THE PRODICAL RETURNS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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FARFETCHED

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

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

I happen to disagree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What can we learn from our review of Farfetch?

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

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

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

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

DO YOU NOT KNOW WHO I AM?

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

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

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

Clearly it has some potential benefits for retailers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EL PRIMO: BUCKING THE TREND

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

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

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

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

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

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

But first a little historical perspective on Primark.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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!