UNTIL DEATH US DO PART

Relationships are at the heart of successful marketing campaigns. The nature of such relationships differs, depending on the expectations and demands of both parties. If we think of a continuum, at one end we experience transactional relationships. These are characterised by a lack of commitment and loyalty. Costs typically drive the decision-making. At the other end, we experience strategic partnerships between the two parties. Trust, cooperation and collaboration drive such relationships.

Nike’s relationships with its independent sports retailers, who make up a figure of around 30,000 worldwide, brought me back to some of the theories and concepts behind relationship marketing. It provides us with a “ready-made” case study of the challenges of managing relationships and managing change.

Nike and Adidas are the two dominant sports brand across a number of categories in the sports clothing, footwear and accessories sectors.

In the case of Nike, it sells through wholesalers, its main channel. However, from 2012 to 2018, its reliance on this channel declined from 83% of total global sales to around 68 %. It sells through over 30,000 independent retailers. Since 2018, it has decided to reduce its dependence on such retailers. We examine this in more detail in later paragraphs.

When you think about it, no manufacturer wants to use intermediaries to sell its product. For one thing, they take margin out of the total price of the product. For another, they are in many cases independent, and do not sell on an exclusive basis. This can lead to a conflict of interests, unless they are sufficiently motivated to do so. However, the sheer scale of the challenge of getting product to the consumer in many cases makes it impractical to eliminate intermediaries.

Since mid-2017, Nike pursued a policy of moving more aggressively to a policy of selling direct to the consumer (DTC). Senior executives refer to this policy as the “Consumer Direct Offense” strategy.

This strategy focuses on main cities in countries, greater focus on innovation and an emphasis on the social media and digital platforms.

Pursuing such a strategy inevitably poses problems for the small independent sports retailers. Nike, and to a lesser extent, Adidas, have introduced policies which appear to threaten the existence of many small retailers. They have introduced targets by way of a minimum annual purchase obligation. Failure to meet such targets has led in many cases, to the termination of agreements. Ace Sports, a London-based sports retailer, has done business with Nike for over thirty years. In 2019, it failed to achieve its £8,600 minimum purchase obligation. It was given two days’ notice of its contract being cancelled.

In addition to such practices, Nike restricted access to its innovative products and delayed delivery of items.

Harking back to the different approaches to managing relationships, such tactics ensure that Nike perceives such relationships as being transactional in nature. Using more pragmatic language, some people have accused them of acting like the typical schoolyard bully.

Yet, you can counter-argue that Nike is pursuing a strategy that fits in with the desire to generate more margin and profitability by selling direct to the customer. In the sports sector that is not performing as strongly as the latter part of the past decade, Nike generated profits of $18, billion in 2019. This represented an increase of around 9.5%.

Lest we think that it is only small independent retailers that are suffering, multiple chain sports retailers also experience difficulties.

Sports Direct, one of the largest sports retailing operators, encounters major problems with both Nike and Adidas.

Over the years, it has specialised in acquiring sports brands, generating useful margin and subsequently lowering prices on Nike and Adidas products. Typically, its stores reflect a Spartan atmosphere; more akin to a discount store. This does not appeal to Nike in particular, who emphasises the need for a positive and strong customer experience. They do not trust him to represent the Nike brand, as they would like. Therefore, Sports Direct fails to gain access to the “desirable” and innovative brands from the duopoly of Nike and Adidas. In the UK for instance, both brands generate around fifty-five per cent of sales of trainers.

If you look at the brand values of Nike, you will see that it places great emphasis at being in the forefront of design and the use of innovative technology. While it still wants to do business with a selective number of independent multi-store retailers, it applies stringent standards.

Sports Direct, via its owner Mike Ashley, has re-designed some of its stores to meet such standards. By contrast, one its main competitors, JD Sports gains access to a wider and more attractive range of Nike and Adidas merchandise. On our continuum of relationships, JD Sports is at the “strategic partner”

Nike and Adidas have been accused of retaining control over their key, innovative products, thus ensuring that they generate the appropriate margins instead of the independent retailers.

Ashley has referred this perceived favouritism to the Competition Authority.

Competition legislators will only intervene if they perceive that there I an agreement between two or more parties that effectively restricts healthy competition. They can also take action if they perceive a supplier that is in a position of market dominance (usually if it holds somewhere between 40 to 50 per cent of total market share), and is abusing its position. So far, in the context of the UK market, it has not intervened.

Nike is clearly moving inexorably to a DTC sales and marketing approach. It applies a selective approach to the use of independent sports retailers.

It increasingly focuses on its own retail stores, particularly flagship ones in key cities, and its own Nike Direct online channel.

This generates an environment where it has much greater control over its key merchandise and, by implication, its margins.

The strategy however creates conflict within the independent supplier network. This leads to problems such as a loss of morale, or in the worst-case scenario, closures. After all most people who visit such retail stores look for either Nike or Adidas brands. If popular brands such as the Vaporfly running shoe are not available, they will go directly to Nike.

Adidas has adopted a less aggressive move in terms of terminating contracts with its retailers. Some of the latter have demanded a face-to-face meeting with its representatives. If they demonstrate that they are willing to invest in their stores and allocate more prominent positions and presentations of the Adidas brands, then they are more likely to get their contracts renewed.

The food sector in general and the relationships between supermarkets and their supply base has provided much debate, analysis and discussion in the academic and business media.

This perusal of Nike’s approach to its relationships with independent retailers also indicates the perennial challenge of managing change. In this case, the shift away from extensively using such intermediaries and adopting a direct to consumer model.

Let’s see what happens over the next year or so.

YIN AND YANG

Whenever I look at the fortunes and travails of Marks and Spencer, I am constantly reminded of that old Chinese concept of yin and yang. Based on the Chinese philosophy and religion of Taoism and Daoism, it posits the view that forces which appear to be opposing or contradictory, such as day and night or winter and summer are actually interconnected and interdependent. Such forces are complementary rather than sources of conflict. In other words, shadow cannot exist without light.

All very philosophical, you might say. What relevance does this esoteric concept have for a retailer such as Marks and Spencer?

You might argue that the clothing part of its business represents the “dark swirl (yin). Whereas the food element projects the yang (brightness, passion and growth). It is arguable however, as to whether they complement each other. In my view, both aspects of the business possibly create more problems than solutions. Should they remain in clothing? Should they divest away from clothing and focus only on food? Should they close down?

In previous blogs, I accused M&S of falling into the trap of becoming increasingly irrelevant to shoppers. I argued that over the past fifteen years or so, it has lost its way in the “fashion / clothing sector and has been relatively successful in food.

Despite changes in the CEO position and within senior management over the past decade, it has failed to recover its former position in clothing and has begun to lose its previously hard won success in food to a range of operators such as Gregg’s, Just Eat, Uber and Deliveroo

To be fair, it has tried to alter this decline, particularly in clothing. This included the use of Holly Willoughby: a well-known presenter of a daytime TV show, largely watched by older women. The actor, Helen Mirren has also endorsed their ranges of clothing.

In my view, such initiatives only serve to accentuate the increasing irrelevance of M&S. Whom precisely are they targeting? They appear to address the older, mainly female demographic. They also target younger female shoppers. Is this not a contradiction in terms? To quote a well-used phrase. If you were a female between the ages of eighteen to twenty-five, would want to shop at a place that is used by your mother or grandmother? The answer is most probably “no”!

My concern is that this issue of positioning and targeting has been a perennial problem for the past two decades. Yet, M&S has failed to grasp the long-term significance of failing to put in place a coherent strategy.

2019 did not bring any improvement in the competitive position of M7S.

In December, it announced the planned closure of around twenty of its larger stores, including the iconic 100,000 square foot Marble Arch store in central London. Interestingly many of these stores contain four to five storeys. This creates possibilities for renting the space for residential and / or office purposes. Are we to interpret this to mean that M&S will enter the property development / real estate market?

In January 2020, M&S posted improved Christmas results when compared to the previous year. However overall revenue from the UK market fell by 0.6 per cent, to £2.8 billion. Food sales rose by around 1.5 per cent.  When we drill more fully into these figures, it becomes apparent that shoppers responded to the range of promotions and lower prices in the food category. While sales may have edged upwards slightly, overall margin from this sector fell.

Revenue from international business increased by 2.3 per cent.

Also in January, M&S launched an athleisure range, aimed primarily at the younger, female shopper. Labelled as “goodmove”, the range consists of around 150 pieces, mainly in the “leggings” category. Optimistically, you could argue that this is a sensible move, as the athleisure segment has grown exponentially over the past decade – mainly driven by sports retailers such as Sports Direct. You could equally argue that this is a very late response to this sector. It also does not directly address the problem of its lack of identity with the younger female shopper (18-25).

Some commentators tale the view that too many of its stores are cluttered up with many unfashionable items that struggle to appeal to even the older female segment.

As alluded to earlier, the food area, while increasing its sales, has compromised by lowering prices and engaging in promotions such as “Dine in for £10”.

On a wider scale, the online area of the business significantly lags behind other retailers. It requires major work in the area of IT development.

On a more positive not, it entered into a deal with Ocado – one of the most successful online retailers in September 2019. M&S acquired a fifty per cent stake in the company. This means that Ocado will stock M&S products by September 2020. This is dependent on the permission of Waitrose, who currently holds a contract with Ocado.

While this can be interpreted as a potentially wise move, there is no doubt that the food sector, particularly the delivery component, has generated fierce competition from such unlikely players as the supermarkets and Amazon.

We have noted that M&S has entered the “discounted price and promotions” element of the market. Does this potentially threaten its former image of being a quality retailer in both clothing and food?

The move to reduce the number of its larger store would appear to make sense. A cursory look at its plans for the future suggests that M&S will rely more on the shift from big stores to the weekly food shop.

It already operates a range of “Simply Food” convenience stores. Perhaps this area might generate greater profitability going forward. At present, the Simply Food stores make up 729 of the overall 1045 stores. The remaining stores (314) sell both food and clothing / home products.

It has also lost its place in the FTSE top 100 companies in the UK. This highlights the increasing danger of slipping even further into the “nonentity” category.

The last decade in particular witnessed the ever-increasing power and presence of retailers such as Primark and the fast fashion development. In my view, the rise of fast fashion retailers has dramatically changed the landscape of fashion retailing. This is in sharp contrast to the 1970’s, 80’s and 90’s, when M&S was seen as the”darling” of UK retailing. My abiding image of that time was its approach to management. Virtually all of its Directors and senior managers were white, male, ex public school and conservative, both in terms of their views and in their dress. Women were an extinct species within this environment.

While things have changed somewhat over the intervening decades, the suspicion remains that M&S has systemically failed in clothing and that it will never capture the younger female segment.

Perhaps it should focus instead on the over forty –five market. After all, this is a growing demographic. It also recognises that you cannot be “all things to all people”.

In the food category it has shown evidence that it can create innovative ranges of food. Whether they can continue in this vein in the future is problematic. Perhaps a focus on the vegan segment and sustainable food may create an opening.

I have a sense of foreboding about the future prospects of Marks and Spencer. Let us monitor their progress over the next couple of years.

NAME GAME

What is in a name? A question that we often ask about various things in life. In the context of marketing, many of us relate this question to the concept of a brand. When we mention brands such as Apple, Coca Cola and so on, they conjure up various perceptions, opinions and beliefs. The stronger the brand equity, the more positive the perceptions and viewpoints.

In late 2019, Sports Direct owner, Mike Ashley recommended to its shareholders that the company should re-brand as Frasers. He justified this move because it reflected its “elevated” strategy. It also focused on the changing profile and customer proposition of the group.

Initially I was surprised by such an apparent major change in its overall positioning in the marketplace.

Why? Well mention the name “Sports Direct” and many people will associate it with low prices, heavy discounting, cluttered stores and so on. Surely, such a strong brand would not “fit” strategically with upmarket brands such as House of Fraser?

Ashley, we should note, acquired a number of various retailers, in an aggressive acquisition strategy during the couple of years leading up to this name-change. These included such a diverse spread as Evans Cycles, Jack Wills, Sofa.com, Game Digital, Flannels and House of Fraser. The latter two retailers traded as up-market retailers. It could be argued that these acquisitions fundamentally changed the portfolio of retailers owned by Sports Direct.

In the case of House of Fraser, Ashley purchased the operation for £90 million in 2018, as part of a rescue deal. This reflected his approach to doing business. Around the same time, Debenhams also underwent major financial hardship. Ashley always sought out opportunities where bargains could be acquired – such struggling, well-known retailer brands. This bid did not work out.

Shortly after acquiring House of Fraser, Ashley expressed regret at the purchase. He inherited a struggling brand, the associated debt and over fifty outlets with expensive leases.  He went so far as to state that the problems were terminal. Subsequently he announced that he planned to “roll out” a chain of luxury high street stores, named Frasers. These outlets would carry a range of beauty, sports and luxury fashion items.

In some of the closed House of Fraser stores, Ashley began to stock them with discounted Sports Direct merchandise and re-opened them for business. He argued that it made sense to re-brand some of the other stores as Frasers, in order to reinforce the image of a new and luxury mini-retail chain, selling more expensive and exclusive labels. This appeared also to support his long-term vision of turning the Group into the “Harrods of the High Street”.

The overall Sports Direct Group has a market value of around £1.8 billion. Ashley justified the re-branding of the Group’s name as Frasers Group to reflect its changing circumstances: based on moving away from a sole dependence on the sports items, to that of a lifestyle brand.

As we mentioned earlier, the original Sports Direct brand has constantly attracted criticism from various stakeholders over the years. As well as being perceived as selling cheap and low-price sports trainers and clothing, it received heavy criticism for the low pay of its staff (many on zero hour contracts) and overall working conditions. Ashley’s background as an opportunistic entrepreneur, initially operating in market stalls, never fully disappeared as his business empire grew.

His acquisition of Newcastle United football club consistently attracted criticism from it fans. Such negative comments revolved around his lack of understanding of football, his unwillingness to pour money into the club and his attempts to change the name of the stadium to “Sports Direct”.  Critics also accused him of using the perimeter advertising as an opportunity to promote Sports Direct. To be fair, some argue that Ashley simply applied the basic principles of running a business to the football industry and treated his ownership of the club as a business asset to be exploited accordingly.

Disputes with fellow board members and accountancy firms (over auditing the corporate accounts) further reinforced the perception among some commentators, that Ashley was “damaged goods”.

In summary, Ashley would appear to have run a very successful sports apparel brand in the case of Sports Direct. It has continued to make money. However, in his quest for further development, he acquired an eclectic range of other retailers to build up his empire over the past few years.

His main motivation appears to revolve around the desire to shed the overall image of being “cheap and cheerful” and move into more upmarket and exclusive areas that broadly address the lifestyle and luxury dimensions of the retail sector.

What are we to make of such a strategy? In fact, we might begin by posing the question as to whether or not there is any evidence of a planned and strategic approach to the development of the Sports Direct (now Frasers Group) brand in the first place.

A cynic might suggest that the acquisition of the retailers mentioned in the preceding paragraphs came from opportunistic and accidental motives. Hence, the position that it currently finds itself in: operating in a range of apparently diverse retail businesses.

Other commentators might argue that it reflects the entrepreneurial and pioneering approach of Ashley: always seeking out opportunities from potentially “high-risk” ventures, and willing to “put his money where his mouth is”, to back up such a strategy.

In some ways, the strategy poses more questions than any “ready-mad” answers.

Arguably, Ashley has thrashed many of the basic principles of branding and positioning. For instance, how can you maintain consistency, clarity within your communications to your customers, if you utilise a standard name: Frasers, to encompass a range of different retail brands?

Is it credible to suggest that you can sufficiently differentiate your value proposition when your core brand is locked into the discount, low price segment of the market, while at the same time trying to project some of your brands in the exclusive and more upmarket segment?

By retaining the different brand names such as Flannels and sports Direct, is Ashley in danger of confusing the respective target markets with mixed messages?

Many commentators argue that in order to reposition a brand, it is essential that internal change is critical. Unless the group changes its approach to its treatment of workers and working conditions, it will be almost impossible to change peoples’ perceptions and attitudes to the brand. A simple change of name will not achieve this objective.

Somebody once said that the true test of successful brands and how they are developed is based on what people say about you, when you are not in the room. This explicitly reinforces the view that a simple name change will have little impact on people’s perceptions. Rather, it requires a fundamental shift in corporate culture from within. There is little apparent evidence that this is happening within the overall group.

Within its core business (Sports Direct), the Fraser Group faces intense competition from retailers such as JD Sports. Is there a danger that Ashley, by moving more fully into the general, lifestyle market, will “take his eye off the core business” and ultimately run the overall group into the ground? Let’s see.

ARMAGEDDON

As we start 2020, the ongoing debate about the future prospect for the high street continues apace.

I have discussed this topic in previous blogs and one consistent pattern emerges from a review of the evidence: that there is no real future for the high street, with one or two exceptions.

As we enter 2020, I thought it would be timely to generate further discussion on this “well-worn” thread.

Experts predict that over 7,000 stores will close in 2020, leading to job losses of around 125,000 positions in the retail sector. The bulk of these closures will come from retailers that operate ten stores or more. Such observations are based on the following trends. A proposed increased in the minimum wage, business rates and the infrastructure surrounding many of the locations in the typical high street.

The period leading into the Christmas season usually provides a sound indicator of what is likely to emerge in the New Year. Footfall figures would appear to indicate a four per cent decline on the same period for 2018. Major retailers such as Debenhams, a high-profile casualty of 2019 announced in early January that it intended to close nineteen of its intended fifty stores divestment. Around the same time as this pronouncement, the UK government indicated that it intended to raise the minimum wage six per cent; to £8.72 per hour.

The business rates that retailers pay for the right to operate on the high street are predicted to rise by 1.7 per cent. This will generate an extra £95 million from the larger retailers.

By contrast, Amazon UK Services (responsible for handling fulfilment centres and customers) paid £1 million on a £2.3 billion turnover.

The issue of business rates engenders much heated discussion. Its critics argue forcefully that it places a high strain on the cost to retailers of doing business on the high street. This is particularly annoying, they argue, because it create an uneven playing field: online, pure-play retailers are not subject to this form of tax. This leaves them in a stronger position to compete, given the relenting pressures on managing costs and margins.

In response, the government states that it has addressed the problem by helping smaller stores. In particular, they argue that retailers with a rateable valuation of less than £51,000 had their business rates reduced by over one-third, with the discount rate increasing to 50 per cent by April 2020. Cynics claim that many small retailers do not pay business rated anyway and this distracted people from the key problems.

Local councils (who are responsible for generating revenue to run their respective cities and regions) have taken a pounding as the high street continues to stagnate. Many of them invested heavily over the years in attracting retail property developers to establish shopping centres. If we continue to see stores closing on the high street, this valuable source of revenue will dry up, leaving large deficits to address on the part of the local authorities and councils.

Retail experts have undertaken government-sponsored evaluations of what can be done to improve the lot of the high streets. One in particular, Mary Portas, generated a number of recommendations to address this problem. They included the following initiatives.

  • A designated sum of money to be allocated to specific towns and cities in order to develop and improve the infrastructure
  • Investment in public transport to attract shoppers into the high street
  • Reductions in the cost of parking in such areas, in order to make it easier to access shops
  • More creative design of the high street e.g. innovative and unusual shops
  • Reduction of business rates
  • Themed events in the high street such as Christmas markets, live music, festivals and so on.

Many of these recommendations were not taken up by the respective stakeholders, leading many commentators to conclude that there was a lack of willingness to focus on the key obstacles to rejuvenating the high street.

In my view, the evidence of stagnation and decline is visual. Please walk around any major high street in your town or city and assess what you witness. I suggest the following will “jump out” at you. A preponderance of charity shops (who receive very cheap rent agreements in order to make the high street look “busy). Betting shops (indicating the popularity of gambling), derelict spaces that appear to be falling down in many cases. Parking wardens pursuing the hapless car-owner with the zeal of religious zealots. Badly lit up spaces, particularly when darkness falls. Beggars and chuggers harassing pedestrians as they pass through. A preponderance also of payday lenders and pawnshops exists on the high street. Furtive activities (such as drug dealing) taking place down back alleys. Need I go on? It leads to the inevitable question. Why would anyone in their right mind go to the bother of visiting the high street when everything is available to them online?

However, I need to be more realistic and objective in my assessment. There are always two sides to an argument.

Proponents for rejuvenating the high street argue that online retailing does not provide an engaging and positive experience for shoppers. In many cases, the design and layout of the website makes it difficult for shoppers to navigate their way to their ultimate destination (i.e. what they are looking for).

Others argue that online shopping is not tactile: it struggles to make use of atmospherics (a common feature of “bricks and mortar” stores). This results in a “sanitised and clinical” shopping experience.

The academic literature and research suggests that the best response from the high street should be grounded in the customer experience. Specifically retailers should capitalise on the ability to invest in “shoppertainment” and accept that they will never compete directly with pure play online retailers on issues such as price. Instead, by focusing on the merging of the online and offline experience, combined with technology, they can continue to attract shoppers to their respective physical premises.

In this situation, I refer you to John Lewis. This retailer revamped one of its major stores (Southampton) with the focus on providing what it labelled “experience playgrounds”. Specifically it created spaces in the store to offer customers cookery classes, gardening talks, beauty makeovers and advice on technology. Senior management see this as a precursor to future developments across its portfolio of physical stores.

Therefore, if we are to follow the examples of John Lewis and other retailers such as IKEA, we will increasingly see physical retail outlets and the high street becoming entertainment centres. This may provide the opportunity to reduce the increasing gulf between online and offline shopping.

The UK government recently announced yet another initiative by making money available to rejuvenate fourteen designated towns in England. Is this a case of “more of the same”?

In my view, governments, retail property developers and retailers will also need to “step up to the plate” and fully embrace the concept of “shoppertainment” if this strategy is to generate dividends going forward. Creating such entertainment venues in badly designed, shabby and expensive physical spaces such as the high street will not necessarily bring shoppers back to the high street. A recent report by the Centre for Retail Research indicates that an average of 2,750 jobs per week in the retail sector will disappear in 2020. Whether the concept of “shoppertainment” will work in the long run is problematic. Let us see.

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.