ON THE MARGINS

The nature of the relationship between suppliers and retailers generates many column inches in the business and academic press. Nowhere is this more evident than in the sportswear industry.

I was reminded of this by some recent developments in this sector recently. In the red corner, we have powerful global branders such as Nike and Adidas. In the blue corner (in the context of the UK sportswear and accessories market) JD Sports and Sports Direct. Before considering the issues, let us try to put this sector in context.

Two entrepreneurs: John Wardle and David Makin (hence the name JD Sports) opened a shop called Athleisure, in the 1990’s in Manchester. It focused mainly on selling Lacoste trainers and Fred Perry shirts. In the intervening decades, it has become the retailer of choice for Nike and Adidas.

Stephen Rubin, the main person behind the Portland Group, gained control of JD Sports in 2005. He paid £45 million for a 45 per cent share. Today it is worth £3.2 billion.

Arguably, the most “high profile” retailer in this sector is Sports Direct. Its owner. Mike Ashley has been one of the most controversial people in retailing over the past decade or so. Sports Direct has faced accusations of sharp practice in areas such as its sourcing policy and its management of human resources. It aggressively attacked JD Sports by engaging in widespread discounting – mainly by acquiring brands such as Everlast and Slazenger and using the higher margins from these brands to fund price cuts on Nike and Adidas brands.

Since 2011, this aggressive policy provoked anger from the latter branders. In retaliation, both Nike and Adidas introduced a categorisation policy when meant that their top ranges of brands were allocated to a select band of retailers. This excluded Sports Direct.

JD Sports recently put in a £90 million bid for Footasylum: a struggling trainers and sportswear company. This is currently the subject of an enquiry by the Competition and Markets Authority (C&MA).

JD Sports also stole a march on Sports Direct by offering Nike and Adidas more space in its stores and worked in collaboration with them in areas such as merchandise display. This led to exclusive contracts with both branders. It is estimated that JD Sports generates over seventy-five per cent of its revenue from Nike and Adidas.

By contrast, Sports Direct (at least up to recently) has placed little emphasis on store design and display, focusing on low prices as its main point of competitive differentiation. This may change in the future, as Ashley contemplates a “name change”, because of his interest in former House of Fraser and Debenhams retail stores.

The relatively “clean” image of Stephen Rubin, when contrasted against the “dodgy” appeal of Ashley, also helped to establish the right credentials for a strong relationship with both Nike and Adidas. Sports Direct has challenged the right of JD sports to acquire Footasylum as it would leave it in a very dominant competitive position in the market place.

Portland Group (run by Rubin) also retains powerful outdoor sports leisure brands such as Ellese and Berghaus in its extensive product portfolio. Rubin keeps away from JD’s operational management and prefers to act as a “sounding board” for senior management in that company.

In response, Ashley has recently embarked upon a re-positioning of its brand image. For instance, it has opened a number of larger and plusher outlets, in an attempt to change the perception that it is a discount retailer. Clearly, he also wants to change that perception in the minds of senior management in both Nike and Adidas.

JD Sports has expanded its operations in the US market by acquiring the retailer called Finish Line for £400 million. This presents an opportunity to fill those stores with better quality sports products. While this retailer has proved to be a loss-making operator, JD intends to upscale many of the acquired stores in the coming year or so.

It has also enjoyed success with its fashion arm: Sports Zone and Hot-T (in Iberian markets and South Korea respectively).

It intends open forty more stores in Europe and twenty in Asia-Pacific in the next two years.

Analysts identify JD Sport’s ability to protect its margins and, therefore, avoiding the need to slash price in order to move inventory off the shelves.

We can recognise the strength of the relationship between JD Sports and Adidas through the queues of people waiting outside its stores to purchase a pair of Yeezy Boost 350 V”’s recently. It collaborated with the rap star Kanye West and Adidas. It worked on the principle of “scarcity” by ensuring that demand greatly exceeded supply. It charged a retail price of around £150 and the popularity of this product could be ascertained from the number of individuals who subsequently sold on their purchase online.

JD Sports recognises the value that the physical store plays in cementing its image. It allows it to showcase the main products and newest editions from Adidas and Nike. This reinforces the view that shopping is still a social activity for many of its customers.

It has employed an aggressive strategy with its property owners, in terms of negotiating its property portfolio. It focuses in particular on avoiding long-term, inflexible leasing agreements. The average lease for one of its stores is around four years.

It continue to invest in the “in-store” experience by making greater use of digital technology allied to its strong brand portfolio.

Senior management argue that its focus on strong, global brands insulates the retailer from the pressure to discount. The use of digital technology reinforces and enhance the shopping experience and allows JD Sports to concentrate on fashionability rather than price. Digital technology also blurs the distinction between online and offline activity. It creates a strong attempt to provide a seamless “omni-channel” experience.

Arguably, it was one of the first sportswear retailers to recognise the concept of “athleisure”. In this case, shoppers increasingly view sportswear as something that can be worn in the context of “non-sports-based” activities such as casual and work wear.

Its value to the likes of Adidas and Nike cannot be underestimated. It is Nike’s second largest global customer behind Foot Locker. Although it must be acknowledged that sales of Nik’s brands have declined in the case of Foot Locker over the past decade. It was overtaken by sales from Nike Direct in 2015. This may pose challenges going forward. Will its younger shoppers continue to visit shopping malls?

It is clear that JD Sport’s strong relationships with key branders such as Nike, Adidas, Under Armour and Puma is critical towards its ultimate success. Acquisitions such as Blacks and Millets stores have also bolstered its strength in the market. Competitors such as JJB Sports disappeared in 2012.

Some commentators describe JD Sports as the “Sport is lifestyle” retailer. This would appear to be an accurate descriptor if its business operations.

It has positioned itself as a “go-to destination for full price premium product”.

Recently Nike notified many of the small retailers handling its brands that it would cease to do business with them by 2021. It justified this reversal in approach by stating that the way that they stocked its goods no longer aligned with its distribution strategy. In recent years, Nike has increased the minimum amount retailers need to spend to keep receiving its products. This may or may not work to the advantage of JD Sports.

In an era of social media influencers, it would appear to have tied in with relevant individuals. It recently launched the British hip-hop artist Buzzy Malone’s clothing line.

In summary, we appear to be looking at a very successful retailer that has sustained its popularity over the past decade or so.

Are there any “clouds on the horizon”?

THE PROMISED LAND

Sustainability has been on the agenda for most companies, particularly in retailing, for the past fifteen years or so. Recent events and individuals, such as the high-profile demonstrations by the Extinction Rebellion group and Greta Tunberg, the sixteen-year-old Swedish activist, has arguably moved it to the top of the agenda.

High profile takeovers of major cities have brought much disruption to many commuters trying to go about their daily lives and business. However, such demonstrations have worked because they have captured the headlines globally. Schoolchildren have also joined in the protests and argued that the decisions and strategies of governments and businesses fail to take account of the longer-term damage to the environment and their future prospects.

Predictably, politicians have made mealy-mouthed statements about putting the environment on the top of the agenda.

Arguably, the activists have not helped matters by advancing the view that people will have to stop eating meat, stop flying and give up their cars. Irrespective of whether they are correct or not in their estimations, it becomes a difficult “sell” to older individuals who are set in their ways and are unlikely to respond to such draconian instructions.

Studies show that even young people are largely disinterested in the issue of sustainability.

Many people, irrespective of age, do not fully understand such apparently complex terms such as “the carbon footprint”.

I would argue that it will take time, perseverance and an incentivised approach on the part of policy-makers and businesses to migrate individuals to a more positive and active approach to this complex topic.

I was motivated to consider sustainability in the context of retailing by some recent changes in strategy by Zalando, the German online retail platform company.

Firstly, some background to this retailer.

Two university friends: Robert Gentz and David Schneider started the business in 2008. It mainly replicated the business model adopted by the US e-commerce company, Zappos. It focused solely on selling shoes online and gradually branched out to a range of categories including clothing for men, women and children.

It buys clothing, shoes and accessories from over 2,000 different brands and sell in seventeen countries in Europe. The footwear category represents the biggest percentage of its revenue – around 21 per cent.

It caters for all segments, ranging from high street brands, designer labels and lower-priced merchandise. It also created its own brands, called “zLabels”. It uses its own brands to cater for gaps in the product lines, which are not addressed by its portfolio of branders who operate on its platform.

This is in contrast to one of its main competitors: Yoox, which focuses only on high-end, premium merchandise.

It is now estimated to be Europe’s leading online fashion platform and generates around 4.5 billion Euros. This is comparable to an established iconic brand such as Puma.

The success of its business model revolves around the word “platform”. It provides the technical, IT and operational infrastructure to its 2,000 branders. Zalando argues that this allows the brander to concentrate on its core competencies such as design and marketing, whilst leaving the inventory and fulfilment functions to Zalando. It provides a wide range of different sizes for its customer base and absorbs costs such as the returns policy.

Senior management have stated that it wants to become “the Spotify of music or the Netflix of entertainment”: a one-stop-shop for online fashion merchandise and accessories.

It employs over 6,000 employees (average age – 32) at its headquarters in Berlin. As of 2019, it has promised to invest around 300 million Euros in its logistics and technology infrastructure to ensure a smoother and seamless customer experience for its shoppers and its brands.

It also promise greater levels of personalisation as it analyses the data and identifies specific preferences across its individual shoppers.

It retains around 30 million active customers (2019 estimates) and its revenues increased by 26.7% by the third quarter of 2019.

Since 2018, Zalando has reappraised its approach to the topic of sustainability. Prior to 2015, it confesses that it had little or no awareness of its growing importance. In mid-2018, took a strategic decision to widen its sustainable assortment.

This included brands such as Ecoalf, MudJeans, Swe-s, Girlfriend Collection and Stripe + Stare. It currently carries around 15,000 such sustainable items from over 240 brands on its platform.

It also introduced a sustainability “flag” label to help shoppers identify such items on the website. It tested the “flag” concept in 2017 and rolled it out across its seventeen markets in 2018. It stated that its overall objective was to make its sustainable benefit fashion assortment “the largest available in Europe” in the next few years.

In 2019, it made some even more ambitious plans to address the issue of sustainability.

Zalando management argue that people hold a number of different interpretations about what constitutes sustainability. They criticise other retailers such as Zara for claiming to be going “100 per cent sustainable”. Zalando posits the view that this is impossible, as everything leaves a footprint anyway. It revised approach includes the provision of a wider selection of brands together with more detailed information about the items in order to help them make more sustainable choices.

The CEO of Zalando: Rubin Ritter calculated that he leaves an average of 40 tonnes of carbon footprint annually (reflecting business class flights to Japan and clothing that he wears). The EU average per person is around 12 tonnes and the global average is 2 tonnes. Motivated by these statistics, he has reoriented the approach of Zalando to sustainability and set a number of targets to be achieved by 2023. He is acutely aware that the fashion sector generated around 8 per cent of global greenhouse gas emissions.

The “game-changing” sustainability strategy features the following targets.

  • Zalando commits to a net-zero carbon footprint in its own operations, delivery and returns policy by 2023.
  • It has revised its sustainability by launching its own “do More” strategy.
  • By 2023 it will have increased is ethical standards and will only work with partners / branders who will agree to align with Zalando’s principles.
  • By 2023 it will generate 20 per cent of gross merchandise volume from its sustainable products.
  • It will eliminate single-use plastics in its packaging and materials.
  • It will extend the life (in line with the principles of circularity) of over 50 million fashion products
  • It pledges to cut ties with any brands that do not comply with its sustainability guidelines.
  • It is not willing to compromise on these principles and will introduce a code of conduct for its branders to adhere to on the dimensions of sustainability such as materials and processes and ethical and social criteria.
  • It will therefore limit the brands customers have access to on Zalando’s platform and thereby encourage them to shop for sustainable items.

How practical and achievable are these goals? Can they be implemented successfully by 2023?

Some commentators argue that in order to address the issue of sustainability, retailers such as Zalando have to be prepared for a drop in growth and potential reductions in profitability in the short to medium term. Otherwise, they will not be around in the world of the future.

Others argue that such aggressive approaches will only create a negligible environmental impact, annoy shoppers and have tangible consequences for profitability. In this obsessive drive towards a sustainable future, other serious social issues such as the elimination of poverty are equally as critical and may fall “under the radar”.

This aggressive approach by Zalando certainly encourages both branders and customers to think about sustainability. Will it work? What do you think? How can they make it work?

UP IN THE WORLD

In August 2019, Boohoo acquired two well-known fashion brands: Karen Millen and Coast. To be more accurate, it purchased the online businesses of both brands. It paid over £18 million for the business and the intellectual property rights of Karen Millen Fashions and Karen Millen Retail. The Coast brand was part of the original Karen Millen portfolio.

Karen Millen was once seen as one of the strongest womenswear fashion retailers, positioned in the premium segment and targeting professional, trend-conscious and seeking “occasion” fashion (for big events in their lives such as job interviews, weddings and so on).

We have discussed the fortunes of Boohoo in a couple of previous blogs. This retailer has garnered much commendation for its performance in the fickle world of fashion as a pure-play online operator.

I thought it might be interesting to explore the rationale for this acquisition as it brings us firmly into play, retail issues such as positioning, merchandise and pricing strategy.

Some commentators have expressed surprise at the acquisition of these brands. They may have a point.

Boohoo has carved out a strong differentiating position at the lower end of the spectrum. It has aggressively competed on offering a wide range of fashionable merchandise at low prices.

The key differentiating factor lies in its overall business agility. This is a term that is used frequently when discussing the overall supply chain of a business. We discuss this in chapter three of the textbook. Many commentators argue that successful supply chains are ones that build on the principle of speed and flexibility in terms of managing the process in the supply chain and in responding to the needs of its target market.

The 16-25 segment represents its core business.

By contrast, the Karen Millen and Coast brands, as noted earlier, focus on the premium sector. With the acquisition of these brands, Boohoo expands its own brand portfolio, which also includes PrettyLittleThing, Nasty Gal and MissPap.

Why would Boohoo embrace the premium segment when its differentiating factor is built exclusively around the opposite end of the spectrum? It challenges conventional marketing thinking; arguing that a company should stick to what it is good at and avoid entering segments where it has no DNA or specific expertise.

Karen Millen and Coast generated much of their revenue from its thirty-two stores and one hundred and seventy five concessions in the UK. It has established a footprint in around forty-five countries through a combination of stores, concessions and franchises.

Its proposition statement revolved around the mantra of creating products that are “style-led, glamorous and a flattering fit”. Its demographic consists mainly of 30 – 40 year-old women. They perceive their typical customer as internationally minded, well travelled  and holding down a position in a challenging professional position.

The physical presence generates roughly eighty four per cent of its revenue from the “bricks and mortar” dimension with the remaining sixteen per cent from its online channel. This is in sharp contrast to BooHoo and its pure-play focus.

Arguably, this is comparable to a situation where Ryanair (an out-and-out low cost airline operator) would decide to compete in the long-haul business by acquiring British Airlines. While not guaranteed to fail, many would see the lack of knowledge and expertise in this sector as becoming a major inhibitor to potential success.

Is it accurate to damn the Boohoo acquisition with such negativity?

Let us consider a counter-argument.

By acquiring Karen Millen and Coast, Boohoo spreads its risk across a wider portfolio of retail brands. By generating a presence in the premium sector, it eliminates the fact that it has “committed all of its egg in one basket”. This sector also provides much stronger opportunities to create higher profit margins: the typical female in this segment considers more variables than simply price when purchasing items.

Boohoo will only retain the physical stores for a short period going forward. It plans to operate the Karen Millen and Coast brands from their online sites as soon as is practical. This is likely to be contentious. The previous owner of Karen Millen has long argued that in key European markets such as Germany, France and Spain it necessitates some physical stores. The supports the argument that women, when making expensive “Occasion Wear” purchases want the comfort of trying on the items in a store. It can also be counter-argued that as they become more familiar with the brand, they are more willing to purchase because they display a higher degree of trust and confidence, mainly based on prior experiences.

We should remember that Karen Millen struggled to generate a profit in the past few years. In 2019, it incurred an operating loss of £1.4 million based on a turnover of £161.9 million. This was an improvement on previous years, where the losses were higher.

On this basis, it is hard to argue against the perception that Karen Millen, as a fashion brand has struggled for relevance in the market.

In my view, it will require senior management in Boohoo to get certain things right in order to make money from these acquired brands.

Firstly, it cannot compromise on the challenge of producing “style-led” merchandise for the core customers who believe in the value of the Karen Millen and Coast brands. It cannot afford to “cut corners” when dealing with the supply base. This arguably, goes against one of its original strengths, driving “hard bargains” and discounts from its own range of suppliers.

Secondly, it must continue to invest in the design of product that meets the “premium” segment.

Thirdly, it must work carefully on content and narratives for the social media platform of Karen Millen and Coast. On a positive note, this was a strong feature of Karen Millen’s communication strategy. It focused on paid media on social media channels such as Twitter and Facebook. It eliminated any form of investment in print advertising and invested in influencer marketing, running a number of themes around the concept of female empowerment.

It is debatable if they can persuade Boohoo’s core customers (females between 16 and 25) to trade up to the choices on offer at Karen Millen and Coast. This will not occur in the short-term.

It must not alter the existing pricing strategies for Karen Millen and Coast merchandise either. To do so would challenge the credibility and authenticity of the brand. It would also bring these brands into direct competition with mid-market brands.

The challenges facing Boohoo are high. Let us see how it pans out over the coming twelve months.

BY INVITATION ONLY

Have any of you heard of Cabi in the context of retailing? No, I thought not. Yet this retailer has been making waves over the past few years in terms of its business model and its impact in the very competitive fashion sector.

I came across this operation recently and thought it would be interesting to review their approach within the context of overall retail strategy.

In essence it is a mixture of the “old and the new”.

In many ways it is similar to our old friend Avon. It started the concept of recruiting people to sell its products “door-to-door”.  Each person recruited to Avon build up a clientele over time and made money by being paid commission on each sales generated. It still has the biggest global salesforce in terms of numbers: most of their sellers are part-time. It still survives despite the vicissitudes and storms taking place in global retailing.

Cabi is also similar to Tubberware. This retailer made its name by encouraging its representatives to use their own homes or to visit homes to organise a Tubberware party. In this case the host provides food and refreshment and people who attend are exposed to the range of products on offer and are encouraged to make purchases.

Let us look more closely at Cabi.

It was founded in 2002 by Carol Anderson and a small number of her friends. She was a designer and was constantly frustrated by the lack of (in her view) information about the latest fashions and styles for busy career women like herself. Due to the time-poor nature of their lifestyle she sought a more “user-friendly” shopping experience. This proved to be the genesis of the Cabi concept. She and her band of friends put together a range of fashion designs to appeal to “career-oriented” females. Its basic proposition was that it was a “company for women, by women”. A number of sellers referred to as “stylists” were recruited to sell and showcase the range of fashion items.

Like Avon and Tubberware it was based on the stylists hosting events in their homes where friends and “friends-friends” would be invited to a social evening where the latest fashions would be displayed and the stylist would provide styling tips and advice and appraise attendees of the latest trends.

At a more strategic level it also provided a clear opportunity for the stylists to build up their own business and generate a good income in the process. This is highlighted by statistics from 2017 which indicated that many of the stylists made around $250,000 a year from their efforts. From becoming part-time stylists who earned a “top-up income to support their main job, many have now become successful operators in their own right.

It is a good example of multi-level marketing, where stylists are encouraged to recruit more stylists from their network of family and friends.

Stylists are required to purchase the season’s complete line of sample items for around $2,500. They use these samples to sell across the different product categories. Cabi’s motto is that “you’re in business for yourself: not by yourself”.

Three income streams are there for the stylists. Firstly they can earn up to thirty-three per cent commission on each item sold. They can also earn commission on the sales of women that they have personally recruited into the team. They can also sell off the past season’s sample line (valued at $10,000). The typical stylist makes around $3,500 from such sales. This more than covers the $2,500 that is required to purchase the new season’s sales.

The statistics from 2017 indicate that the average income across all of the stylists is around $30,000. Over 70% of the stylists have a second job.

Cabi targets mainly women over forty. The US woman in this category is not necessarily a trend-setter in the sense that they buy the latest fashion. However they want to be on trend and see benefits from valuing the stylists as advisors, mentors and influencers

Cabi claims that it has a very high retention rate; quoting a figure of 86%. They suggest that this is a strong endorsement of the success of the model. For instance in similar direct selling retailers such as Avon, the retention rate can be as low as 25%.

Fielding criticism of the multi-level marketing approach, Cabi states that it does not provide bonuses and discounts to stylists to incentivise them to recruit. It also claims that it does not employ arbitrary benchmarks or targets for stylists to move up the ranks.

In order to work on the social nature of the interactions between stylists and customers, Cabi uses storytelling as a critical part of the strategy. This reinforces the ethos of Cabi: that it is rooted in human connection and personal experience. Women share their experiences: much of which revolves around achieving a balance between a business career schedule with home and family. The stylists, in addition to selling, are also expected to deliver on a strong and positive experience for their customers.

In terms of international expansion Cabi has moved into the Canadian market and more recently into the UK. In January 2019 it sponsored the “Design for Bigger Things” women’s conference in London. Senior management felt that this was a perfect fit in terms of projecting Cabi’s image in this market.

Cabi sees their stylists – also referred to the “personal development team” as over 2,500 “pop-up” boutiques in the home. Over 1,500 hostesses work closely with the stylists to create and shape the experience.

Cabi also provides small business loans to women in developing countries who want to establish their own businesses.

It has become the largest social selling women’s designer companyy.

The Cabi shopper can also make use of its online magazine called “The Notion”. They can browse the collections and get the latest opinions on outfit ideas and tips for matching their purchases from season to season. They can then go to their stylist’s personal website to make the purchases.

So what can we say about this business model?

Firstly it challenges the concentration of “out with the old and in with the new”. It has combined the essence of the Avon and Tubberware value proposition and embraced the online and social dimensions of the new retail environment.

Secondly it has embraced social media side of marketing communications and has developed its own website. Whether this could lead to potential conflict or not is problematic, particularly if shoppers want to purchase merchandise directly from the website. This could lead to problems with the stylists.

Thirdly it places great emphasis on building social and human relationships with their clientele. This provides customers with a degree of personalisation that is hard to replicate via online e-tail operators. This would appear to be in line with current trends, where some people value the “high touch” approach.

Where will it go from here? Let’s see.

TOO BIG FOR YOUR BOOTS

Traditional and well-established retailers continue to struggle. The list is endless. The latest icon of the high street to experience difficulties is our old friend Boots.

This company operates over 2,500 outlets in the UK market.

It was founded in 1849 by John Boot in Nottingham. It has undergone many changes of ownership over the years. Significant developments included a merger with Alliance Unichem in 2006. In 2007 it was bought by Kohlberg, Kravis Roberts and Stefano Pessina and it moved its headquarters to Switzerland.

In 2012 Walgreens, the largest USA chemist chain purchased a 45% stake in the company.

In 2014 it exercised its option to purchase the remaining stake and Boots became a subsidiary.

Trading as Boots in the UK, the company has three strings to its bow: the chemist business, the optician business and its retail international development operations.

Over the decades it has also operated an R&D business. For instance in the 1980’s it developed the painkilling drug called Ibuprofen.

In terms of brand identity and equity it can be argued that Boots captures the market for trust and confidence in its products among the older demographic in the UK. It is largely seen as a retailer that offers competitive prices, particularly among the price conscious segments in the health and beauty sectors.

Walgreens as part of its global operations has sets itself a target of reducing its costs by $1 billion across its portfolio of businesses globally. This was driven by the need to offer lower prices and better service to its customer base.

This naturally has had an impact on Boots.

In May 2019 it announced that it was reviewing its portfolio of over 2,500 outlets in the UK and the Irish market.

Despite its strong brand presence in the market and the high degree of trust in the brand, Boots has experienced a slowdown in the last couple of years. It recorded a 20 per cent decline in full-year pre-tax profits in 2018.

Retail experts blame this reduction in performance on the usual suspects: the trend to online shopping, the inexorable rise in business rates, higher minimum wages that have to be paid to comply with UK government regulation and the drop in value of the pound due to ongoing uncertainty over Brexit.

In addition to the above factors, it can also be argued that Boots has experienced ever-increasing competition from retailers such as Savers, Poundland and Home Bargains. That other agile price-centred retailer, Primark, has also moved into this sector.

Boots, like many of the similar well-established retailers in various sectors, has struggled to respond and in particular identify the new brands that have gained favour with online shoppers as a consequence of being recommended on social media platforms by key social media influencers.

The health and beauty sector throws up its own peculiarities in my view. Much of the items that fall into this category arguably are not needed by consumers – certainly the higher end items (in terms of price).

As is the case in many retail sectors, the prolonged recession of the last decade has conditioned previously less price-conscious shoppers to make visits (online and in person) to the discount retailers. Health and beauty is no exception. Savers and Primark are very active in these sub-categories and the previous advantages of having a strong brand equity with high levels of trust, have been eroded over time and are threatening the “comfort zone” of retailers like Boots.

The 2,500 retail outlets arguably cemented the position of Boots in the high street and in shopping centres. In an era where all retailers have to question the logic of having so many bricks and mortar outlets, Boots is no exception.

It is further complicated by the fact that many of these outlets would be designated as being “small” in terms of space.

Boots also has to grapple with the perennial challenge of enhancing the customer experience in such shops. To be fair, it has a reasonably impactful website and has operated its Boots Advantage loyalty card for many years. While arguably not keeping up to the fullest extent with changing trends in beauty products, it has the essential online architecture already in place to rejuvenate its online presence.

It’s bricks and mortar architecture is more problematic. With rises in wages and business rates a seemingly unstoppable process, it arguably does not make sense to retain a portfolio of 2,500 outlets. Arguably the decision to look at 200 stores only for possible closure is not sufficiently strong enough to effect a major uplift in fortunes.

In defence of so many stores, senior management argue that people make over 800 million visits annually. That, in any person’s language is high-traffic density! Also 90% of the UK population is within ten minutes of a Boots outlet.

Commentators have suggested that Boots is focusing its intentions on stores that are coming to the end of the expiry of leases. Also under the microscope are outlets located in towns where there is already more than one Boots outlet.

Recently Boots has begun to address the concept of enhancing the customer experience. It is undergoing an overhaul of 24 of its biggest “beauty halls” in 2019, with the aim to “win back relevance”. It is also planning to open a new flagship store in Covent Garden, London.

This “reinvention” will involve some major changes (by the standards of Boots). Traditional counters in the chosen beauty halls will be replaced by trending zones, discovery areas and live demonstration points. The focus will be on interaction and product immersion.

Two hundred beauty specialists will work alongside brand experts to drive these changes. Advice, guidance, demonstrations and engagement will be the order of the day.

Have we heard all of this before? In the case of many struggling retailers who want to recover their position in the market? Very much so in my view. Is it now too late to respond to the changing needs and requirements of the market? Possibly, in the case of Boots.

Sadly for them more illustrious retailers, in terms of higher-end beauty products, are experiencing the so-called “showroom” effect. Beauty halls in retailers such as Harvey Nichols are not making as much use of beauty advisors and consultants. They are finding that customers make use of the expert advice but make their purchases on online websites that offer the same brands at considerably lower prices.

While Boots is not so dependent on the higher end items, it still could find itself in a vicious circle: where it provides high levels of expertise and yet loses sales to online websites.

In a quest to improve its competitive position it has entered into a twelve-month partnership with Glamour and it is sponsoring the latter’s live beauty festivals in London and Manchester. This provides an opportunity for shoppers to preview the latest, trending beauty products.

Boots plans to launch twenty beauty products in the next year, alongside eight hundred and fifty general products.

Let’s monitor developments at Boots over the coming months? Will it recover its prominent position or slip into mediocrity?

DELIVERANCE

Recently Amazon invested over £500 million in the restaurant delivery company Deliveroo. This sparked off a few thoughts in my mind about the ever-changing and dynamic nature of the retail business.

Firstly, a little background on Deliveroo.

It was founded in 2013 and was one of the first companies to develop a takeaway app that uses its own couriers, rather than the previous practice of restaurants delivering to customers themselves. Over the past five years it has proved to be one of the fastest growing businesses in this sector of the retail food business. It quickly expanded its business operations by setting up its own standalone kitchens (called “dark kitchens”) where their chefs prepare a range of different dishes which are then delivered by couriers. These “riders” are not directly employed by Deliveroo. Instead they are paid per delivery. Deliveries are expected to be made within a fifteen minutes to thirty minutes window.

The company operates within around five hundred cities world-wide and in fourteen countries. Like its counterpart and competitor Uber, it has been heavily criticised for the way it manages and pays its riders. It is a typical example of the way in which the “gig economy” has transformed the business models of many businesses. The focus here is on outsourcing the elements of the value proposition, with an overall objective of keeping the costs down as much as possible.

Despite the objective of managing costs, Deliveroo recently posted figures which show that it has increased its operating expenses and recorded losses of around £180 million.

Therefore the concept of partnering has attractions for a company like Deliveroo as it tries to stem these losses and acquire capital to inject into new aspects of its business model.

For instance recently it as established a new concept based on combining delivery kitchens and food markets in Hong Kong.

It was one of the first companies to build bricks and mortar kitchens, where several restaurants cook food for delivery. This concept has been copied by many competitors.

Speaking of rivals, its main competitors in the UK market are Just Eat and Uber Eats. The former is the dominant player in this fast-growing market.

This concept of “dark kitchens” and food delivery has certainly “caught a wave” in recent years. Due to a combination of a number of factors such as recession, austerity, lack of growth in real incomes, time-poor customers and so on, people in the United Kingdom have reduced the number of times in which they “eat out” in restaurants.

This has impacted across all categories of restaurants in the food retail sector.

As I began to write this blog it was announced that Jamie Oliver’s restaurant operations had gone into administration. This is worth further investigation from our point of view as he has been one of the most successful entrepreneurs in this business over the past twenty years.

Discovered by the BBC programme: the Naked Chef, in the later 1990’s, he became an iconic figure on TV and his recipes generated a lot of publicity. In 2002 he opened up the “Fifteen” restaurants. In 2008 he introduced “Jamie’s Italian” chain of restaurants. He expanded internationally and used franchising to expand his business. His stated goal was to “positively disrupt the mid-market dining segment of the restaurant business.

In May 2019 twenty-two restaurants in the UK closed and went into administration with the loss of over 1,000 jobs.

What went wrong?

Some commentators put forward the view that he expanded too much and over-extended the business. Others argued that the restaurants were too large in size. With reduced staff, delays were occurring in servicing the tables and ratings dropped on social media platforms.

To be fair, other similar restaurant chains struggled. These included Strada, down to three restaurants, Caluccio’s, which closed over one-third of its operations.

Byron, Café Rouge and Prezzo are also experiencing difficulties.

If we buy into the notion that the food restaurant business is fickle: some experts say that they have a five-year life cycle, before they become stale, then it is perhaps not surprising that even successful ones will inevitably fail.

To this we must add (as mentioned earlier) the changing consumption patterns of people – no longer prepared to eat out as frequently as before.

As we have seen across other sectors in retailing. Dark kitchens and delivery processes reduce the costs that are normally incurred by traditional restaurants in terms of rental and leasing arrangements that are often prohibitively expensive. Staffing costs are also much reduced under this model.

This leads us back to where we began this blog: Amazon’s investment in Deliveroo.

What is the driving force behind this investment?

We should note that Amazon entered this space in in 2015, when it opened up Amazon Restaurants. It closed in 2018 because of difficulties in differentiating itself from Just Eat, Deliveroo and Uber Eats.

Clearly there is scope here for synergy between Amazon and Deliveroo in terms of integrating their respective value propositions. Amazon brings it technological and IT competencies to the party. Deliveroo has established a vast ranger of riders – currently delivering food, but in the future (in light of this partnership) could also deliver many of the staple items sold by Amazon. As Amazon Prime grows then this could be neatly fitted into the Deliveroo process.

The Deliveroo model is largely based on the concept of convenience: a theme which resonates strongly with the current generation of customers.

Amazon’s investment is part of an overall investment round initiated by Deliveroo which is expected to general over £1 billion. This investment will be used to grow its technology base and expand its reach by tying in with more restaurants and developing its  “deliver-only” kitchens called Editions.

A prominent UK politician has criticised this partnership – arguing that Amazon only wants to get access to Deliveroo’s technology and data. He further argues that this is symptomatic of Amazon: an obsession with tracking people and using micro-targeted messages. He has labelled this phenomenon as “surveillance capitalism”.

What are we to make of this partnership?

Firstly it further threatens the traditional food restaurant business model. The high costs associated with running such businesses are reduced.

Secondly it reinforces the notion that many restaurants have relatively short life cycles and even the most successful ones in the mid-dining segment can struggle and fail.

Thirdly it confirms the perception that Amazon is spreading its tentacles into almost every sphere if people’s lives.

This partnering move is arguably a good one for Amazon. It failed when it established its own operations. This approach allows it to have a “foothold” in this fast-growing segment. It also benefits from the competencies of Deliveroo in this area.

This “gig economy” proposition of Deliveroo arguably might struggle in the future as the fickleness of customer may mean that a new business model developed by an entrepreneurial operation may replace this current “flavour of the month”.

Let’s see.

THE PRODICAL RETURNS

In an earlier blog we analysed the fortunes of Superdry – a UK fashion retailer which makes extensive use of Japanese images and letters to convey the impression of being an “international” retailer.

It was founded by Julian Dunkerton in the mid 1980’s with a colleague. He acted as the initial CEO and subsequently as the creative person behind the designs and ideas. Evidence of its “global reach “was evidenced by a ten-year joint venture with the Chinese retailer: Trendy International Group, in 2015.

In recent months it has experienced an interesting phenomenon that is reminiscent of many businesses and stems from that perennial question; what happens when the CEO / Founder / Key Catalyst leaves?

The problem is compounded by the fact that Dunkerton had left Superdry in April 2018; having fallen out with fellow Directors over the direction of the business. However he still retained shares in the business and like Shakespeare’s Banquo in one of his plays, still retained a strong interest in the operations of Superdry: holding a nineteen per cent stake. Increasing frustrated by the decisions of the new CEO he mounted a return to his original post in the latter months of 2018 and the early months of 2019.

Naturally this created ructions among the board members: many of whom had blamed Dunkerton for the decline in fortunes of the brand prior to his original departure. In particular he was criticised for not showing enough innovation in product design.

Dunkerton was a strong vocal critic of the increasing tendency to engage in heavy discounting and also poor product and design decisions. He has also been scathing about the trend of Superdry to reduce the number of SKU’s within its core product categories. Some of its new product categories such as “performance wear” has also been attacked strongly by Dunkerton. He has also argued strongly against the idea of Superdry entering into the kids wear area.

He based this criticism on the fact that Nike and Adidas perform strongly in the “mini me Children’s wear market and that Superdry is in danger of moving away from its core segments such as the young professional groups, sixty per cent of whom are over twenty-five.

In his view it is not sustainable to cater for such disparate groups in a heavily competitive market. This will lead to a weaker brand equity in the longer term.

This led to profit warnings being issued. Over £1.2 billion was wiped off the share value of the brand between 2018 and early 2019. It has resulted in a forty per cent plunge in profits in the year ending December 2018.

After a six months campaign he won the battle with the board room and the institutional investors and gained enough support to return as the CEO. Together with the support of Boohoo’s Chairman, Peter Williams, he has launched a strong campaign to revitalise the fortunes of Superdry. The battle was won on a wafer-thin majority of the shareholders (50.75%: 49.25%).

Shortly after it was announced that he was returning, the share price dropped: an ominous portent of things to come perhaps.

His initial proposals to revitalise the brand upon his return include the following elements.

  • A reduction of around twenty per cent of positions at Superdry’s Head Office.
  • Move some of the production from China to Turkey in order to shorten the supply chain
  • Review the roll-out strategy in the USA market
  • A rethink on how its online operations can be integrated into the “bricks and mortar” formats. Dunkerton feels that, by comparison to a retailer like ASOS (114,000 sku’s, and fifty percent of those being own label), 4,000 sku’s only being on line in the case of Superdry is not very impressive.
  • A review of the number of Superdry stores. As of April 2019, sixty per cent of the stores will be up for renewal over the next four years.
  • The cancellation of the recent move of Superdry into the children’s wear segment. Dunkerton argues strongly that the Superdry brand traditionally holds a lot of appeal for teenagers. It is unlikely that that will remain so attractive if “little brother / sister” is also wearing it. One-third of sales comes from the 16-25 age bracket.
  • Focus more fully on its core customers: teenagers and “twentysomethings”.
  • Stem the practice of heavy discounting that was pursued by the previous CEO.
  • The hiring of a new Creative Director – Phil Dickinson (formerly with Nike) to inject more radical thought into the area of product design. This individual is very familiar with two of Superdry’s core markets: China and the USA.
  • The reintroduction of the Superdry Design Lab, with the intent of getting new designs into the stores well ahead of the Christmas season in 2019.

The fact remains that his return has not been welcomed by the existing board. Many of them have quit as a consequence of his reappearance.

In addition to accusing him of making major mistakes when he was with them, many argue that the decline of Superdry has coincided with a very weak period for fashion retailing in general. Also the very mild winter in the UK has also affected Superdry, given its reliance on outerwear.

A number of questions have to be posed in my view.

Can the prodigal’s return lead to a reverse of the decline in share value?

Will he quickly overcome the clear dissatisfaction about him in the minds of the current board and the shareholders?

Can he recover the initial success and creativity associated with Superdry in the 1990’s and 2000’s?

Is Dunkerton “clued into” the changes that have taken place in fashion retailing in the last few years?

Can he overcome any prejudices or biases that he may hold from the last time he was employed as CEO / Creative Director?

I am minded to associate the return of founders / CEO’s to their original business ventures as being akin to the reappearance of football managers, who have been sacked or have left and then return subsequently in a “blaze of apparent glory”. How many time do we see a similar return to success? Not in too many cases, in my view.

The fashion industry has traditionally exhibited signs of volatility. This, in tandem with the emergence of pure-play e-tailers, has led to many changes in the competitive structure and nature of this sector.

The recruitment of an ex-Nike creative individual, with experience of the Chinses and US markets should arguably improve the position of Superdry on the global stage in key markets.

It is arguable that the return of the prodigal son will lead to the changes necessary to rejuvenate this brand. Let’s monitor progress over the next year.

FARFETCHED

When we think of luxury goods, many of us picture an opulent retail environment; where customer service is key and is defined in terms of the extent of personal attention provided by swooning sales associates. The design of the retail environment would also reinforce this perception: expensive carpeting or marble flooring, expensive accessories in the store. All reflecting the exclusiveness and lifestyle that people (who can afford it) look for in the luxury space.

Many people argue that you cannot sell luxury online. They justify this by arguing that it is difficult if not impossible to replicate this “luxury” effect on an online website. More importantly shoppers, in their quest to purchase luxury items actively seek the “experiential” aspects. This, in their view can only be achieved in the physical space.

I happen to disagree.

Ongoing developments in technology mean that e-tailer’s websites are constantly undergoing re-invention. Rather than relying on text and simple videos, they are moving more rapidly to address the experiential dimension. The use of simulation, virtual and augmented reality are featuring more prominently.

Farfetch is a company that is worthy of further study and analysis.

Founded in 2007 by Jose Neves and has positioned its business very firmly in the luxury end of fashion. It is present in 190 countries and sells luxury merchandise from over 1,000 brands. In essence it connects global shoppers to over 500 boutiques from its UK-based platform.

In 2016 it generated over $800 million in overall business. This translates into over $200 million in terms of sales. This emanates from an average of 20% to 25% commission that is earns from individual items that it sells on behalf of its clients (the branders).

In 2017 and 2018 it has also made significant acquisitions such as JD.com – China’s second largest ecommerce company and a partnership with Chalhoub – a luxury goods distributor in the Middle-East.

The business model employed by Farfetch is interesting. The CEO, Jose Neves, describes the company as a “tech” business: not as a retailer. This is graphically emphasised by the fact that 1,200 of its 2,000 employees are engineers.

This is also reflected in the high level of investment that it has made in areas such as IT, logistics and delivery processing.

It is “asset light”: at no time carrying any inventory. Instead it builds many different websites for its customers. This is evidenced in a recent strategic partnership that it has entered into with Harrods: the quintessential UK luxury Department Store. Under the terms of this agreement, Harrods joins a group of seventeen luxury brands including: DKNY, Manola, Emilio Pucci, Blahnik and JW Anderson

For such retailers, Farfetch addresses one of their key limitations. They do not have the knowledge or expertise internally to manage the complexities of an online channel platform. These complexities are centred on the following areas: ecommerce management, operations support, international logistics support and overall technical support. Brands such as Harrods will continue to manage trading issues such as marketing, brand relationships and product strategy on the site, along with creative and editorial content.

Arguably this is a “marriage made in heaven”. Farfetch brings it considerable technical expertise to the party and the brander brings the power and equity of its brand. End result? An effective online platform which can optimise performance in terms of global sales for the brander and considerable revenue from commissions payments to Farfetch.

Farfetch, through one of its subsidiaries, offers white-label ecommerce services for brands and retailers. White label production is often used for mass-produced generic products including electronics, consumer products and software packages such as DVD players, televisions, and web applications. Some companies maintain a sub-brand for their goods, for example the same model of DVD player may be sold by Dixons as a Saisho and by Currys as a Matsui, which are brands exclusively used by those companies.

Some websites use white labels to enable a successful brand to offer a service without having to invest in creating the technology and infrastructure itself. Many IT and modern marketing companies outsource or use white-label companies and services to provide specialist services without having to invest in developing their own product.

Farfetch acquired Browns; multi-brand womenswear boutique in 2017. This allows it to gain a direct experience and knowledge of operating a “bricks and mortar” store and to feed in this knowledge to its concept of “store of the future” – a data-powered operating system for retailers. Neves describes this development as “augmented retail”. This essentially represents a mixture of online and offline experiences for the shopper.

The “store of the future” is a good example of omni channels in operation. The operating system captures consumer information. This is made available to sales associates who can “tap into” this resource and work more proactively with shoppers. The shopper can connect with Farfetch either online or offline.

In some ways this overall business model is similar to Yoos Net-a-Porter (YNAP) a multi-brand online platform which was recently acquired by Richement. YNAP however is a pure ecommerce retailer that controls the entire value chain: from customer relationships, product inventory and fulfilment to the digital presentation of the brand.

By contrast Farfetch operates as a market-place through partnerships with independent retailers, who post their offerings on its platform. The branders manage aspects such as fulfilment. They use the data generated from the Farfetch platform for implementation purposes. This reinforces the approach by Farfetch: that it is a technology company and not an actual retailer. It does not hold or manage inventory.

In case you think that Farfetch has dismissed the concept of the traditional bricks and mortar retail store, the CEO argues strongly that the future of retailing in the luxury end of the market will be centred precisely in that area. He argues that Farfetch exists to help brands and retailers more fully understand the luxury shopping experience. By providing a platform it can achieve this objective. Harvey Nichols has also signed up with Farfetch to work in this strategy.

What can we learn from our review of Farfetch?

Firstly this business model is not new or unique. Arguably Amazon performs most of the features offered by Farfetch and it has been the pioneer of such electronic marketplaces.

Farfetch has however captured a prominent global position in the field of luxury fashion mainly through its relentless investment in the “techy” side of the value chain.

As noted earlier while many luxury branders exhibit dexterity and creativity in terms of marketing their creations, they are noticeably lacking in the skill-sets required to set up and operate a robust value chain e-commerce platform site. By entering into strategic partnerships with companies such as Farfetch (as evidenced by recent developments with Harrods and Harvey Nichols) luxury branders can widen their appeal to a global market without having to make the required investment to do so.

We are likely to see many similar developments going forward over the next few years.

DO YOU NOT KNOW WHO I AM?

Technology moves on apace. In this blog I consider the developments in the area of facial recognition and detection and how it can impact on the ongoing relationship between retailers and shoppers.

This technology has had its origins in the area of police and security protection. There is ongoing debate as to the efficacy of the use of facial recognition and detection when it is used to scan people going about their business in the streets and highways. Some argue that it is a gross invasion of privacy. Others maintain that it helps the police to detect criminals and terrorists and that it can lead to successful prosecutions. Clearly this leads to polarised views as to how facial recognition is used. While police detection rates may improve as a consequence, the ever-encroaching influence of “Big Brother” moves closer. In terms of personal freedom and democracy, powerful arguments can be put forward to restrict its usage.

It is not the intention of this blog to enter into sustained discussion on political or social matters here. Our focus relates specifically to how the retail sector approaches such technology.

Clearly it has some potential benefits for retailers.

Software such as FaceFast technology can scan faces as far as 50 to 100 metres away. Many retailers use variants of such technology to identify existing shop-lifters and dishonest people. This can help to decrease the losses from theft and arguably leads to lower prices for shoppers (as retailers traditionally pass on this cost in the form of higher prices). This use of radio facial recognition might be called “shallow learning” – from the perspective of the retailer. By this I mean that it is not used for “deeper learning” such as linking individual faces to data on that customer which has been gleaned from loyalty cards and previous purchases in the store.

Such a linkage can then be used more strategically in the form of triggering sales associates in outlets to make use of this information to personalise their approach to shoppers as they come in close proximity to them.

This conjures up an interesting experience for that shopper to say the least. For instance if you enter a Zara retail outlet (presupposing that you have downloaded the relevant Zara app and you have your smart phone switched on) and a sales associate approaches and says “Hi Bill, Welcome back”, How would you react? Would you feel reassured and relaxed about being part of the “Zara community”? Or would you feel uncomfortable about such familiarity at being referred to by your first name? Many of us probably would not feel too aggrieved by such a tactic as, superficially at least, it poses no threat to us and may engender a “feel good” factor.

It is when we move to the “deeper learning” aspects that some shoppers might feel uncomfortable. For instance Seven Eleven has around 11,000 stores in Asia. It uses facial recognition technology to address the following issues.

  • Identify shoppers that hold loyalty cards
  • Analyse in-store traffic
  • Monitor inventory levels on the shelves
  • Suggest appropriate products to shoppers, based on their previous purchasing patterns and preferences
  • Measure the individual emotions and moods of individual shoppers as they walk around the store
  • Monitor the most popular areas that shoppers visit within the stores.

This provides some “wins” for the retailer as it can use such information to create a more relevant and personalised experience for shoppers. Likewise customer can benefit from a slicker and more relevant visit to a store.

We can see yet again (a common theme running through the blogs) the confluence between technology and data.

In some ways such developments as facial recognition technology bridge the gap between what goes on in the retailer-shopper interface within online channels and physical outlets or stores. Up to now it could be argued that online retailers have enjoyed a major advantage in being able to capture the data about individual shoppers and use it to promote and provide personalised offers.

Now, with in-store technology, retailers can also put together customised offers. Online and offline information can be merged.

For instance the International Finance Centre Mall in Seoul, South Korea uses its information kiosks for such a purpose. As a customer approaches the kiosk, the cameras identify the person’s age and gender in real-time. It can then personalise the interactive advertising surrounding the kiosk accordingly.

We also see increasing use of cameras hidden in digital billboards to effect a similar response and experience for the shopper. For instance in the Westfield shopping centres throughout Australia, such cameras capture age, gender and also the mood of the shopper as they pass by the digital billboards. They can then conjure up personalised messages or adverts on the screens of the billboards.

Westfield uses software developed by Quivindi (a French software firm) in 2015.

Tests have demonstrated that it is accurate in 90 per cent of the cases.

It can identify five categories of mood, ranging from very happy to very unhappy. Clearly mood is an important measure for advertisers as it can indicate the level of sentiment towards a brand. While clearly more difficult to measure, when compared to age (accurate to within five years of a person’s age), it can glean some useful information nonetheless.

It is important to note that this is an example of facial detection, NOT recognition. In this case all of the data captured is anonymous – it is not linked to the individual’s past purchases and preferences. It identifies the characteristics of the individual: not who they actually are.

It does not take a genius to recognise that it does not take much work to take this technology to a higher level of “deeper learning”: where the face of the individual is recognised and is linked to all of the existing and ongoing information that is already captured. In such cases the retailer can shape and groom the shoppers to specific and highly personalised messages, promotional offers and brands.

A study by RichRelevance (2015) indicated that 68% of respondents described facial recognition technology as being “Creepy”. 63% favoured a mobile personalised app which would identify item locations within the store.

Although the survey was conducted in 2015, it indicates a degree of resistance on the part of shoppers to such technology. However it is also likely that such attitudes can change, as shoppers become more comfortable with it and can see likely benefits to their overall shopping experience.

We are clearly going to see more usage of such technology going forward.

It will be interesting to see if legislators address issues such as the privacy (and possible intrusion thereof) of shoppers as they engage with retailers within an in-store experience.

Amazon’s pioneering cashless stores are beginning to roll out. In this case shoppers can pick up items, place them in a bag and leave the store without have to check each item out individually. Neither do they have to queue up at a check-out to pay. They simply walk out of the store, with the payment automatically conducted with relevant technology. A large part of this process relies on facial recognition and arguably it works well for the shopper as it speeds up the process of shopping. For many of us check-outs, whether manned or self-checkouts are a “pain-point”. It causes delays and for many of us who are “time-poor”, this represents a major improvement.

The debate about the intrusion of privacy and “Big Brother” will remain a constant issue. Let’s see how it pans out in the future.

EL PRIMO: BUCKING THE TREND

A brief perusal of the business and social media would suggest that the march towards online shopping at the expense of “bricks and mortar” stores is unquestionable. This view is broadly supported by the apparent evidence of retailers rationalising the number of their outlets and the burdensome costs of business rates and lease agreements. The latter two areas are not something that is relevant for pure-play online retailers.

Is this an accurate assessment of the current state of play in the retail sector?

At first glance it is hard to argue against this inexorable development. Indeed projecting ahead into the next decade it would appear that more and more shoppers will gravitate to online shopping.

But hang on a second! Is there any evidence to suggest that this perception may be too simplistic and one which underestimates the complexity of shopping behaviour?

In my view Primark: the fashion retailer challenges this view that “all things lead to online”.

In this blog I attempt to dissect the Primark strategy to shed some light on why they appear to be so successful.

But first a little historical perspective on Primark.

It began life in Dublin when started to trade under the name of Penneys in 1969. In the intervening fifty years it has become one of Europe’s leading fashion retailers in the so-called “fast and affordable fashion” segment. Founded by a gentleman by the name of Arthur Ryan and boosted by its popularity in Ireland, it expanded its operations into the UK and Northern Ireland. It is now part of the British conglomerate, British Associated Foods (ABF).

Over the years it has grown to over 350 stores in around nine countries in Europe. It opened the first store in the USA in 2016 in Boston. Since then it has expanded to nine stores.

It was prevented from using the name “Penneys” outside of Ireland because J.C. Penney had already acquired the rights to use the name. It came up with the name “Primark” to address the international markets.

It has also expanded the range of products from clothing to include including new-born and children’s clothing, women’s wear, men’s wear, home ware, accessories, footwear, beauty products and confectionery.

Its approach to expansion and development can be summed up as being incremental, measured and cautious. It has used organic and inorganic growth strategies to reach its current portfolio of around 350 stores. For instance it acquired stores from former successful retailers such as C&A and Littlewoods in the 1990’s. It has also opened a number of stores such as its largest one in Manchester.

It can be argued that it has a very clear and unambiguous positioning strategy.

Quite simply the value proposition is firmly centred on the concept of allowing shoppers to stay on trend and who have a limited budget to purchase clothing and other accessories such as “beauty care”.

Low prices are central to this positioning strategy. Indeed some would say it offers rock bottom prices that are in many cases more competitive and cheaper than the pure-play online retailers.

Primark targets the under 35 demographic. This includes millennials, who are “tech savvy” and are constantly on the look-out for bargains.

It invests heavily in its buying teams, who work closely with a wide range of suppliers, particularly in developing economies such as Bangladesh. It has built up a reputation (sometimes negative) for driving hard bargains with suppliers in order to obtain large discounts on volume orders and purchases.

It also recognises that in a “fast-fashion” business it is critical to have effective and modern supply chain systems in place. It was one of the pioneers of computerised customs clearance, has invested in state-of-the-art warehousing and distribution networks. For instance it operated a giant warehouse, operated by TNT, which is dedicated to holding and moving Primark inventory on an exclusive basis.

Computerised warehousing and distribution systems are linked to computerised data on daily sales and inventory information. This allows for effective rapid replenishment. It makes extensive use of outsourcing and working with third-party specialists to achieve this aim of rapid re-stocking.

Lesson so far? It is critical to develop a sophisticated supply chain strategy to deliver “fast fashion”.

Primark does not engage too actively in developing brands. It places greater emphasis on stocking wide range of items at low prices.

Before we accuse Primark of being luddites and “sticking their heads in the sand” about online retailing, we should note that they have a strong social media presence. This is evidenced by encouraging shoppers to upload “Primark Looks” on their website and generating discussion and sharing of experiences.

In 2013 it set up an online sales presence on the ASOS website to “test the waters”. It dropped this initiative after twelve weeks, reflecting its unhappiness with the experience.

Senior management argued that further developments in online retail channels create more problems and costs than originally anticipated. For instance Primark estimates that within the online fashion retail sector, as much as 30 – 40 per cent of items purchased are returned. Such returns can be up to as much as six times more expensive than in-store returns.  Some online retailers provide free delivery or do so at a heavily subsidised charge. This also builds in a layer of cost to the operations.

They argue strongly that such costs “eat into” their ability to deliver rock bottom prices, as per their value proposition and positioning strategy.

Instead Primark invests heavily in its in-store experience for its shoppers. It make use of digital features such as big screens to highlight their merchandise to enhance the selling environment.

Interestingly research tells us that Primark shoppers tend to buy in large quantities when they make a visit to the stores. From a psychological point of view, those of you who visit a Primark store will notice the very large baskets that are placed at the entrance.

A comparative research study looking at H&M, the Swedish fast fashion retailer and Primark in 2015 indicated that the former generated around £5,000 sales per square metre across its UK stores. By contrast Primark achieved around £8,000 per square metre.

This reinforces the perception that in many ways Primark is typical of the traditional retailers of the past: “pile them high and sell them cheap”. In some ways it is like shopping in Costco.

Two esteemed academics in the field of marketing observed that “If you nail positioning and targeting, everything else falls into place”. (Kotler and Keller: 2016). You might reflect on the accuracy of this observation with respect to Primark.

Primark has certainly bucked the trend. It is a pure-play bricks and mortar retailer. In my view its strategy is based on a calm, measured and incremental approach to development and international expansion. It is a trend-led, low-cost leadership operator.

Is it sticking its head in the sand? I do not think so. Primark makes clever use of social media platforms to promote its image and engagement with shoppers.

Online retailers such as Boohoo, ASOS and Ocado have to grapple with the challenges of remaining lean and cost-effective in such an environment.

Let’s monitor Primark in the future to see if it eventually has to “bite the bullet” and establish an online sales presence.

Can Primark sustain its low-cost strategy? For instance it has been accused in the past of using “sweatshops” in Southern Asia to generate its cheap garments. Let’s see.