TWEEDLE DUM, TWEEDLE DEE OR SOMETHING DIFFERENT?

TWEEDLE DUM, TWEEDLE DEE OR SOMETHING DIFFERENT?

Since I started the blogs to stimulate discussion on issues raised in the text I have always tried to take a longitudinal view of their contribution. In other words I like to revisit and expand on earlier blogs about issues and retailers.

That “hardy annual” UK retailer, Marks and Spencer is always worthy of revisiting and revising. I was tempted to go back to this retailer recently when I saw that clothing sales had experienced an increase at the end of 2016. This suggested that perhaps it had reversed the seemingly irreversible downwards trend in recent years: where food sales gradually overtook clothing and home sales.

More recent figures published in July however suggested a slight decrease of around 1 to 2 per cent (depending on whether they were based on like-for-like sales or adjusted.

As we know statistics can be “bent” to suit a particular narrative and Marks and Spencer is no exception.

On the one hand the CEO, Stephen Rowe was delighted with the clothing and home performance particularly as sales in this category appeared to increase by 7% if full price was taken into account. This meant that the role of discounting and promotions played a lesser role in stimulating sales (clearly a positive feature). In the past couple of years Marks and Spencer has been criticised for an over-reliance discounting.

That said, overall clothing sales still declined in spite of some favourable underlying conditions in the first quarter of 2017. For instance Easter fell later in the year than usual, the Eid festival took place earlier in the year and the prevailing weather conditions in the UK during Easter and early summer were favourable and conducive to encourage shoppers to spend money on summer clothing.

You may have noted from an earlier blog of mine on Marks and Spencer that I have put forward the notion that it should consider the nuclear option of pulling out of clothing and focusing instead on the food sector. I am not alone in this view although I fully recognise that it is a controversial view and one that is likely to be torn apart by many retail commentators and so-called experts.

My argument in that earlier blog was based on the view that the clothing sector has changed out of all recognition to the climate faced by M&S back in the 1970’s and 1980’s. Much has happened to irrevocably change the business models and way of doing business in the clothing sector. The main change has been driven by pioneers such as Zara and H&M who have revised the way of doing business: creating a fast-fashion and fast supply chain system that provides the shopper with more variety at lower prices than could be sustained by the more inflexible and traditional models (four fashion seasons, slow supply chains and decisions made a year to eighteen months in advance of the particular season).

We have also witnessed a polarisation of retailers operating at both ends of the spectrum: high price and quality versus low price at an acceptable quality level. As we discuss in chapter six of the book a retailer in the fashion sector does not want to be seen as a “piggy in the middle”. Mid-range, mid- level retailers have consistently struggled to make an impact. This is based on the simple view that if you are caught in the middle it is next to impossible to develop and sustain a relevant point or points of differentiation. This is what has happened to M&S in my view, within the fashion sector. It has tried numerous launches and re-launches such as the Autograph collection, Indigo, Collezione and North Coast labels. None of which has made any significant impact as regards turning around its fortunes in the fashion sector.

It has also struggled to carve out a relevance for younger shoppers, arguably the most vibrant and lucrative segment of the fashion market. It is still seen by many such young, professional females as a retailer that sells items that only their mother or grandmother would wear. This is analogous to throwing a party in your flat and inviting your friends as well as their parents and grandparents along to!

The other irreversible trend over the past fifteen years or so has been the emergence of the supermarkets in the fashion sector. They too have created ranges of clothing that are of an acceptable quality and at a low price. This has been very attractive for many categories of shoppers (low income, families and so on). Their growing significance has also been exacerbated by the prolonged recession since 2007 and the continuing decline in real incomes generated by pay freezes in the public sector in the UK.

Marks & Spencer has experienced more success in the food area however. Currently 60% of its revenue comes from this area and only 40% from clothing and home categories.

There has been an inexorable trend towards changing the direction of M&S. For instance in late 2016 it announced that it would be closing over eighty of its stores in the UK. This could be interpreted as an admission that in the longer-term it needs to reduce its involvement in fashion.

Of course it could also be argued that it is a recognition that there is a need to eliminate physical space from the retail operations and focus instead on online channels.

I would argue that M&S has successfully carved out an identifiable and recognised niche in the area of food. Whether this has been by accident or design is a moot point. However in any event it has bought into the “changing behaviour of consumers in the past decade. Let’s take a simple case in point.

Many of us do not work in the conventional ways in which our parents did. Do we work from nine to five each day with a lunch-break of an hour in between? Of course not. Even in the bureaucratic public sector, people and organisations adopt a much more flexible position. People work from home or they come in early and nip out for a sandwich at 10am or 10pm. Food on the go has become the norm for many people. It is here that M&S has done well.

It produces an innovative (and changing) range of popular food items at levels of high quality ant mid t0 high price points. This has given it a clarity and relevance that is totally missing in this clothing and home categories.

We should also note that the food sector by far exceeds the clothing sector in the UK. In the case of food (including alcohol) it was estimated to be worth £114 billion in 2014. By contrast the clothing sector was worth around £63 billion. This might suggest that in the longer-term greater opportunities arise to capture more business in the food sector.

While this sector is still very competitive (with specialise food operators such as Sub Way and Pret a Manger to the fore), I argue that M&S has a clear positioning strategy in focus.

Does it really need the baggage of trying to also compete in the fashion sector? In some ways this is analogous to an elephant trying to compete with a gazelle in the running stakes. With the move away from large format and “large space” retail operations, surely it would be better for M&S to direct their innovatory approaches to delivering food options in much smaller physical spaces? The virtual space? Or through other operators such as petrol and service stations? In fairness this is what they have been trying to do in the past few years. By divesting from high-cost physical spaces it can become more nimble and flexible in anticipating and responding to changes in the environment.

Of course as long as the clothing and home sectors still remain somewhat profitable, the decision to divest would be a difficult and potentially painful one for senior managers.

However I would end by observing that the heritage of M&S is to be found in the food area. When it opened as a bazaar in Leeds in 1864 it did so as a food operator. It did not sell clothing until after the First World War.

Let’s continue to monitor M&S to see the next instalment in the story!

 

Advertisements

I Want it all

The title of this blog is not about a megalomaniac attempt to take over the world on my behalf or the consequence of a bad dream. Instead it might best describe the attitude and desire of that famous entrepreneur: Jeff Bezos – founder of Amazon when it came to is recent acquisition of Whole Foods the mid to high-end US grocer.

A little background to this acquisition.

In June 2017 Amazon acquired Whole Foods for around £10.6 billion. Although it had made some previous and tentative ventures into the world of grocery retailing about ten years ago (the purchase of WebVan being an example, albeit a failed on), this represent a serious and determined move to consolidate its presence in this sector. It is the biggest ever deal for Amazon and judging by the business press coverage is seen as a potential “game-change” for the future of this sector. Prior to this acquisition Amazon has registered a very small presence in the grocery business in the US: it is estimated to have around 0.6 per cent market share.

By acquiring over 440 stores in the USA and around 40 in the UK it clearly widens the footprint of Amazon in this area.

The reason why it has attracted such media coverage is because it has generated a range of different theories as to the rationale for this move. We will tease out a few of them in this blog.

Perhaps the simplest observation is that it represents a reversal of Amazon’s onward march towards domination in the online retail space and might signal that there I life still in the traditional “bricks and mortar” grocery retail arena. However in my view this is simplistic and naïve.

The reality is that for the past decade or so retailers have grappled with the challenge of provide a range of channel options for shoppers. More recently this has morphed into the concept of having an omni-channel presence – where shoppers should enjoy a seamless and integrated experience in their dealings with a retailer. The concept of remaining as a “pure-play” retailer in either bricks or mortar or online is reducing.

As we know Amazon is one of the most aggressive players in terms of innovation. This applies to all aspects of its business model: from big data management, the application of technology right through to the vision of Bezos which is most accurately captured in his desire to build an “everything store”.

Over the past decade this has evolved through buying parts of the supply chain it did not already own – for instance initially it relied on third party delivery companies such as UPS. Now it has its own delivery systems across shipping and air. In the latter case we are currently witnessing its testing of how drones could be profitably used to expedite delivery via a range of options such as click and collect, direct to a locker or storage or to a person’s home or office – all within a two-hour turnaround.

Therefore the acquisition of Whole Foods opens up the opportunity for Amazon not merely just to gain a physical presence but the leverage the strengths of this company across its existing operations. Let’s examine this in more detail.

Whole Foods has encountered a slowing of sales and profits in recent years. It is not a low-price, discount retailer however. Instead it is seen as a premium retailer which focus on a range of quality and healthy options for an affluent and young target market. This might be contradictory in terms of how many people see Amazon (a place where you can buy items at lower prices than the competition). It can be equally argued that it allows Amazon to expand it range of items in the grocery sector to include a more sophisticated range of fresh food items and therefore make itself even more appealing to this “affluent” shopper.

Let’s not forget that it has already innovated in this space with Amazon Prime and amazon Prime Fresh, where shoppers are willing to pay an annual subscription (£75 in the UK or $99 in the USA) for this delivery service.

Rather than being perceived as making a grab for simply a greater physical presence in the grocery space, it could in fact be argued that it could be seen as more of an opportunity to consolidate its stranglehold on the online shopping arena.

Let’s be careful about making the jump to the assumption that this acquisition signals a reverse in the inexorable move towards online shopping and instead marks some form of recognition that the bricks and mortar space is going to witness an upsurge or shift in popularity.

After all in the USA the last few years in particular has witnessed the decline in visits and usage of shopping malls (the term “ghost malls” has come into vogue to capture this phenomenon). For most retail categories the upcoming generation, weaned on online shopping, social media platforms and apps, are unlikely to switch away from this ingrained behaviour and jettison it in favour of a return to physical shopping to any significant extent.

A recent study by Alltech with young shoppers (20 year olds plus) captured a revealing comment. When asked if grocery stores and supermarkets are still important one person responded thus: “Yes they are very important – for old people”. This may give us an interesting insight into this segment’s perception of grocery stores!!

Consider this. Over 23 million US shoppers live more than a mile away from a grocery store. Fresh food and fruit is largely inaccessible to them. Amazon with its innovative approach to delivery is capitalising on this. Likewise the acquisition of Whole Foods store gives it a local dynamic and more importantly access to data on these shoppers. This can widen the reach of Amazon and increase its range of items – particularly in the premium (mid-to upmarket grocery category.

In the UK, with Whole Foods having approximately 40 stores, a similar strategy can also ensue.

I would argue that despite the relatively poor financial performance of Whole Foods in recent years) it still has a strong brand perception and presence with the affluent 20 – 30 year old shoppers, and older). Let’s look at the relative strengths of both parties.

Amazon demonstrates its capabilities in the following areas: innovation and its aggressive approach to implementation, a very strong delivery capability and its masterful management of big data.

As well as a strong brand profile Whole Foods brings it reputation for high quality items and a strong set of relationships with existing suppliers. The harnessing of these strengths is only likely to lead to further improvement.

Will Amazon retain the brand name and the brand values? In my view it should certainly retain the name and most of the stores. It may make a number of adjustments to the portfolio of items – still largely focusing on the premium image but with some adjustment to lower prices in some categories, although this could create problems if it moves too aggressively in this direction.

With aggressive technological developments in areas such as facial recognition likely to emerge in the next few years, Amazon will continue to improve its delivery mechanisms and speed up the convenience issue in its Amazon Go stores.

The competition in the form of established grocery retailers such as Wal-Mart, Tesco and so on will have to respond. Likewise online pure-play retailers such as Ocado will be nervously looking over their shoulders.

The only certainty is that a “do nothing” response is not an option.

 

SURGING UP, UP AND AWAY

I have always been attracted to the challenge of setting prices for products and services. Why? Well mainly because it is probably the most neglected and misunderstood aspect of retail marketing strategy. However things are changing rapidly.

In recent months here in the UK the business and daily press have become obsessed with the concept of “surge pricing”. The term has been portrayed by commentators and journalists as the “latest “in-thing” or “whizz” that shoppers are about to become exposed to. I would like to de-bunk this argument and in this blog I express some observations that hopefully put the concept in perspective and context.

The term apparently describes the notion that retailers are likely to do away with the concept of “fixed pricing”, which has been the practice for many decades. Instead prices will rise and fall in an ever-bewildering number of changes during the day to reflect rises and falls in demand. The reason why it is gaining more traction is built around the confluence of big data and technology: a theme which is a recurring feature of my book and my previous blogs.

However, let’s get real here. Call it what you will – surge pricing, dynamic pricing, peak time pricing or whatever. It has been around for a long time, particularly in the services sector. Most of us have experienced such variations in pricing with airlines and hotels for quite a number of decades. It is particularly appropriate in services, where you cannot store or inventories services. Once the flight takes off (whether at capacity or half-capacity) the opportunity is gone to sell extra seats. We refer to this as one of the consequences of “perishability”.

Of course in traditional retailing, as shoppers, we are constantly exposed to promotional prices, discounts, special offers and so on. However a number of developments have increased the frequency of such strategies and in particular the practice of varying prices in a frequent or dynamic way to reflect demand or the lack thereof.

Companies such as Amazon have taken the practice of dynamic pricing to ever higher levels of sophistication. Again I take you back to the confluence of technology and data. By capturing a raft of information about the individual shopper and by making use of technology to developed detailed algorithms to project and forecast demand, companies can reflect this in the pries that they charge for their products.

This has been further helped by the use of e-pricing within the “bricks and mortar” stores. This has been going on for a number of years in European countries such as Germany and Scandinavia. This is visibly identified by the increasing use of Electronic shelf labels (EPL’s). This has recently entered the lexicon in UK retailing.

Let’s reflect on this development for a second or two.

Traditionally one of the biggest challenges facing retailers was to implement price changes. Paper-based shelf labels had to be changed manually by a vast number of people across the store portfolio. Imagine the length of time it can take to fully implement changes across five hundred store outlets for example? Also reflect on the potential for human error: again a large number of individual doing such a mundane task. There are bound to be errors. Also not every store will work to the same level of expected efficiency when it comes to making the changes. It could potentially take a few days before every store in the portfolio has addressed the changes.

Now reflect on how it is so easy for online retailers to make and implement price changes. What may take a few days in a “bricks and mortar” store can happens within an hour or two of a strategic decision to effect a change in price on a number of different items.

Now, through technological developments, prices can be altered with bewildering frequency across the traditional physical outlets.

Surge pricing, it is argued can lead to higher margins for retailers because it can allow them to reduce waste: in the form of excess stock at the end of each day. This is achieved by altering the price of items to reflect demand patterns and also lead to operational efficiencies by spreading the shopping more evenly during the day.

A good example of this was an experiment by Marks and Spencer in 2016. It reduced prices on its food items up until 11am each day and then increased them during the peak “lunch-time” period (when people call in to buy a sandwich or salad). Petrol stations in Scandinavia have used similar strategies to manage demand by increasing the price of fuel at peak times and reducing it at off-peak periods.

The notion of a “one piece fits all” approach is coming under increasing attack and is seen as being implausible – given the array of data and technology available to retailers.

What are the benefits to shoppers who might be faced with varying prices when visiting their local supermarket or fashion retailer? Well if you are prepared to shop during off-peak hours you would certainly benefit from lower prices. This might mean making a visit to the store at 11am on a Monday morning or 11pm at night.

If retailers go even further and link your personal data and shopping preferences and patterns to a personalised form of pricing, then you may also benefit from lower prices gain some reward through your continued loyalty.

In essence shoppers would have to readjust their shopping habits and this may take some time before they become conditioned to such “surge pricing” tactics. For instance in Scandinavia petrol stations are engaging in such practices by changing prices at different times during the day.

Retailers probably gain more from this exercise. The do so through more effective management of inventory and through achieving cost efficiencies by more effectively managing resources e.g. front-line staff.

It also makes it easier for retailers to make more effective price matching offers and get these changes up more quickly via electronic shelf labels.

In theory it addresses the ever-increasing need for price transparency.

The fact is that UK retailing is only in the nascent stages of implementing the technology when compared to countries such as France. In the latter case retailers there are in a position to changes prices over 90,000 per day if they so desire.

For bricks and mortar retailers it allows them to compete more effectively with pure play online retailers. They can effect price variations potentially as quickly as them, thus reducing the gap between them.

If you are getting cheesed off with the implications for shoppers there is good news, at least in the short term. Retailers, particularly supermarkets, faced with the bewildering range of items and the sheer size of the number of the stores which they operate, are only able to drive changes with such frequency on about 20 per cent of the changes that their computer systems and algorithms recommend.

It will also take time to combine personalised, individual pricing for each and every one of their shoppers.

Once again the combination of technology and data is driving change.

Remember this. The concept of surge pricing is not new. What is innovative is the potential that it offers to retailers. For shoppers, if we wish to benefit from it, we will need to become conditioned to it and adjust our shopping habits accordingly.

Haggling over prices has been around for centuries. To some extent this notion of surge pricing reinforces this practice: shoppers will become used to such variations. The idea of a standard fixed price may disappear. Let’s keep an eye on this development.