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WH Smith – how does it keep on squeezing those margins?

I mentioned WH Smith’s continued walk-on-water results in my last post, with sales down and operating margins up, and I’ve started to worry that I might be obsessing about a single brand.  However, on reflection, this is understandable – Smiths is the only retailer in the book sector whose current performance is visible to the public.  Waterstone’s is now privately held, so it’ll join Foyle’s with Companies House filings only published many months after they cease to be relevant.  And Amazon of course never breaks out UK performance, and reveals no more than it chooses to through its Luxembourg base.

We all know that WHS is no longer the serene multi-layered-management arm of the Imperial Civil Service that it once felt like.  We can only speculate as to its market share in the critical Toblerone sub-sector.  And as a well-known retail guru and government advisor observes on Twitter this morning:

Mary Portas

@maryportas I truly hate WHSmith. Used to be a loved British biz & now a dump. Rush hour, 7.45am at Euston. One person on till. Queues. And shitty promos

But, spitting feathers aside, and noting obvious savings in staff costs, shop-fit etc, where is WHS’s continual margin gain coming from?  With twenty minutes to kill in their new store at Westfield Stratford yesterday, I went strategy spotting.

One of the best ways to drive margin is through own-brand, and WHS continues to extend own-brand and unique stock throughout all its categories.  WHS has always carried a sizeable slug of own-brand stationery and the like, but many of its categories are now dominated by own-brand to an unprecedented degree.  Take calendars.  There are multiple suppliers of wall calendars in the market.  Some of them own valuable IP – eg Top Gear, The Simpsons – but a large proportion of the market is generic – kittens, landscapes etc.  And WHS (at least in Westfield) no longer stocks generic calendars that aren’t own-brand.  The opportunities to increase margin are significant.

Value publishing – creating attractive books to be sold at a lower-than-expected price – has been a staple of store chains like The Works for many years.  It served us well at Borders, and WHS has always had a toe in the water, but its commitment to value publishing is now more substantial, and takes many forms.  Value titles are no longer separated out, highlighted as “second-class” goods – they’re integrated into the main offer.

WHS is proving particularly adept at providing alternatives to current trends/titles – eg baking books to accompany the Great British Bake Off.  This can be yours for a fiver:

Placed strategically close to the Guinness World Records dumpbin is a selection of similar facts’n’entertainment titles like “You Won’t Believe It But…”, “Gruesome Facts”, “Planet Earth” and so on.  These are retailing for £5, half the price of Guinness (which in turn is nominally 50% off its £20 RRP, though I defy you to find any chain merchant selling it for over a tenner).  WHS offers a cheap alternative to Guinness which isn’t as time-sensitive, and will earn a higher cash margin per unit sold than Guinness.  Win-win.

Now, here’s an interesting offer – any two for £10 on over forty best-selling hardbacks.

That’s a great deal in today’s market, but it’s also a clever deal, recognising that WHS’s average customer isn’t a Bookseller subscriber or regular attendee at the London Book Fair.  These are, for the most part, last year’s books (long available in paperback), or they’re illustrated publishing of the sort that The Book People specialise in – big print-runs on reliable topics, sold into specific outlets at low-low prices.  Describing these books as “best-selling” is accurate – they certainly have been best-selling in their time, and with offers like these, perhaps Ant & Dec will sell better second time around…

Here’s another way to get mileage out of old books.  On the new books table at the front of store, two hot biographies of major cultural figures, both best-sellers, but Keith Richards was published 12 months before Dickens/Tomalin:

The River Cottage Veg book is new, and appears to be selling at full price – though keeping up with stickering is hard work in this environment.  (The Cheryl Cole at bottom right was published in September 2010, and is on a not-wholly-attractive “2 for £10 or £4.74 each” offer, if I’m reading that sticker right.)

The Keith Richards was a huge success last year, and representing it for Christmas 2011 works for everyone.  At 70% off, it’s retailing for £6 – somewhat higher than a traditional remainder seller would price it, but excellent value nevertheless.

Elsewhere, WHS has bought heavily into what is essentially “Jamie Oliver’s Greatest Hits”, a collection featuring previously published recipes from all over Europe, priced to sell at £9.99.  This is more heavily featured, and more cheaply priced than this season’s new Jamie – and as a recipe selection, it may well be more attractive to many customers.  Given WHS’s stock commitment, a better cash margin also looks likely.

*     *     *     *     *

These are just a few examples, culled from a brief stroll around one store, but they underline WH Smith’s absolute commitment to creating a consumer offer that will drive the strongest possible margin.  Lest this sounds merely blindingly obvious to any general retailer, this isn’t how a traditional bookshop works – stock selection is driven by frontlist publishing, and by the creation and maintenance of a diverse and credible backlist range.  The bookseller will haggle with the publisher for margin and payment terms, marketing support etc, but their commitment to the “right” titles will limit their ability to grow margin.

What WH Smith has done is to free itself from the old dependence that retailers of copyright products (books, news/mags, music, movies, games etc) have on producers, by analysing what its customers want to buy, turning the screws on suppliers in exchange for exclusive deals and big buys, and generating large volumes of unique and own-brand stock across all categories, from bookazines to giftwrap.

I still share the general bogglement at Smiths’ ability to keep pulling off this trick, again and again – last month, Kate Swann announced that a further £11m-worth of savings had been identified across the business.  And I wholly understand the dismay that Mary Portas and many others have in the current WH Smith store environment – these are no longer pleasant stores.  (Younger readers, when I were a boy, WHS and John Lewis felt very similar to each other…)  But WHS now has a much greater level of control over what they stock and sell.  How all of this will fare if digital content takes over 50% of the book market (and the magazine market?) is hard to say, but as a survival strategy this looks more robust (if less attractive) than that of the old “stockholding bookshop”.

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2 Comments on “WH Smith – how does it keep on squeezing those margins?”

  1. Jo Henry says:

    And will be interesting to see how their tie up with Kobo works out over Christmas – whether the new Kindle offer is so attractive no one jumps ship….

  2. Competing with Amazon is difficult, to stay the least – they won’t be beaten on value, and that’s the measure that matters most to consumers.