecasting and lead to potential savings which could (in theory) be passed on to the customer in the shape of lower prices.

Increased automation is also likely to feature more prominently both in-store and within the areas of supply chain management. Robotics, once the prerogative of science fiction movies and books, is now become more viable and practical in the retail and supply chain environment.

This development has implications for the work-force. It also has relevance – given the possibility that the number of migrants entering the UK may drop in the longer term due to Brexit negotiations. Work that was previously performed by low paid workers can now be tackled by robots or technology.

In previous blogs we discussed the example of self-checkout and the lack of need for physical personnel.

As you might predict, Amazon is one of the pioneers and drivers of developments in robotics and automation.

We have often recognised the unpredictability of weather and its impact (usually negative) on demand – particularly in clothing and fashion. The Retail Week article predicts that we will see more “seasonless” fashion practices.

It highlights retailers such as Brands including Burberry, Tommy Hilfiger, Topshop Unique and Ralph Lauren, who have embraced “see now, buy now” collections, allowing shoppers to buy the styles they see on the runway immediately rather than waiting six months.

In summary 2017 will be an interesting year to monitor in terms of developments and trends. Let’s cast a “gimlet eye” over proceeding in the coming months and compare notes at the end of the year.