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.

Advertisements

THANK YOU AND GOODBYE

No, I am not packing in the blogs. However I use this title to capture the essence of yet another “problem” retailer.

The end of 2018 continued its sorry path in terms of devastation within the UK retail sector. His Masters Voice (HMV) is no more. That doyen of music retailing: HMV went into administration for the second time in six years. It must be said that this time it appears to be terminal.

Rescued by corporate restructuring expert, Hilco, in 2013, it appeared to be turning around during the past few years. However a major decline in DVD and CD sales hastened its demise. KMGP took over the administration and are currently seeking new investors. This is unlikely to happen anytime soon.

Why has this retailer, which has been around since 1921 and currently has around 125 stores in the UK, employing over 2,000 people found itself in such a mess? Let’s look into it in more detail.

Firstly we should acknowledge that the usual reasons are offered for such struggles in the retail sector. High business rates and rental costs, Brexit uncertainty and wary customers, unwilling to spend too much on entertainment are right up there in the “explanation stakes”.

However in my view this case masks one of the most glaring examples of a company ignoring the realities of the market. We often discuss in retail marketing classes the need for companies to proactively assess changing market trends, perceptions and behaviours: otherwise it is most likely that they will go out of business. This seems to be the case with HMV.

Superficially HMV would appear to have performed to an acceptable level as late as 2017. It increased its share of the physical music market from 26.7 per cent to 27.7 per cent (year on year). Its market share in the DVD segment increased from 20.1 per cent to 21.2 per cent during the same period.

However such figures masked the reality of the market-place. There was an inexorable move to people buying CD’s online, where the combination of much lower prices and quick delivery made for a more compelling value proposition than physically visiting an HMV store.

More worryingly for HMV most young music consumers had changed their buying behaviour more fundamentally: they were switching in droves to digital music services from operators such as Netflix and Spotify.

You might well ask how a long-established retailer such as HMV failed to monitor such change and react accordingly. It is a good question. Perhaps we can pick up some of the reasons in a statement by a former CEO, as far back as 2002, who rubbished the dangers from online retailers and music download operators. He also ignored the move by supermarkets into this sector. Such trends proved to be more than that. They changed the way in which people consumed music world-wide.

As is the case with many struggling retailers, irrespective of sector, HMV was very late into the online retail channels, preferring to rely instead on the “bricks and mortar” approach. This relied on the presumption that most shoppers prefer the “live” music environment that can be created in an outlet, the joys of browsing for their favourite artists and genres of music and the occasional promise of a live band playing at the stores.

While it is true to say that many of us like the physical store environment, the much more attractive proposition of lower prices from online channels continued to hold sway and indeed increase in recent years.

HMV is the classic example of a company that ignored reality and instead continued to plough on with its existing strategy, with a genuflection to online channels. It is surely a case of “too little too late”.

To be fair to HMV the high costs of operating physical stores: something that we have flagged up in previous blogs, has not helped. For instance in the context of business rates, it was faced with a bill of £15 million in 2017. With further rises in place for 2018, this was only going to go one way – upwards! By comparison online giants such as Amazon do not face such costs. This is clearly a case of a glaring imbalance in terms of competition.

Hilco, when it took over in 2013 succeeded in establishing more favourable relationships with its suppliers and also renegotiated more favourable deals with landlords. However to use a nasty analogy, you cannot stem a tsunami with ply board. Inevitably the market and more specifically the consumer will have its say in shaping the future.

Sadly for Hilco, music shoppers shifted far more quickly to streaming services than the experts anticipated.

This shift also raised questions as the willingness of people to actually pay for music. Then as now, there are many illegal streaming services providing music for free. Inevitably a culture of “can pay, won’t pay” prevailed. It is not hard to see why. If your favourite music is free and the quality of sound is excellent, what’s no to like about adding it to your collection?

Apple and its iTunes model changed to some significant degree, peoples’ conscience about paying for music. Most people are willing to pay something for music, as long as it is perceived as being value for money. Unfortunately music producers and retailers traditionally relied on the presumption that people would be willing to pay high prices for their favourite CD’s and DVD’s. This belief have been well and truly shattered by the emergence of digital music service providers.

Basic conceptions of selling music via full albums were also shattered: people want to pick their favourite tracks and not having to shell out on all of the tracks on a pre-developed album.

In my view HMV has fallen into the “sin of irrelevance”. Its products have no resonance any more with what people actually want.

This was rammed home to me recently when I purchased a new laptop. There was no facility for playing CDs or DVDs on the product. This confirmed to me that the product designers recognise the irrelevance of such a feature. In the future there will be no way back for such products. Yet walk into an existing HMV store (do so before they close) and you will see that the vast majority of the inventory revolves around CDs and DVDs.

The only area which exhibited signs of growth in the music sector is ironically a throw-back to the past. Vinyl sales have continued to grow as older shoppers rediscover their youth and younger people are attracted by the sound that emanates from this product. HMV has done well in this area and perhaps there is some way back if it wishes to survive.

Some commentators argue that a drastically “stripped-down” HMV (with only a dozen or so stores and a much stronger online presence) can operate in the vinyl area.

To be fair it is currently doing so, particularly with one of its subsidiary – FOPP. This was formerly an independent music retailer and has traded for over twenty years, with one or two problems.

Whether HMV has any relevance in such as retail space is very debatable. I accept that some of these independent music retailers offer the attractions of surprise, excitement and curiosity. Whether a slimmed down HMV can do so or not is a moot point.

Let us monitor the situation over the coming year.

WAKE UP AND SMELL THE MARGIN

We have witnessed the problems and tribulations of traditional “bricks and mortar” retailers over the past couple of years. In previous blogs I have discussed how increasing costs; revolving around rentals and business rates, have stymied their growth prospects. By contrast online retailers have forged ahead, unencumbered by such restrictions. It appears as though their nimble business models are likely to win out in the longer-term.

You can imagine my surprise when in mid-December (2018) I woke up to read about the profit warning pushed out by ASOS. This was the first time in my recollection, that a pure-play online retailer has expressed problems and concerns about its performance. Has the “worm turned”? Is this the first sign that the travails of “bricks and mortar” retailing has extended to online operations?

Let us consider some of the underlying background and key issues.

ASOS has been one of successful pioneers of online retailing. Founded by two brothers in North London in 2000, it has consistently posted impressive sales and profit statements over the past fifteen years or so. It claims to have over 18 million customers world-wide, operates in over 240 countries, employs around 4,400 people and operates state-of-the-art distribution centres in Barnsley (UK) and Berlin (Germany). It is working on a similar operation in Georgia (USA). In recent years it has invested heavily in its back-office operations such as distribution and warehousing along with its digital marketing. Approximately forty per cent of its sales comes from its domestic UK market. In truth it is a major player globally in the pure-play e-tail business space.

Thus the profit warning sent out in December has caused some significant ripples across the retail sector and beyond. Retail commentators are beginning to express some doubts about the efficacy of the respective business models of e-tailers.

Specifically ASOS announced that its sales for the three months to end November 2018 had increased by 14 per cent. On the face of it, not too bad you might say. However this represented some significant deterioration in the month of November and forced the retailer to revise downwards its anticipated sales of between 20 – 25 per cent full year growth to in and around 15 per cent.

This had the effect of wiping over 38 per cent off its share price.

More worryingly it predicted a decline in profit margin from 4 per cent to 2 per cent.

In another alarming disclosure similar problems in terms of sales were experienced in two of its main European markets: Germany and France (both markets representing 60 per cent of its European sales).

Was this an isolated event only featuring ASOS? Not really. One of its main online competitors in the fashion business: German e-tailer Zalando also had nearly £1 billion wiped off its shares. H&M, the Swedish fashion retailer also encountered a fall of 8.5 per cent.

Shares in Boohoo – a retailer that we have highlighted as one of the success stories of online, also recorded a drop in share price of 18.5 per cent. We can conclude that this is not necessarily an isolated case from the perspective of ASOS. Something is happening that we should not just acknowledge but assess, as it may have implications for online retailing going forward.

Let us look more closely for potential clues as to this decline.

The possible answer in my view lies in the predicted decline in profit margin from 4 per cent to 2 per cent in the case of ASOS. These figures reveal the dangers of operating on very low profit margins.

This has been exacerbated by the unrelenting heavy discounting applied by many fast-fashion retailers in an attempt to drum up business. Retail analysts also reveal that approximately two –thirds of the 4 per cent margin comes from ASOS charging shoppers for deliveries. If the margin continues to decline, as predicted by ASOS senior management, then we can expect even worse performance in the coming couple of years.

It highlights the dangers of discounting in a very clear way. The reality is that over the past couple of years, fashion retailers have survived by consistently offering promotions and discounts. The “Black Friday” phenomenon, established a few years ago, had bred an expectation among shoppers that they will get discounts if they are prepared to wait.

Heavy and sustained discounting erodes the value of the brand.

The 2018 Black Friday campaigns totally focused on discounting. In the case of ASOS, it offered a blanket 20 per cent discount on all items, on top of already heavy discounting in the previous months. Even so, many customers globally appear to have gone off the initial enthusiasm captured in previous “Black Friday” campaigns. Why? Because they expect discounts all year round now.

This has led to the effect of shoppers becoming discount-loyal at the expense of becoming store-loyal. Quite simply they will shop where they can get the best deal. If a retailer is already working with very tight, nebulous margins, the pressure to make money becomes even more acute.

We also need to factor in the typical demographic profile of fast-fashion shoppers who do business with the likes of ASOS and BooHoo. They are typically in their twenties and operating with lower disposable incomes than was the case ten years or so ago (due to a decline in real incomes). Although wages are showing tentative indications of increasing in the UK in 2018, such shoppers have cut back on their expenditure on fashion and are seeking better value and deals on the internet.

While footfall has declined in physical stores in the UK, we are perhaps witnessing the same effect in the e-tailing space as well.

Some e-tailers offer free delivery to shoppers. This in my view is no longer sustainable in markets where the margin is so low. ASOS charges different categories of shoppers for different delivery patterns such as standard next-day, same-day and Saturday deliveries. This is difficult to justify if some of its competitors are offering free delivery.

Shoppers will need to recognise that they will have to pay in the future, possibly more than they pay presently.

It is difficult to assess whether the problems encountered by ASOS and some if its competitors is temporary and a blip. Uncertainties surrounding BREXIT and economic performance in many European countries suggest that it may last for a longer period of time than is acceptable to retailers.

Pure-play retailers will need to revisit the basic dynamics of their business models – particularly with respect to discounting practices and management of their supply chains. Operating on such low margins works well in times where there is significant demand. In periods where demand declines, this affects the quantity of the items sold and places enormous pressure on the sustainability of such a model.

Trend-setters such as Amazon have set the pace in terms of retail innovation – particularly in the context of supply chain management.

Retailers such as ASOS would be well advised to study carefully the Amazon model and effect, and learn.

Let us see what happens over the next year or so!

STUCK IN THE MIDDLE WITH YOU

My recent blogs, for the most part have tended to be pessimistic in the extreme. I have focused on retailers that are in decline: some of them terminal. I continue this unhappy trend by looking at department stores in general and Debenhams in particular in this blog.

Recently Debenhams, a bastion of the UK department store sector announced that it was closing ten stores with immediate effect and forty more over the coming months. With over one hundred and sixty stores dotted across the UK it has been a retailer exuding history and heritage for decades. Earlier in the summer of 2018, House of Fraser also went into terminal decline. In the USA another iconic department store, Sears announced closures. Is nothing sacred anymore?

Department stores have been around since the middle of the nineteenth century. They represented the innovation of those times, leading right up to the 1970’s in Western Europe and the USA. They were the precursor to the shopping centres and malls.

Their unique selling proposition (USP) has revolved around the fact that it is a “one-stop-shop” carrying a wide range of brands in an eclectic mix of product categories. Shoppers can explore the offerings over a wide shopping space and over a number of different floors. What’s not to like about this?

Well the reality is that the inevitable rise of online channels, social media platforms and location-based marketing has shattered, if not irreversibly damaged this hitherto strong differential advantage.

Time-poor shoppers find the concept of trekking around a department store to be unduly daunting and stressful. Why put yourself through this misery when you can shop in relative peace from the comfort of your home, place of work or on the train or bus into work?

Different sub-sectors of retailing: fast fashion and electronics, to name but two, provide a much wider range of items in a specific category than a department store can hope to deliver.

Their cost structures are lower, particularly those with no physical presence on the high street. Their taxes are also lower and in some cases non-existent.

As department stores grew in size (in terms of physical space in an individual store and in scale of operations) many shoppers see a badly laid-out store, with the constant drudgery of going up escalators and floors to find the required department.  The worst of them are almost like a maze!

In previous blogs we have discussed the cost structures that have damaged stores such as Marks and Spencer and House of Fraser. I do not plan to revisit this in detail again. Let us focus instead on other issues that have led to the potential demise of department stores and discuss whether or not they can instigate measures to improve their prospects going forward.

As we have discussed in my book, one of the biggest apparent crimes that a retailer commits is that of being “stuck in the middle”. By this I mean that they are not seen as a premium player or a discount player in their retail sector. This reduces the ability to develop a clear point of differentiation when compared to their competitors. This makes it difficult for the shopper to identify a clear reason as to why they should patronise this store and give it their repeated custom.

What can we take out of this observation? I would suggest that being “stuck in the middle” is the ultimate recipe for blandness, boredom and a muddled value proposition. In most retail sectors shoppers are looking for excitement or something different to what is there already. Middle of the road retailers fall down between the cracks. If we consider the concept of positioning then it becomes almost impossible to create such points of differentiation.

In the case of department stores in the United Kingdom, we can see that premium retailers such as Selfridges and Harrods most certainly do not fall between the cracks. They put forward innovative initiatives that help them to create a position in the minds of their respective target markets.

Put simply they focus on experiential customer journeys when shoppers make a visit to their stores. This is reflected in the way in which they make use of retail space. They work on the principle of providing a range of activities that are not necessarily focused on the purchase of items. They indulge in some of the following by way of illustration. Dedicated events such as masterclass cooking classes, juice bars, restaurants and so on. The toy departments introduce a range of multi-sensory features to enhance the experience.

None of these are necessarily unique in my opinion. We see many such activities in shopping malls for instance. However they address the fundamental need for many shoppers: in interactive and positive shopping experience. Whether or not this is a long-term way of sustaining their businesses is debatable. What is to prevent competitors in the non-department store sectors introducing better “experiences” for shoppers?

Premium department stores also have worked more proactively to develop the omni-channel experience. With varying degrees of success they are striving to provide a relatively seamless and integrated experience for shoppers across their touchpoints during the purchasing process.

Middle of the road department stores such as Marks and Spencer. Debenhams and House of Fraser have failed to grapple with experiential customer journeys to the same extent. They have also been more reactive than proactive in their quest to develop omni-channels.

The net result is they have struggled or in the case of House of Fraser gone out of business.

In my view it is inevitable that even successful department stores will have to rationalise their physical store operations to reflect the changing trends.

By contrast they can focus more fully on their “flagship” stores. These stores allow them to portray their “best-in-class” value proposition: innovative brands, new initiatives and so on. If the trend towards omni-channels continues apace then it is likely that the flagship, “bricks and mortar” store will continue to play a role in the customer journey.

This weakness with department stores even extends to one of their traditional metrics for measuring performance, sales per square foot”. This approach takes on decreasing relevance as footfall to department stores declines and eyeballs on online channels grows.

There has also been (relatively speaking) little meaningful investment in the department store sector. When allied to the high overhead costs we can say that this has led to the decline.

Some stores have addressed in-store elements such as in-store WIFI, self-service kiosks, and staff tablets and so on. Again they have been relatively slow in relation to other retail formats to embrace such technology. Constantly playing “catch-up” in not the best way to succeed.

The concept of a “one-stop-shop” across a very large, potentially confusing space, arguably is not the way to go in light of trends and developments in the retail sector.

Let’s watch this space!

ACER

2018 has not proven to be a stellar year for retailers – particularly in the UK. A continuing decline in people’s incomes, many closures of outlets on the high street, ever-increasing costs and taxes all mean that retailers have continued to struggle. This has been exacerbated by the ever-increasing move to online shopping. The pure-play online retailers also hold significant advantages: no high leasing costs associated with physical properties and no exposure to business rates.

Amid all this doom and gloom, one retailer stands out in my view and is worthy of further analysis and appraisal. That retailer is, not surprisingly an online operator and I am referring to ASOS.

This company was established in 2000 and in the space of eighteen years has proved to be consistently successful. Figures released in October 2018 showed full-year profits to be up by twenty-eight per cent (£102 million), with UK sales rising by twenty-three per cent (£around £860 million).

The name: ASOS stands for “As Seen on Screen” and reflects the focus that the retailer places on the role that celebrities play in setting the tone and style in fashion trends. Initially it focused exclusively on such designs but over the years has broadened out the range to cater for diversity.

Its stated mission is to “build ASOS into the world’s number one destination for fashion shopping twentysomethings”.

Interestingly it has appeared to have made little impact in key geographic regions outside of the United Kingdom (7.4 per cent). For instance it holds a market share of 1.6 per cent in the European Union and 0.5 per cent in the USA. This indicates that there are great opportunities for further growth as we look into the next five to ten years.

Its continued success and growth prompted me to “dig a little deeper” into the reasons for its success. What is it doing that has led to that success? What are other retailers NOT doing?

I would certainly highlight the innovative nature of ASOS. “Innovation” is a term that is bandied about by many commentators. It is applied to companies in the same way that a footballer is deemed to be “world class” after a couple of impressive performances in two or three games. In most cases the term is devalued. Being truly innovative is essentially putting it at the forefront of every decision and initiative that is introduced by a company – not an isolated activity. A perusal of ASOS suggests to me that they have managed to earn the term “innovative” right throughout their continuing development since 2000.

Let us explore this further.

Technology represents one critical dimension of its overall strategy.

Before social media and mobile marketing became popular ASOS recognised their relative importance. They were one of the first retailers in the fashion business to recognise the importance of influencer marketing. They established a group of over one hundred “twentysomethings” (ASOS Insiders) who posted their personal preferences on social media. They also launched the ASOS brand magazine, containing high quality content and an opportunity for readers to order directly from the online magazine. This has built up over 800,000 subscribers world-wide.

The use of technology has featured more prominently in recent years.

For instance it recognised that its web site ordering, fulfilment and returns policies had to be “leading edge”. This is magnified by the sheer scale of the operation. It carries 85,000 to 90,000 items on its channel and introduced an average of 5,000 new items each week.

A key feature is the way in which it deals with returns. The young Generation Z shopper (born at the beginning of this millennium) demands quick refunds if they are unhappy with something they have purchased. It has invested in appropriate technology to manage quick responses to dealing with returns and building in a status-tracking feature so that customers can monitor progress.

Much of the work of online retailers such as ASOS revolves around logistics: the process of dealing with managing inventory and delivery. It has invested in distribution centres in Atlanta and Berlin in the last couple of years – an indication of where they see the likely potential for future growth and development.

In October 2018 it launched a voice search system for its shoppers to find items on the website. A shopper can initiate a conversation by using ENKI – a chatbot, on Google. It helps the shopper discover new lines (in both womenswear and menswear). The ASOS owners argue that this enhances the points of engagement between the retailer and the shopper and leads to a more seamless shopping experience. ENKI essentially finds products for shoppers and visually displays them on their smartphones.

It is also building on its technological capabilities by introduceing new languages on its websites, improving the detail in its recommendations section by developing new algorithms. It is also developing AI (Artificial Intelligence) to further improve the conversational interfaces. This together with the average of 5.000 new items that are introduced each week, arguably does place ASOS at the forefront of innovation.

The cornerstone of ASOS is all about engaging with and creating a social welfare dialogue with their customer base. This appears to work; judging by the financial performance of this retailer.

ASOS has committed to spending around £250 million annually to reinforce its position as an innovator and trend-setter in the fast-fashion sector.

Allied to the use of technology is the focus on creating a series of designs and items that set the trend for the “twentysomethings”. While still reflecting celebrity it has expanded its collections to all forms of fast-fashion.

In the summer of 2018 ASOS reinforced this aspect of its strategy by launching a new label: Collusion. This again is aimed at the Generation Z segment. In this case however the designs are gender neutral. This was launched with the help of influencers: one hundred Generation Z shoppers. The Collusion collection is picking up the trend towards unisex designs. Arguably Zara has already addressed this issue. However this tended to be reflected in the styling aspect. By investing so heavily in this label ASOS has gone deeper into the identity of the concept. This is captured in a quote from the ASOS CEO. Collusion is a “200 piece collection for a new generation united in their pursuit for inclusivity and representation”. The collection generally focuses on athleisure and casual wear. The former is picking up in the trend toward people wearing clothing that doubles up as leisure wear and training / gym gear.

It also adopts an innovative approach to pricing in general and discounting in particular. It is by no means the cheapest online fashion retailer. This is reflected on on-off, stand-out branded products, which are sold at a premium. Roughly five per cent of the items fall into this category.

Instead of applying a discount policy across all of its items ASOS has created what it called an “outlet section” as part of its online store. This is updated on a daily basis and can cover a few thousand items. The discounts can go up to as far as seventy per cent. Arguably this approach draws customers to visit the site on a frequent basis as they are likely to find constant changes to the discounted offering.

In summary there is a lot to like about ASOS and its value proposition. By putting its money where its mouth is, it has become a consistent innovator over the years. This places it within the potentially “game-changing” category in the fast-fashion sector. More importantly it gives it first mover advantage in many cases and provides it with a window of opportunity. It also takes its competitors some time to play “catch-up”.

To use colloquial terminology I describe ASOS as an ace retailer: one that gets to the key issues in terms of creating, delivering and maintaining a successful business proposition. What do you think?

POISON IN THE AIR

Concerns about the environment have been bubbling away in the general and business community for the past couple of decades. In early October (2018) they came to the forefront once again with the publication of a major UN report on the future threats to the planet.

Specifically the UN Intergovernmental Panel on Climate Change produced a report which indicates there is a high risk of global warming if it passes 1.5 C degrees. If it goes beyond this figure then there are major threats of drought, floods and “all things nasty”.

This report has its genesis in the 2016 Paris Agreement and appears to reinforce the widely-held fears of governments and policies about the continuing way in which we are damaging the environment.

Coincidently and around the same time as the publication of this report, the UK government questioned some of the practices of fashion retailers about what specific measures they were implementing in order to address the environmental and social impact of the items that they sell to their customers.

They wrote to ten of the top fashion retailers (M&S, Next, Primark, Arcade, Asda, TK Maxx & Homeservice, Tesco, JD Sport, Debenhams and Sports Direct outlining their concerns and questions.

This sector is valued at around £20 billion to the UK economy.

This reawakened by interest in this subject – a topic that we address in some detail in one of the chapters in my book.

As we discussed in that chapter the environment touches upon almost every aspect of a retailer’s business operations: from transportation to recycling; from working conditions to pay and through to the materials that are used in clothing. It is the best example of how to define the word “ubiquitous”.

If we look at the literature on the retailer’s response to the environment we can see that many of them have adopted a proactive and planned approach. For example in the UK, Marks and Spencer was one of the first to develop and implement such a plan. Many others have followed.

Cynics have suggested that many retailers pay lip service to the environment: indeed some have been accused of using it as an attempt to “greenwash” people into believing that they are instigating initiatives when in fact they are, at worst, misleading them or at best, cultivating a “good news story” in order to place them in a favourable light.

The UK government has challenged fashion retailers to examine and re-assess their respective approaches to the design, production and discarding of clothing.

I am always intrigued by the role that the consumer plays in this process.

I will give you an example. Over the past twelve months or so I have conducted classes on this topic with a wide range of students (under-graduates, honours students, MSc and MBA candidates) in the UK, Europe, South-east Asia and the Gulf Region. I have asked each group to specify which of the following categories they belong to: environmentally aware shoppers, neutral or couldn’t care less.

In total I would have posed the question to over seven hundred students. While I appreciate that it does not necessarily represent scientific and publishable research, it nonetheless provides an indicator as to people’s views and opinions.

What was the result? In all classes and in all international centres, about ten per cent indicated that they were concerned about the environment, about sixty percent suggested that it was not something that concerned them and thirty per cent highlighted that they couldn’t care less about the topic.

What are we to make of these views? From a marketing perspective I would suggest that the various stakeholders have under-estimated the challenge of convincing and converting people’s attitudes before we might see evidence that shoppers are likely to change their shopping behaviour and habits.

While not necessarily challenging the exhortations from governments and institutions such as the UN, I would argue that it is not sufficient to “blind” people with all sorts of scientific data and evidence in a directional and in some cases, condescending manner. For many of us such messages go over our heads.

Specifically in the case of retailing shoppers need an incentive to switch their purchasing of clothes away from items that damage the environment.

This takes us to the heart of the matter. It is a reality that if people are to purchase eco-friendly clothing items, they will have to pay more for the privilege.

Retailers have also had to grapple with the issue of cost. However many have realised that if they examine and assess each aspect of their supply chain, they can pinpoint areas where savings can be made in areas such as recycling, energy and more efficient modes of transportation. In other words, while there may be initial costs associated with revamping transportation or introducing various initiatives within each individual store, benefits will accrue.

An example of this is where retailers work with third-party operators such as suppliers and freight forwarders in order to address environmental issues. In the latter case some of the more proactive freight forwarders are introducing technology to calculate carbon emission levels for their retailers. This initiative can break down the analysis by the mode of transit, the supplier and the location. They can provide information on what the statistics are equivalent to. For example 5 tons of CO2 emissions equals half of a person’s home energy.

Marks and Spencer have set a target, in their Plan A 2025 initiative of becoming a zero-waste business by that date.

Retailers are also reviewing their key performance criteria when selecting suppliers. The latter will increasingly have to meet stringent targets with respect to their use of eco-materials and transportation modes.

While all of these initiatives are being adopted in an increasingly focused manner by retailers, I still contend that not enough is being done to work more closely with perhaps the most important constituent stakeholder: the shopper.

Most of us do not like being told what to do or apparently being foisted with an increasing list of directives from policy-makers.

This is best illustrated in the use of plastics in many of the materials that are used in fashion retailing. Every time one of these items is put into the washing machine it releases micro plastic fibres. These find their way into the environment and collectively, over time, can damage the oceans. Do many of use care? How much of this does not register with us?

Many of us, particularly the younger demographic, actively participate in “disposable fashion”. We DO NOT purchase a shirt or blouse to last us for a few years (like perhaps our parents once did). Instead we wear it for a couple of times and dump the item in our bins. They eventually clog up landfill sites.

When we factor in the amount of merchandise that is dumped or discarded by retailers in such landfill sites, we begin to get an idea of the likely damage to the environment.

Can we convince people that we should only buy material that is less damaging, but more costly? Can we argue that we should buy clothing that will last for the longer-term? When many of us want to buy items that provide instant gratification but are not seen as something that remains in the wardrobe.

It will take time to change such views and retailers will have to become more creative in encouraging shoppers to alter their shopping behaviours. In my view it will take a generation to do so. What do you think?

THE HOUSE THAT JACK BUILT

In mid-September 2018 and after two years in development, Tesco opened two new stores under the brand name of “Jack’s”.  Called after the original founder of Tesco, Jack Cohen and precisely one hundred years after he launched the Tesco concept, this new brand hit the high street.

What is the essence of the brand and who is designed to compete against?

Many commentators see it as an attempt to challenge the continued growth of Aldi and Lidl, the two German discounters. They have more than doubled their combined market share of the UK grocery market to 13.1 per cent.

Around 2,600 products will feature in the typical Jack’s store. This compares to around 1,500 or so items in an Aldi and Lidl store.

A key element of this new retail concept is the focus on “Britishness”. Around eight per cent of the products are sourced within the UK. The British flag appears prominently on the packaging. Of the 2,600 items, 1,800 will be branded as Jack’s. The remainder will contain “big name” brands such as Kellogg’s, Coca Cola and Lea and Perkins Worcestershire sauces.

The décor and layout of the Jack’s stores are broadly similar to Aldi and Lidl: wide spaces between the aisles, products which are stacked on pallets and aisles devoted to promotions on big name brands as well as an aisle which features promotions on homeware items called “When it’s gone; it’s gone”. To underline the minimalist nature of the stores, polished cement floor will be employed: in contrast to terracotta tiles which are prominent in traditional Tesco stores. Other initiatives include the concept of “Fresh Five”: a fruit and vegetable offer which changes fortnightly. This is suspiciously similar to Aldi’s “Super Six” promotions. Is this a form of imitation as opposed to innovation?

Workers will not wear a Tesco uniform. They will earn more than their Tesco counterparts on basic pay: £9 as compared to £8.42 and £8.85 at Aldi. Crucially they will not earn the normal staff discount or annual bonus.

Interestingly it adopts a “local pricing” strategy build around the strapline of being “the cheapest in town”. This implies that it will be the lowest on price, compared to Aldi and Lidl in any given town. This is a sharp departure from the strategies employed by Aldi and Lidl. Their respective models are based on the principle of standardisation. Pricing decisions are taken centrally at their Head Offices. The Jack’s model, in the context of pricing, effectively gives autonomy to store and regional managers.

It intends to use three hundred and fifty of its regular Tesco suppliers to stock the stores. This allows it to leverage its existing power and influence and derive some cost savings.

Two stores were opened in mid-September, essentially old Tesco stores that had been “mothballed”. The plan is to have around ten to fifteen stores in operation by early 2019.

This has become a bone of contention among retail analysts. Some argue that it is a very slow roll-out and will fail to make a sufficient footprint to seriously threaten Aldi or Lidl. The essence of this argument is that you are better off making a big bang – with numerous store opening as opposed to “dipping your toe in the water. To be fair Tesco has committed over £20 million on the development of the brand over the past two years.

The counter-argument to their approach is that other supermarket groups have tried similar brand launches and failed. For instance Sainsbury’s opened a number of Netto stores (Danish food retailer) in 2014 but closed them down two years later because they made little impact.

In terms of positioning and identifying a point of differentiation it is focusing heavily on its “Britishness”. This is reflected in items such as Cornish camembert and Derbyshire craft beer. Also all milk-based items are to be sourced from within the UK.

Commentators (some cynics perhaps) see this launch as an opportunistic attempt to leap onto the “Britishness” dimension, roughly six months shy of Brexit. Some argue that the nationalistic (jingoistic) dimensions that are likely to gain in strength as the March 2019 deadline approaches, will allow Jack’s to make a significant impression on the high street. That might be going a bit too far perhaps. Is it a template based around the notion of Jack’s being “a bargain shop for Brexit? It will stock a couple of categories of product that are not demonstrably British: bananas (which are climate dependent), and Italian pasta products.

Some fear that cannibalisation will occur: any sales generated in Jack’s may come from existing Tesco customers simply switching over. Overall net sales increases may be minimal. The CEO of Tesco feels that this is not an issue to be unduly concerned with. He argues that “I’d always rather cannibalise myself than have someone cannibalise me”. This suggests that he expects some cannibalisation but as long as it is only regular Tesco customers shifting to Jack’s rather than Aldi or Lidl customers then everything is all right. This is a contentious perception in my view. What do you think?

Interestingly existing Club Card holders cannot use their privileges in Jack’s stores. This is probably a good move as it explicitly recognises that Jack’s is a separate brand. Again, what do you think?

As Tesco roll out new stores (10-15) over the next few months, a key feature of the strategy is that they will use stores that have been closed in the past couple of years.

The intention is not to set up a web-based channel for Jack’s shoppers. Instead Tesco has developed a payment app which shoppers can use when they make a shopping visit to a store. This is similar to the strategies employed by Aldi and Lidl.

Senior management in Tesco have been quoted as expressing the view that Jack’s is designed to “appeal to the economically challenged that need a bargain and the affluent shopper that seeks a bargain”.

It is too early obviously to make any pronouncements about the likely success or otherwise of this venture. I would make a number of observations however.

The slow roll-out of Jack’s stores either smacks of undue caution on the part of Tesco or an opportunity to “test” out the concept and make adjustments accordingly. If it “fails” over the next year to eighteen months, then Tesco will likely “pull the plug”. However it will not represent a major blow. Relatively speaking the company has not spent much on the launch; with the use of existing stores or ones that have been closed.

If it fails, it will give them “a bloody nose”.

There is an obvious danger that is could be making the classic mistake of aping the competition and failing to provide any real point of differentiation between Jack’s and the Aldi / Lidl’s of this world. “Me too” products very rarely if ever make any impact. We have to ask the following question. Is there sufficient differentiation to attract customers to this concept? I am not fully convinced.

There is a tendency for shoppers to make more use of “top-up” shopping. Aldi and Lidl have benefited from the convenience they provide to shoppers in the form of small product ranges, small stores and ease of access. Jack’s falls into this category but may not make any inroads on these established discounters.

The emphasis on Britishness might appeal to people who support Brexit and, in the event of a disorderly and messy exit from the EU, might be seen as tangible evidence of a “siege mentality”. This might generate some sales but is it likely to create long-term benefits?

Let’s review the case in a future blog.