You’ll have to bear with me; I’m a following a train of thought here. There’s nothing scientific about this, but there’s plenty for retailers and mandarins to think about.
I was reading a piece on The Next Web, about the rise in the US of online-only brands. The article (which you can read here) discusses US enterprises like Dollar Shave Club and Warby Parker whose business model is built around having no bricks and mortar availability for their products. As Everlane CEO Michael Preysman says:
We are going to shut the company down before we go to physical retail… Traditional retail models are bloated with unnecessary costs. Online just makes more sense: we’re national from day one, we have a single store, we don’t have to cover costs of physical inventory in stores and we don’t have to pass on a 2x markup through retailers.
This moves us on from showrooming, and into a world where the showroom has been specifically designed out of the equation. In terms of business planning, this is a big leap forward from “omni-channel” – the message from companies like Everlane is that, while there may be multiple ways for brands to communicate with each their customers, there is only one channel through which they will make their goods available to you.
This marinaded in my mind for a little while, then we started Twittering this morning about the sad closure of a fine record shop. Record shops have been in the advance guard for physical closure and collapse in the retail sector for many years; however few we have left, it seems as they though they keep on failing. As Steve from Rounder Records wrote:
We are closing because we can’t make it add up any more. We are a business that has been decimated by downloads (both legal and illegal), VAT avoidance by the big online retailers, a double dip recession, & the decline of the high street. Our lease has ended and we have nowhere to go.
So, I started to think, how many properly staffed, paying-their-taxes retail businesses (or indeed retail categories), anchored in bricks and mortar and supporting a vibrant high street, have to go to the wall before HM Treasury starts to feel the pinch?
Here are some purely illustrative and not properly audited at all numbers to think about. Let’s assume – as the British Standards Institution believes – that total retail sales in the UK are worth around £300 bn. (That’s 300,000,000,000 in pound coins.) And, to keep it easy, let’s assume that half of those sales – excluding food, children’s clothes etc – attract VAT.
20% VAT on a gross £150 bn equals £30 bn. That’s a lot of schools’n’hospitals. Of course, most online retail transactions attract VAT at the appropriate rate, but some don’t – all those downloads from Luxembourg, for instance.
Right, £150 bn less VAT equals £120 bn. Stick with the train of thought:
Business rates at, say, 4% of ex-VAT sales, will raise £4.8 bn.
Staff costs, at 10% of ex-VAT sales, will raise £2.4 bn in income tax on those wages, assuming tax is paid at a flat 20%. (Netting out personal allowances against higher tax band payers, for the sake of argument.)
Employers’ NI on those same staff raises around another £1 bn.
And if all those retailers make 5% net profit (happy thought) ,on which they pay 20% corporation tax, that’s another £1.5 bn.
Of course, online retailers have the same cost-heads, but with fewer staff, cheaper premises etc, the tax-take from their business activity is going to be significantly smaller than from a traditional bricks and mortar retail model.
Now, I probably ought to be having this debate over a third pint on a Friday night, but somewhere in this maelstrom of lower prices for consumers and lower operating costs for online retailers (yes, I know, they have to spend much more on marketing), there’s a lower tax take.
If online becomes progressively more dominant, as this graph from The Daily Telegraph suggests:
– and as I discussed in this blog at the end of last year, at what point will the current tax regime start to feel the strain?
It rather looks as though the Exchequer will need to raise more money – either from online merchants, through some form of additional levy (which in due course would lead to price inflation); or from consumers, either through raising VAT (though this is vulnerable to corporate strategic avoidance) or by raising income tax.
The channel change is gradual, of course, but inexorable. We won’t end up buying everything online and nothing from physical shops, but there’s a lower-tax trend. Looking to the future, our Chancellor and his shadow could just carry on flicking each other with wet towels, but – in the absence of real economic growth (driven by eg significant job creation in other parts of the economy) – I hope there’s someone in the Treasury giving this longer-term structural change some serious thought.
No argument about what today’s big story is – though details of the proposed relationship between Waterstones and Amazon are scant at present. The Guardian is all over the story:
both merit your attention, and The Bookseller has of course been updating all day long.
The Bookseller asked me to write an instant blogpost, and you can read it here. I don’t just draw lessons from history, but I’ve been through one consummated relationship with Amazon in my life, so some reflection is allowed!
To comment on this blog post, just click on “leave a comment” in the Tags block above.
The Bookseller has run a piece on the speech I gave to the World E-Reading Congress earlier this week, so I’m reproducing the text in this blog entry.
Whilst I’ve edited out some of the more obvious “lecture” elements (eg “Good afternoon, my name’s Philip Downer”), this is still a talk, so in places you may find it (even) more rhetorical than some of my usual writing; similarly, the grammar and syntax will be a little sketchy or forced in places!
My audience consisted of publishers, and those who provide publishing services – distribution, analysis, technical support, media coverage, plus a smattering of creatives (writers, illustrators, designers) and some online sellers of books and/or content. There were no bricks and mortar retailers present.
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My theme for this afternoon is Bookselling: The past is another country, but the future is another planet.
This is a bit clunky, but on an agenda full of brave new worlders, keenly identifying opportunities and breakthroughs for the future of eReading, I am the lucky person who has elected to talk about shops.
I’ve given a few talks over recent months, and as I approach each one, the news for specialist booksellers appears to have got a little bit more challenging. At Frankfurt last year, I observed that “We are entering a world where a handful of corporations own proprietary formats through which all the books, and a great proportion of all other creative content, are channelled. New technology can do great things, but it can also damage supplier diversity and consumer choice.”
I stand by these words. The bigger and more powerful the mega-corporations become, the more entrenched they’ll be. They operate out of highly protected walled gardens, and their goal is to tie you, very tightly, into their specific eco-system. It isn’t in their interests to allow this situation to change – even though I would argue, it is clearly not in the best interests of every author, publisher and reader, for a handful of tech-driven organisations to own books and reading.
I’m talking to you today about retailing, rather than the broader outlook for publishing. However, the old author/agent/publisher/bookseller/reader model is significantly fractured and everyone in this industry needs to decide whether monopolies or diverse markets are more appropriate for its future.
As this is an eReading Congress, I think a show of hands would be appropriate.
Who uses an electronic device in their leisure reading – an eReader, a tablet, a smartphone? [Practically everybody in the room.]
Put your hand down if your principle device is a Kindle. [Around half of those present.]
OK. Now, lower your hand if your principle device is an iPad or iPhone. [The other half of the room.]
Sony? Kobo? Nook? AN Other? Samsung phone? PC? [No, no, no. Everybody used Amazon or Apple devices.]
Although they play very different roles, there are of course two, big dominant players in our new world, a retailer and a consumer electronics company. But Amazon and Apple are an odd couple
Amazon: is setting a course to becoming the world’s biggest retailer, and en route laying waste to the established author/publisher/bookseller ecosystem.
Take a look at its performance for the first quarter of this year:
Profit: $ 130,000,000
Amazon sells ebooks and pbooks at low margin, break-even or a loss. This (we are assured) benefits the customer.
Amazon has very patient investors, who support a high P/E ratio, currently running at over 90x. I assume they work on the principle that, once world domination is assured, the profits tap will be turned on. Otherwise, where’s the value?
How many sectors and countries does Amazon have to dominate before this happens?
Apple: is producing the products that everybody wants, selling phones, tablets and other hardware and content at a spectacular profit.
Notwithstanding Samsung, it pretty much leaves all its competitors in the dust. It also, by-the-bye, runs a highly successful and much-respected retail chain.
Looking at its quarter one performance:
This extraordinary margin, we understand, also benefits the customer; so Amazon’s 1% is a good thing, and Apple’s 29.6% is also a good thing.
Naturally, Apple’s investors are as happy as can be, and they’re even being promised dividend payments in the future. Oh, and Apple’s P/E ratio is a rather more rational 10.5.
Jeff and Steve have made this world for us in which consumers are happy to pay top dollar for the best hardware, and the lowest conceivable prices for content.
In the past month, of course, a new alliance has been formed – something of a 1990s supergroup. Is the Microsoft/Barnes & Noble alliance strategically brilliant, or a last throw of the dice? Microsoft has a track record of alliances with previous cycle winners, like Yahoo! and Nokia.
However, publishers and many readers are looking for alternatives to Amazon’s hegemony. The deal enables B&N’s Nook and College divisions to separate themselves from the old superstore business, and provides the firepower for the Nook to be launched worldwide, with a solid retailer base in the US.
Are Barnes & Noble the future, or is this just a coming together of legacy businesses? And what is a legacy business, anyway?
Ten years ago, if I’d said “legacy” to you, you’d have understood it in the old sense – “Something handed down from an ancestor or a predecessor or from the past”. A legacy was a good thing – real value created by previous generations, and a solid foundation for the present and the future.
Today, the word “legacy” is used as an unthinking term of abuse – essentially, any business that has a history longer than a few years is a “legacy” business, and thus unfit for purpose, and ripe to be taken down. Established publishing houses are described as “legacy businesses” by teenage entrepreneurs seeking to discredit them. Perhaps they fail to distinguish between a business that has a valuable inheritance, and has the capacity and the drive to embrace the new world, with one that isn’t in control of events. Or perhaps they confuse all established businesses with the fireworks of the tech sector, the Netscapes and MySpaces that crashed and burned; the Yahoos and Research In Motions whose innovation has been eclipsed by other, newer stars.
It’s inevitable that what appears to be change-making today will become – necessarily – protective and fixed tomorrow. Perhaps, in this sense, “legacy” simply means “grown-up and responsible”. Well, there are worse things to be, and, companies that once behaved radically will start to behave protectively instead, in order to maintain their primary income streams.
But let’s talk about retailing, because this is where a physical legacy can become really toxic. In the 1930s, Woolworths opened nearly 400 brand new stores across the UK. When I say “opened”, I don’t mean “rented a tin shed and screwed their name to the front”. I mean, they acquired freeholds, and built big, brand-new stores. This was a massive investment of cash and confidence in the market. The crowning glory was the Blackpool store, which opened in Spring 1938. Five storeys over 75,000 square feet, including two vast restaurants. Woolworths was one of the biggest and most powerful consumer brands in the world.
Building all those stores guaranteed Woolworth a strong presence in every town in the country. This was the legacy of its period of supergrowth, but as time passed, the retail offer lost its focus; the freeholds were sold, and the legacy of great stores was no longer a valuable inheritance, it was a millstone of failing retail premises.
Historically, this is what retailers have done – opened stores, and carried on opening them until sometime after the market cries “enough”! Clintons Cards and Game are two of the most recent examples in the UK – and then, of course, there are the challenges facing the remaining booksellers.
Right, here’s a scary prospect for you.
Imagine you’re running a chain of bookshops. We may be talking about hundreds or a handful; we may be talking about any country in the developed world. Two or three years ago, the era of the superstore came to an end. Now, I would argue, the era of the chain bookshop is going to follow, unless the model is radically reinvented.
So, if you’re running a chain of bookshops today, you have to do two impossible things.
The first is to deal with your straggling real estate, because, as I’ve discussed, the single biggest challenge for any bricks and mortar retailer is their legacy of old stores. However carefully that estate has been built, however appropriate it was five years ago, it is now shot through with toxicity. All of those shops are tied to long leases, with upward-only rent reviews. Landlords are operating in a shrinking market, so are in no position to give concessions to any business that wants to close a shop while the lease still has years to run. This leads to pre-packs and CVAs (company voluntary arrangement), but these acts of desperation are usually the prelude to administration.
All retail businesses have an unproductive tail, and any location that’s bad at the moment has the scope to get worse.
Archie Norman, Asda’s former CEO, has observed that retailers should close 5% of their estate every year, and he’s absolutely right – but I can think of no retail business that has heeded that advice until it’s much too late.
As a bookseller, your bricks and mortar shops have to be super-viable. You must close today’s loss-makers, and tomorrow’s loss-makers too.
Plenty of retailers are facing this problem right now – Argos, French Connection, Mothercare and Thorntons have all been in the news in recent weeks. However, although they’re vulnerable to online sellers, it’s still difficult to digitise a romper suit or a box of chocolates.
So, close your under-performing stores. Then define your customers and their interests, and close any further stores that don’t match that profile.
Your second impossible challenge, and one that is at the heart of this conference’s purpose, is that you have to compete in an omni-channel marketplace, and you have to do so against some of the richest corporations the world has ever seen. Logically, this is impossible, because it requires huge resources, and your chain of bookshops can’t do this alone.
This is where the book trade needs to pull together. This industry is at a crossroads where it either allows the global corporations to progress from being walled gardens to becoming super-fortresses; or it fights to ensure plurality. I salute unreservedly the stand that Macmillan and Pearson are taking, alongside Apple, in the Department of Justice case regarding agency pricing. A couple of weeks ago, Amazon decided to give away the Hunger Games eBook free of charge. Now, maybe I’m just losing it as I get older, but can anyone explain to me how giving away the best-selling book in the world helps to secure current income, or to create a future value proposition, for anyone other than Amazon? It may be that the publisher and thus the author still got paid, but at the long-term cost of proclaiming their work to be without value.
Booksellers today need the freedom to participate in the omnichannel world, and it is in everyone’s interests to lower those barriers. That means removing DRM, so that content becomes device-agnostic; customers can buy the hardware that suits them, and the content, at an appropriate price, from the retailer who can do the best job for them.
I would love to see thinking of this sort emerging from Microsoft and Barnes & Noble’s NewCo. If B&N thinks it now has the firepower to challenge Amazon without also changing the ground rules, then they will find that Amazon can always out-gun them. Anybody else with a stake in ebookselling needs to do likewise. You won’t beat Amazon by being a pale imitation of Amazon, pleading with consumers to do what’s best for the long-term health of the book trade. Consumers have enough to worry about. They will respond, though, to a different, better offer.
Your retail goal – because you’re running a chain of bookshops, remember? – has to be an integrated ebook and pbook offer, with full online visibility of stock by branch for your customers. You’ll need a financial model that supports “showrooming”, because it’s a fact of life. You’ll offer Click and Collect, targeted social marketing and all the rest of it – everything a sophisticated pure-play online retailer does, with a shop attached. You’ll need to understand more about your individual customers than ever before.
Your online and ebook offer can of course cover all categories. Your pbook offer must be reshaped to reflect the new reality. That means fewer fiction paperbacks, and fewer reference books, because the day of the “general bookshop” is over. You need to be known for doing a few things extremely well, not everything tolerably competently.
All of this sounds scary, and you will all be aware that the number of specialist bookshops in the UK has declined by over 20% since the credit crunch kicked off.
Booksellers – and, by extension, our suppliers and our customers – invested far too much energy in worrying about supermarkets, and not enough in recognising that Amazon wasn’t just another specialist competitor in a healthy eco-system, with a novel twist. Today, if we take all the UK’s true specialists, the Waterstones, the Foyles, the academic chains, all the independents, and add them together, I don’t suppose their unit sales are as great as Amazon’s are now.
There’s a school of thought that says, well, you pesky booksellers, you should have done more. Should have done it sooner. More fool you. I think this is a little like acknowledging that a fine historical building has caught fire, and saying “they should have installed a better sprinkler system. I’m not calling the fire brigade” – when there is still plenty of merit worth saving, and plenty that you’d miss if that magnificent building was gone.
Specialist booksellers – including independents – are now barely competing with each other at all any more. They’re competing with Amazon and Apple; they’re competing for time as well as spending.
However, here’s the interesting thing. At the risk of sounding like Clement Freud on Just A Minute, I’m going to run through a diverse list of retailers. Here goes:
Anthropologie • Argos • Asda • B&Q • Bentalls • Blacks • Comet • Conran Shop • Cotswold Outdoor • Dobbies • Eden Project • English Heritage • The Entertainer • Fortnum & Mason • Habitat • Halfords • Hamleys • Harrods • Harvey Nicholls • HMV • Historic Royal Palaces • Hobbycraft • Homebase • John Lewis • Lakeland • Morrisons • Mothercare • National Gallery • National Trust • 99p Stores • Oliver Bonas • PC World • Pets At Home • Poundland • Royal Horticultural Society Wisley • Ryman • Sainsbury’s • Selfridges • Tate • Tesco • Toys ‘R’ Us • Urban Outfitters • Wyevale Garden Centres
Most of these businesses are thriving, successful enterprises. Some are struggling – but all of these chains are also booksellers.
Some, like the supermarkets, are big, important players. Others offer books as a value proposition, or as part of the lifestyle offer they’re promoting, or as a souvenir of a day out.
But they all believe that there’s a place in their shops for physical books. Most of these retailers have a much clearer understanding of their brand, and of their customer, than general bookshops have.
The physical bookshop struggles, but the physical book can thrive.
We tend to look at the problem from a “growing online, declining physical” standpoint. But if the solution is to ensure that all physical stores have multichannel capability, surely the same applies to pureplay online retailers?
As Sarah Wilson of the Egremont Group has argued persuasively, without a high street presence, without the ability to see and touch the goods you want to buy, online sales will plateau. After all, if we all really wanted to, we could stop using bricks and mortar shops tomorrow, and just buy everything online – it’s all there, after all. But we don’t. Consumers of the future will be looking for an “integrated experience… as they choose to shop across channels and increasingly look on pure plays as employing yesterday’s model”.
OK, this is where it gets interesting. You’re running a chain of bookshops, remember? But chains are inevitably bland. Chains are corporate. Chains are bound by process; necessarily managed to lowest common denominator standards.
I’d posit that more good managers leave book chains and open their own bookshops than happens in most other sectors. They do it because they love what they do.
So, at this stage in the development of the bookshop, I think it’s time to acknowledge this. You could create a partnership model, like John Lewis’s.
Or you could be bolder, and create a franchise model. The centre would provide the technology, the systems back-up, the buying power. The managers acquire ownership of the stores, buying an interest in them or purchasing them outright, customising their shops as appropriate for their markets.
You cease to have a chain of stores. Instead, you have a network of individual specialists. They may go down the children’s route, open cafes, build non-book sales. Or they may, like the Harvard Bookstore, invest in Espresso Book machines; providing a real specialist service, with same-day delivery to local addresses, and next-day around the world.
That network of stores doesn’t have to be restricted to your core business. You can sell your chain’s expertise to other independent bookstores, and reinvent yourself as a bookshop service organisation.
We have a number of good businesses supporting UK booksellers. Gardners’ networked Hive website, offering pBooks and eBooks online; the Bookseller and Nielsen, providing news and reliable data; and of course the support of the Booksellers Association. I’d like to see all of these organisations – and others – committed to supporting everyone who is a bookselling specialist, whether they’re primarily selling eBooks or pBooks, online or instore. If anyone could pull this together it would be the BA, but the organisation would have to repurpose itself appropriately.
There’s a way forward for individually managed and owned shops that have full access to ebooks, and yet can localise their offer to suit each physical location, each local residential, business and academic population, in a way that chains inevitably struggle to deliver.
And funnily enough, your carefully tailored local offer could be exactly what individual customers around the world are looking for. And today, you can reach out to any potential customers. You can identify where there are similar populations, elsewhere in the country, elsewhere in the world, and serve them too.
Of course, this means that you and your shop need to have to have an opinion. A point of view. A personality. All of these things rolled up into a specific and saleable competence. Please some of the people most of the time, because you can’t be all things to all people.
Supermarkets have done their damage, and will reduce their book ranges as the mass-market transitions away from paper books. This is an opportunity for our industry’s specialists, who need to improve in quality and consistency. Some of our best bookshops are among the smallest and most independent, in every sense of the word.
Customers will still seek out good, well-run shops, and I suggest that the distinction between “independent” and “specialist chain” is a whole lot less important to everyone’s future, than the distinction between “specialist” and “non-specialist”.
A healthy bookselling sector is in the best interests of everyone in the trade – authors, agents, publishers, readers. Bookselling needs to remodel itself for the future, and do so in partnership with all the other key players in the publishing business.
But books and bookshops still matter, and there are still people who want to sell books. If those specialist bookshops focus on competing with each other for ever diminishing returns, they might disappear altogether. The more effectively they can work together, the more robust our retail offer in the future.
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My eBook, A Year at Front of Store, is available in these Amazon Kindle territories –
The analysts have jumped all over Amazon, following the release of a set of fourth quarter and full year results that demonstrated that no company walks on water (well, not indefinitely). In part, Amazon have brought this upon themselves; they failed to live up to their guidance, having not learnt the “under-promise, over-deliver” rule that Apple always applies to its relationships with the investment community.
Jeff Bezos has reminded us that he wants to be a high sales, low margin company, rather than vice versa. It’s well understood that Amazon is investing in distributing barely profitable Kindle hardware in order to secure future content sales worth many multiples of the original investment. But that spectacular P/E ratio has come under some pressure – the Publishers Weekly account of the investors’ call is worth a look.
When I’m looking at financial statements, I always start with the obvious operational numbers, and these certainly suggest a flattening in Amazon’s growth trajectory:
Sales uplift, Q4:
2011 vs 2010: +37%
Sales uplift, full year:
2011 vs 2010: +43%
This does feel like a reversal, in that one would expect all of the hard work from the full year to deliver extra benefits at Christmas, and that those much discussed Kindle Fires would have made a material difference to sales in Q4.
Unfortunately, operating expenses are up, so margins have tightened.
Operating expenses, Q4:
2011: 97.1% of sales
Operating expenses, full year:
2011: 96.5% of sales
Operating income, Q4:
2011: 2.9% of sales
Operating income, full year:
2011: 3.5% of sales
What is a little unusual about these numbers is that they fly counter to normal retail practice.
If I’m running a bricks and mortar shop, my occupancy costs in the fourth quarter are largely unchanged – perhaps a little more heat and light than in the summer, but rent and taxes are stable. My staffing costs are higher, but not proportionately – retail staff are much more productive in the Q4 than through the rest of the year. So, although my gross margins may be subject to competitive pressure, my costbase shrinks hugely as a percentage of sales.
This is why traditional retailers refer to Q4 as the “golden quarter” – it’s when they deliver the lion’s share of their annual profitability, and run with the highest efficiency. In a bookstore, I might see my pay-to-sales ratio drop from 11% in June to 6% in December. This is because hitting the cash registers is a small part of the total work done instore, and other activities – receiving goods, merchandising, interacting with customers – deliver much higher returns in December.
However, I guess it’s different online. I have no doubt that Amazon runs some of the most sophisticated warehousing in the world, but I’m going to guess that higher transaction volumes lead to higher payroll cost – there are fractional gains from selling large quantities of a small number of titles, but the manual processing required won’t diminish exponentially, as it does in a physical shop.
The other possibility that these numbers suggest is that Amazon discounts even more furiously in Q4 than it does through the rest of the year, in pursuit of always providing the very best value for its customers. Given that Amazon is so often the price leader in its category, you do wonder if some of that discounting is being sliced just a little too thinly for Amazon’s own good?
Now, these are simple, bricks vs clicks parallels – and the opacity of Amazon’s reporting inevitably leads to much speculation. There are plenty of questions specific to the Amazon model for investors to ask – is Prime costing more than it’s delivering; when will Amazon reap the dividend of selling Kindles at around cost, etc.
All of the above applies to Amazon’s “mature” market, North America, where sales are up by “only” 37%. The rest of the world is lumped under the heading of “International”; new territories are being opened up, and new products and categories launched.
Sales uplift, Q4:
2011 vs 2010: +31%
Sales uplift, full year:
2011 vs 2010: +38%
Away from North America, growth is significantly lower than it is at home (and exchange rate shifts mean that like-for-like growth is overstated here). This may reflect the very sluggish/recessionary European economies – America is starting to see a recovery that Europe is still waiting for. Of course, Q4 growth of 31% (29% currency-corrected) still compares pretty favourably to, say, the BRC’s +2.2% UK like-for-like sales in December, or CapGemini’s +16.5% like-for-likes for online retailers in the UK over the same period.
But it all comes at a cost:
Operating expenses, Q4:
2011: 97.6% of sales
Operating expenses, full year:
2011: 97.0% of sales
Operating income, Q4:
2011: 2.4% of sales
Operating income, full year:
2011: 3.0% of sales
In mature retailers, when margins halve, alarm bells ring. There might be one-off costs, of course – launching new products; or one-off crises – warehouse meltdown being a favourite. However, there’s no suggestion from Amazon that they’re anything but happy with these results, and they’ve weathered worse. Still, that economies of scale question is an interesting one to ponder…
Photo ©Les Wilson
This short piece was originally published earlier today by My Retail Media, in their “Insight” section. myretailmedia.com is a website dedicated to the Retail Sector, covering all the major retail categories, and offering finance news, videos, comment and insight. They also produce News at Nine, a free daily eNewsletter, and offer bespoke subscription services, aggregating retail news from over 4,000 sources, and tailored for individual subscribers.
As we enter 2012, we asked Philip Downer, the owner of retail consultancy Front of Store and former CEO of Borders UK to tell us where he thought the major trends and shifts for the year ahead would appear.
The retail industry enters 2012 in the throes of profound change driven by two factors:
- The continuing belt-tightening of Britain’s consumers, which will continue into the mid-decade, as cuts in government spending and the rebalancing of the global economy continue to change our working lives.
- Along with this, the channel shift from physical stores to online provision, in which the UK – according to Bain & Co – leads the world, with over 9 per cent of all retail transactions now taking place online. None of us can predict where or when retail behaviour will “settle” as technological change continues to accelerate.
Many established retailers found themselves in difficulties in December 2011, with profit warnings, administrations and rumours of collapse circulating across the industry. Here are some key pointers for 2012 – all equally applicable to major chains and to indies/start-ups:
First up, it’s no longer feasible for any retailer not to have an active online presence. And “active” doesn’t simply mean an online store; customers expect integrated online and instore browsing and purchasing. The rise of click-and-collect underlines this change.
Thanks to the power of web research, consumers are now often better informed than sales staff instore, both on product specification, price and value. Poorly trained or unmotivated sales staff are a greater liability in physical stores than ever – some retailers are recognising this, others still don’t “get it”.
What’s more it’s become a truism that a chain now only needs 50-80 stores to achieve national coverage – where 20 years ago they needed 300 or above. Understanding which centres or towns will be winners, and which are the also-rans, is going to be critical for retailers and for legislators. It’s telling that Grant Shapps, the new “Minister for Retail” – who has to deliver the Government’s response to the Portas report – is attached to Eric Pickles’ Communities and Local Government department, and not to the Department for Business, Innovation & Skills. High street revival is, perhaps rightly, viewed as a whole-community strategy, rather than simply a commercial challenge. This should at least mean that a holistic approach is taken to the many good points that Mary Portas raised.
Finally, things will get worse before they get better – but as the structure of the retail industry undergoes a once-in-a-generation change, the opportunities for entrepreneurs and visionaries to create retail success stores for next decade is wide open.
There’s an interesting report in The Times today; if you have a Times subscription, I urge you to take a look behind the paywall. The purpose of the story is track sales growth online, and there is much additional data regarding online research, different online trends across luxury/premium/mass market products, and so on.
The data has been provided by Bain & Company, and I’ve reproduced the gist of two of the graphs below. Please note:
- the graphs merely mimic graphics from today’s Times
- copyright rests with Bain & Co
Just treat these charts as trend indicators:
1. Internet retail as a percentage of total retail:
No doubt about it, we are leading the world in Britain, which makes the repurposing of our high streets and an intelligent repsonse to the Portas Report all the more vital. The flatter growth in the US is surprising; the sudden take-off in China is no surprise at all.
And it looks as though we’ll be maintaining our UK lead in the future:
2. Online sales forecast as a percentage of total sales, by category:
Music and video close the decade with 95% of sales online, and books are at 75%; within these percentages a large (but unspecified) proportion of the whole will be digital downloads.
In physical products, electricals soar to just under 60%, and clothing/footwear and homewares grow significantly. Travel and food are more stable, but still likely to see growth.
Both charts show a percentage of spend, and are therefore not suggesting that total spending by category could rise. They simply illustrate channel shift, and spending might just as likely fall.
As the sector returns to work, we brace ourselves for the Christmas trading statements (which we’ll be following closely on this blog) and, of course, the progress of the administrations and restructurings that were being signalled in the run-up to Christmas. Consumers are making the most of clearance sales now, but the medium-term future for most retail categories is very challenging. Watch this space…
Last week, Gateshead’s Metrocentre marked 25 years since its official opening in 1986. It was the first of the out-of-town megamalls that opened in the late 80s, followed by Merry Hill in Dudley, West Midlands (1989), and Lakeside (Thurrock) and Meadowhall (Sheffield) in 1990. Later arrivals included Cribbs Causeway outside Bristol, and Bluewater near Dartford.
These giant developments – typically supported by significant retail park space – were the climax of a busy decade of shopping centre construction. The out-of-town giants remain highly successful, and an important part of the retail landscape, but they came at the end of a building surge that was halted by the 1992 recession.
Of course, we’re seeing similar patterns today. With Westfield Stratford opened, there is little under construction at the moment – Trinity in Leeds, smaller schemes in the likes of Newbury. But not much. Development is, of course, cyclical, and completion tends to lag against the market. When the economy picks up again (crosses fingers), we’ll have to wait for a couple of years before developers are able to respond.
But what will they be responding to? Two news items have caught my eye this morning. The Daily Mail has a savvy business section, and reports today that “internet purchases of clothing and footwear are up by 21% compared to a year ago, which compares to a 2.1% fall for bricks and mortar outlets”. The Mail confirms that overall retail sales are now 10% online and rising.
Just to frighten ourselves into the weekend, let’s graph that change over ten years, assuming that the current split in fashion and footwear is 9:1, and that current trends continue unchanged. (They won’t. They may accelerate, and they may later slow down. But I’m seeking to provoke debate and activity, not complete an economics thesis.)
The other piece I was reading – and this is where we came in – is on the FSP Retail blog. This reminds us that, as all those 80s shopping centres approach their silver jubilees, all of their original 25-year leases will start – finally – to expire.
A 25 year, upward-only, retail lease. No wonder Retail Week’s subscribers talk about the UK having “the most anti-tenant commercial lease law in the world”. Of course, there are very few retailers who would sign a 25 year lease today, but there are plenty who are waiting for old leases to end, freeing them of onerous responsibilities, and allowing them to continue with the strategic reduction in selling space that the online environment necessitates.
This won’t impact the great regional centres that I named above – they’re well managed, regularly refurbished and repurposed, and exceptionally popular. But all of those infill schemes in secondary towns, with their cheap po-mo detailing, low ceilings, narrow shop units and second-rate parking – they are going to suffer. Voids (empty shops) will become more prolific, and some centres will close – a good “street” environment is usually preferable (and more flexible), compared to tight and compromised shopping centre space.
Mary Portas’s report on the high street is due to be released soon, and some of the leaked details are looking attractive – eg (as Tim Danaher reports this morning) giving start-up retailers the same business rate relief enjoyed by charity shops. But Portas has consistently observed that many town centres simply have too much retail space. The market may cause some developments to be reworked as residential or commercial space, or simply demolished and replaced, but councils up and down the country need to be thinking long, hard and long-term about how to secure their fragile town centres in a smartphone-enabled world.