The Bookseller has published a column I’ve written in response to WH Smith’s prelims announcement last week, which delivered the double whammy of £100m+ profits, and the upcoming departure of Kate Swann as Group CEO. I’ve reproduced it below.
When the WHS announcement was made last week, two sets of instinctive responses crashed into each other. The City reporters raised the roof for Queen Kate, during whose reign earnings-per-share have been driven to ever higher peaks, thanks to a combination of margin enhancement, cost-cutting and share buybacks. And the naysayers pointed out that, yet again, sales were down – even in the go-go Travel division, like-for-likes keep falling. Oh, and BTW, the store environment is pretty poor.
I try to take a slightly more nuanced (or reflective) view. Swann has delivered extraordinary numbers through torrid times, but has she left her heir apparent, Steve Clarke (who is promising more of the same), with a sustainable model?
WH Smith has made every decision with its shareholders’ interests paramount – and that’s as it should be, am I right? However, it is hard to escape the conclusion that those decisions have been predicated on short-to-medium term returns, rather than the sort of long-term investment that leading retailers make. WHS is still a bricks-and-mortar company (notwithstanding a long-standing but rarely promoted transactional site, and the slightly more forward-looking Funky Pigeon online offer), trading in categories – printed books, newspapers and magazines – that are in long-term decline. Its overseas Travel expansion plans are broad-based – but winners need to be idenified from a pot-pourri of investments across several continents.
Retail Week has just dropped through the door, complete with a profile of Steve Clarke. In the meantime, here’s The Bookseller piece:
Some smiling faces in the retail community this morning, with news that like-for-like sales in September lifted by 1.5%, easily the best result of the year. Why the bounce? There will have been some pent-up demand, following the armchair weeks of the Olympics and Paralympics, and – extraordinarily – there was actual alignment between fashions instore and the weather outside, so customers stocked up on winter clothing.
This didn’t necessarily mean a kiss of life for the high street, however – online sales rose by 9.9% year-on-year, compared to 4.8% in August, so the big shift from physical stores to the online environment accelerated, once customers started shopping again. And JJB Sports called in the administrators at the end of the month – one of the biggest failures in a terrible year for business failures.
There’s an interesting piece in the FT this morning (you’ll need a subscription), which lists some of 2012’s most notable casualties – Blacks, Game, Clintons etc – and notes the overall fall in the number of trading retail units across the country. Most pertinently, it highlights the quiet retrenchment taking place within successful non-food chains across the country, whereby multiple smaller stores are being closed in favour of a fewer, larger stores in the big centres. (nb my blog on the top eighty retail locations, from the start of this year). It may not feel like it, but independent retailers are increasing their share of the number of trading retail units, with 67% of all stores controlled by indies, up 1% against 2011.
And this is where the retail shake-out in the headline comes in; progressively, over the past four years, the out-of-date leviathans, the single product chains, the superseded-by-technology businesses and the unable-to-respond-to-slicker-competition-or-just-ground-down-by-Amazon retailers have been bought out, merged or closed down. There’s now a big “middle of the market” gap between the FTSE 100 corporations and the street-fighting new players, but this recessionary climate has been rolling for long enough to allow the biggest players careful application of their cash piles to reshape their store portfolios and integrate first-class online offers, while the new companies have grown up, and been designed from the ground up, for an omnichannel (apologies to John Ryan) world.
A guaranteed better retail tomorrow requires consumer confidence, and we haven’t yet turned that corner. (With Europe unresolved, the end of austerity is still some way off.) Nevertheless, we are seeing the birth of a new, fitter retail sector in the UK, with plenty of entrepreneurial spirit among the start-ups, and in larger, imaginatively run, modern businesses like Hotel Chocolat or The Hut. This is a volatile and fast-changing sector (asked Bill Grimsey), and there will be more business failures, more empty shops, more job losses. But good retail practice thrives on its ability to adapt, to anticipate changing consumer behaviour and surprise, delight and good value. The new generation, and the wisest of the old, understand this, and are seizing the opportunity.
I spent Monday with the Booksellers Association Conference at the University of Warwick, and wrote up my immediate reactions in this piece, published by The Bookseller.
I do believe that there is a robust future for the best independent bookshops. But they’ll have to evolve, and to stay ahead of their customers’ expectations rather than trailing behind them. I hope that bookshop owners, publishers and their trade associations can work together to ensure that there is still a role for these businesses.
Do add your comments.
I’ve been working in retailing for many years, and throughout the time, commentators, trainers, coaches and indeed CEOs have continued to return to the importance of customer service. And yet, still, as a nation, we really aren’t very good at it. On a day-to-day basis, the apparent “cost” of providing good, one-on-one service – in terms of people, time and training – still doesn’t appear to be worth the bother, for operators in big chains, and for owner-managers too.
The high street renaissance may be dependent on rebalancing the landlord/tenant relationship, weaning councils off their addiction to critical parking charges, or making the business rates regime fairer. But if customer service is still poor, then sayonara, shopkeepers – and the retailers will only have themselves to blame.
Retailer Solutions is an initiative driven by Enterprise Ireland, the organisation responsible for the development and growth of Irish enterprises across the world. Enterprise Ireland is a champion of innovation, and can provide retailers with access to emerging technologies from Irish companies with world class solutions for retail.
…who are as ignorant of each other’s habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets.”
The quote, of course, is Disraeli’s, and it was brought to mind after I read this piece by Marcus Leroux in Monday’s paywalled Times.
The gist of the article (for those of you without a Times subscription) is that 25% of non-essential retail spending takes place in just 3% of Britain’s shopping areas. Of course, the crushing dominance of London – West End, City, Knightsbridge, Westfield – will help to skew those numbers, as London’s share of tourist retail is exceptionally high. But forecasters CACI have reviewed 4,000 different shopping destinations, grading them from A to E, with anything below a C having questionable long-term viability.
The retail landscape has become more differentiated in recent years, as a combination of demographic polarisation, plus online, supermarket and out-of-town shopping, has caused the geography of the UK to divide more starkly between winners and losers. I pondered this in a blog I published at the start of this year, seeking to identify 80 centres that I believed had future relevance; in Leroux’s piece, he notes that around half of Thorntons and Argos stores are in D and E banded locations. And when stores close, which centres do you think will bear the brunt?
Well, here’s the good news (he said, a little acidly): the clone town will be a thing of the past. No longer will there be identical parades and malls of the same jewellers, fashion stores, chocolatiers and gift shops, from Cornwall to the Highlands; instead, we risk a brutally stratified selection of pound shops, pawn shops and cheap booze in struggling towns and suburbs, while chi-chi boutiques and cafes overwhelm the rest.
I’m not convinced this is a good thing (I am a One Nation kind of guy); and I wonder if all of the government’s attempts to focus on local retailers (Portas towns et al) only takes us a short way down the road. I very much support reducing business rates, slackening planning red tape and freeing up parking in order to revitalise a shopping district – but that revitalisation requires strong and solid national chains as well as entrepreneurs and start-ups. Any smart indie retailer understands the appeal of well-known neighbours, preferably robust and well-managed ones.
There is a significant risk that squeezed, mid-market retailers will be closing in the top locations, pushed out by high occupancy costs and sophisticated online shoppers; and closing also in the poorer towns, where falling sales are precipitated by falling employment, collapsing aspirations and a general hopelessness.
We may need to move away from the purist “you can’t buck the market” view to a more nuanced standpoint that recognises that decent communities need a well-balanced high street (as well as good jobs, schools, healthcare, housing…), and that allowing high streets in densely populated areas to fail is akin to leaving broken windows unattended. Of course, those retailers need to provide goods and services that their customers need – which of course is what mid-market chains have always delivered, tweaking their value offer as appropriate to local demographics. But once “some quarters in the City” (Leroux) have prevailed on Argos et al to close their D and E locations, recovery in those towns will become just that little bit more difficult.
Blindingly obvious “two nations” photo: Cheryl de Carteret on Flickr
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.
Clinton’s new Chief Executive Dominique Schurman has spoken to Retail Week about her plans for the brand, following her appointment by new owners Lakeshore Lending, a subsidiary of Clinton’s largest creditor and supplier American Greetings.
Schurman has enjoyed a thirty year career in card and gift retail in the US, where she will continue to serve as CEO of Schurman Retail Group, which is part-owned by American Greetings, and comprises the Papyrus, Carlton and American Greetings shopfronts and online sites.
Adding 397 well-worn UK stores to this mix is a tall order, and Retail Week concentrates on three elements of her short-term strategy thus:
1. Renegotiate lease terms out of administration. With retail chains falling like flies, landlords will be interested in reducing rents to secure tenancies, particularly in the sort of secondary mall locations that Clintons has historically filled – locations that are less attractive to fashion users.
2. Refurbish the stores. The extent to which Clintons had allowed its estate to go to seed looks like a long-term death wish – either that, or simple disdain for customers and competitors. The design of the typical Clintons store – inside and outside – has moved on very little since the 1980s, as the business became captive to its own heritage. And maintenance has been poor: carpets are tatty, and fixtures and lighting well-worn and out-of-date, creating an ambience of “downmarket without the value-add”. It is hard to see how you just freshen up these stores – they will need to be gutted and started again.
Schurman has indicated that she will drop the chain’s signature orange. I’d think hard about the name, too; “Clinton Cards” has had out-dated connotations for a long time, and though it never quite shot itself in the foot (cf Gerald Ratner), it’s become a brand for which there is little consumer loyalty. The store and online offer is going to have to be completely reinvented – why keep the old name, when you could do a Next-out-of-Hepworths, or River-Island-out-of-Chelsea-Girl, and properly reposition your business.
3. Improve the product mix. Clintons is another middle-market retailer that has fallen between the two stools of value (personified by Card Factory) and designer/quality (think Paperchase or Scribbler).
This is likely to mean a broader spread of gifts. What does Schurman sell in her US businesses?
In addition to cards and stationery, upmarket brand Papyrus offers photo frames and albums, bags and purses, soaps, books and bookmarks, candles and diffusers, mugs, glasses and tableware, entertainment products, jewellery, scarves, journals, toys, games, plush and much more; Schurmann’s other brands provide mid-market ranges of similar products.
The US has a greater appetite for printed invitations and formal partyware than the more casual Brits, and this is reflected in the offer. It also memorialises public holidays to a greater extent. We do birthdays, Christmas, the spring seasons (Valentines, Mothers, Easter, Fathers), and a few personal milestones. We don’t send a lot of cards celebrating Halloween or New Year, we’re disdainful of industry-created opportunities like Bosses’ Day, and – for instance – we express our patriotism rather differently to the US (did you receive any Diamond Jubilee cards?). There’s no market for UK versions of the 4th July selection at American Greetings’ website, however keenly we support Help for Heroes.
Of course, it’s too easy to point up how we’re divided by a common language etc etc, but Schurman’s team will need to quickly recognise how different our attitude towards each other can be, and how this affects our preferences in cards and gifts.
All of the above will cost a lot of money, and a reinvention of this sort cannot be delivered overnight – American Greetings will have to run fast to deliver store prototypes and revised ranges for next Christmas. And Schurman will of course have to address Clinton’s unexciting online offer, out-manoeuvred by Moonpig and prey to WH Smith’s new Funky Pigeon brand.
As a manufacturer and supplier, as well as retailer, AG will have to manager its supplier relationships with the supermarket chains, who are muttering about boycotting AG’s cards. It would be counter-productive to save Clintons (at significant short-term cost) in order to lose long-term supermarket business.
Similarly, Clintons has important retailer relationships with AG’s direct competitors, like Hallmark. Much triangulation will be required…
So, what’s the endgame? – a long-term presence as a retail owner in the UK, or a turnaround and exit in the course of the next five years? While it’s good news that nearly 400 stores (and the jobs that go with them) have been saved, can profitability be grown at all of those locations? And if you were setting out to build a 400 store chain, how many of these locations are the ones you’d choose? This is not a quick-fix business.