The rich and the poor: “Two nations between whom there is no intercourse and no sympathy…

…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

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Online retailing: when will new taxes be needed?

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.


Good Luck cards

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.

Image: shirescentre.co.uk


Shapps/Portas – and now…?

Housing Minister Grant Shapps has announced the government’s official response to the 2011 Portas Review.  You can read the Communities & Local Government Office’s full text here.

It’s been quite a week for retailers, with the government promoting local shopping by manufacturing a petrol shortage which will ensure we’ll only be spending at shops we can walk to this weekend.  Much more seriously, the impact of channel change on established and historically successful retailers is being felt across the world – Game Group’s administration, the collapse of leading Dutch bookseller Selexyz, famous for creating the “world’s most beautiful bookshop“, and today the announcement from Best Buy that (a) it’s closing 50 US stores and (b), short of slashing costs and talking hopefully about online opportunities, it’s a bit short on strategy.

So, back in Britain, there are plenty of feelgood elements to Grant Shapps’ announcement: market days and Town Teams were particularly eye-catching back in December, so they get full support, but there’s relatively little money forthcoming – around £12.8m, which will fund a few more Portas Pilots, but is a tiny sum of cash – it’s rather less than, say, Foyles in Charing Cross Road turns over in a year, or under a third of the estimated cost of the Leveson Enquiry.

Paradoxically, though, I’m not calling for loads more cash; I’d prefer to see more real local power and accountability, with councils mandated to create a successful business environment for the communities they serve.  This will be the acid test of the programme, as there is much promised on revoking archaic bylaws and reforning planning  – will local councils have the guts to go the whole way, and will the government be prepared to devolve real decision-making and – at council level – revenue raising powers?  Step forward the first council that wants to tell Grant Shapps that, actually, we think a 5.4% increase in business rates is a little steep in the current environment, so here in Tomorrowtown, we’d like to do things a little differently.

Well, I can dream.  But beware of short-term revitalisation and too great a focus on heritage and bringing back “the old high street”.  There is, understandably, much hand-wringing about the number of vacant shops across the country – 14.6% of total stock across the country, it says here.

But hang on just a second – is that the number of empty premises, or the volume of empty space?  Or, to turn the numbers around (without knowing the answer) what is the total volume of trading square footage in retail today, compared to ten or twenty years ago?  I’m going to bet that the number has gone up, but that old stock has been allowed to rot on the vine.

As retail commentator HatmanPro has observed on Twitter, much of our empty retail space exists because newer space has superseded it.  In too many town centres, successive new developments – blocks of stores, little shopping centres – have been dumped into vacant spaces, increasing the total volume of footage and laying waste to older shopping streets and districts, on the assumption that, as the population grows and we all become wealthier, more and more shops can prosper.  Even without the internet, this is patent nonsense – I’d like to see new shopping centre openings accompanied by a structured reduction in dead space; a recognition that, with 10.7% of all retail spend now online (and that number will grow and grow), even the most Pollyannaish assumptions of future economic recovery will not merit the number of old shops cluttering up our old towns.

Will Town Teams and local councils have the ambition, the power and the cojones to repurpose spaces?  Will they be able to do so, and maintain the variety of chains and independents, generalists and specialists, commodity sellers and boutiques, that a thriving town centre needs?  I really hope so.  But the “beating heart of the community” needs to be strong and vigorous, and must look beyond the reduction of street furniture and controls on levels of parking fines – if 15%, 20% of all retail spend is going online (because that’s what the consumer wants), then those high streets need to reflect tomorrow’s needs, rather than yesterday’s longings.

And having said all of that – if this comes off, when those first Town Teams cajole their councils into really making a change and doing  things differently, this is going to be damned exciting.  Retailing is one of the things we do best in the UK, and everyone who’s committed to a retail career wants to make it better.

Pictures: The Sun; bhbeat.com


Modern Warfare

There is, sadly, little sense of surprise in the news that Game Group has finally called in the administrators, as the chain’s poor Christmas was followed by the reluctance of the banks to prop up a struggling enterprise, and then the progressive withdrawal of support from its suppliers.  However, what does shock is the speed at which a plc can go from success to failure, once the storm starts to rage.  In 2009, Game Group posted pre-tax profits of £119m, up 75% in two years – here was a company that was beating the consumer recession – although this proved to be the last of the good news, as the absence of new platforms, lower pricing from online competitors, and the growth in downloaded content progressively reduced profitability and investor confidence.

Game themselves – slick and capable operators who’d innovated in many ways (eg by mainstreaming the second-hand market) – now had a brand that was too anodyne for the hardcore gamer.  They should have repositioned their primary brand to better serve that market, rather than chasing the more family-friendly (and fickle) Wii market.  Instead they sought to serve the hardcore through the rougher and readier Gamestation brand, having committed the Retail Deadly Sin of acquiring a parallel business in 2007 and then having to post-rationalise it (see Clintons/Birthdays, Mothercare/ELC, WH Smith/Waterstone’s and many more down the ages).

Their second Deadly Sin was to focus on international expansion at the expense of the home business, when they should have been replicating their physical dominance (a one-third market share at peak) in the online sphere.  That’s a tough, going-on-impossible trick to pull off when the competition includes retailers like Amazon and developers like Zynga and Rovio, but it was where the market was going and it’s where Game should have gone, in a fair and equal world.

However, this world ain’t fair nor equal, and a retailer – any retailer – committed to decades-long leases in prime pitch locations at the most expensive malls is naturally going to be focused on how maximise those stores’ sustainable profitability, how to turn them around – in short, how to protect the legacy/millstone that they’ve inherited.

It’s this lack of flexibility than can kill even market leaders in the current consumer climate; their lease commitments are so onerous that they have to focus on hauling those locations back towards profitability, even though there are precious few examples of gone-bad retail locations miraculouly coming good again.

Game Group’s collapse is the worst, in terms of potential job losses, since Woolworth at the end of 2008, and it is to be fervently hoped that some jobs, stores and the brand can be saved.  However, it once again throws the plight of the middle market into sharp relief, as a profitable core of Game stores won’t prosper unless the online/download/value challenges I instanced above can be resolved.  (And any good news that all of this represents for HMV will be short-lived too.)

Meanwhile, the less attractive or affluent high streets and shopping centres are being hollowed-out by store closures.  The Portas Review rightly promotes the conversion of retail premises to other uses, but what strategies, one wonders, are the shopping centre landlords contemplating?  The biggest and best – the Westfields, the Meadowhalls – can thrive, but all those poky, low-ceilinged 80s developments with their shallow shop units, the natural home of Game and many other 2011-12 retail casualties – how will they be repurposed?  Which major landlord is going to break ranks and announce a new strategic approach to asset management that isn’t built on the old assumption that everything will remain largely the same as it was before?

In February 2012, 10.7% of all UK retail sales – including food – were executed online.  In February 2011, the figure stood at 8.3%.  That’s a lift of £140m in a dull month, when overall retail sales were flattish at the very best.  Factor in Christmas, and you’re looking at the thick end of £2 billion transferring from bricks and mortar to online over the course of 2012.

Despite all of this, I personally remain convinced that physical retail has a strong future but – as my headline suggests – bricks and mortar is trapped in a losing war at the moment.  That war will end – a truce will be called, and a new equilibrium established – and it will be consumers en masse who end hostilities, once a new balance of online purchasing (for value and convenience) and physical retail (for the experience of the product, the face-to-face benefits, the “localness”) has been established.  

Of course, online and physical will blur, as they already have for successful, robust businesses like John Lewis or Apple (this hoarding is just two doors down from Game in Kingston’s Bentall Centre).  It’s proved to be very much easier for customers to evolve into multi-channel operators than it is for the retailers that serve them.

But the biggest and the best will survive and thrive, as will the smaller operators, who know their market, understand their customers and can move swiftly without too much legacy encumbrance.  The mass, the middle market?  That’s proving to be much more difficult.

Author’s note: My alma mater, Borders Group, of course committed more than a few Deadly Sins in its time; but the concession agreement we had with Game in the UK was highly successful for both brands during its all-too-brief existence.    

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A showroom with a view – the future of high streets

Frankly, you could cancel most of the drama series on TV nowadays and instead stream a live tale of everyday retailers into the nation’s homes.  Tesco, Peacocks/EWM, Game, Iceland and many others are all delivering stories of real tragedy (job losses), hubris, separation and (in Malcolm Walker’s case) triumph.

It’s edge-of-the-seat stuff, and today’s sensational news of Richard Brasher’s exit from Tesco is just the latest exciting plot twist.  Furthermore, this is interactive experience, as customers are the ultimate arbiters of who succeeds and who fails.

It’s also a tale of legacy and inheritance – too many stores in the wrong places, old management styles or an immature multichannel offer all presage disaster ahead.  Stand by for next month’s Titanic metaphors…

Last Friday’s Retail Week devoted several glossy pages to a gallery of multichannel leaders from across the sector, representing companies as diverse as Harrods, Sainsbury’s and Wickes.  In a very short time, “multichannel” is moving towards “omnichannel” (thanks Gareth), as consumers move faster than stores to blend their online, mobile, and bricks-and-mortar shopping activities.  The customer is always right, and – frustratingly for both parties – the customer is now often several steps ahead of the retailer.

The more this snowball gathers speed, the more quickly prescriptions about the high street become out-of-date.  So here are a few thoughts, wrapped around a simple statement:

Showrooming is here to stay

At least it is for as long as the showrooms can remain open.  But the ease with which customers of all ages have embraced comparison shopping, and the unemotional way they’ve ditched their old loyalties in favour of better value in tough times, has come as a nasty surprise to many retailers.

You spend years building your brand, extending your storebase, cementing a reputation for value and/or service and then, without so much as a Gerald Ratner speech, the whole house of cards is blown away, and the company is left not with a proud legacy, but a horrible mess of bank debt, unprofitable shops and over-complicated management structures.

Nevertheless, customers enjoy showrooming, and no large retailer can succeed in the future without an integrated offer that recognises stores are showrooms.  It needs to have few enough of them, in cost-effective enough locations, for the whole P&L equation to add up.  John Lewis Partnership (reported last week to be investing £450m in “growth and multichannel leadership”) will build its JL and Waitrose online offers, not as “alternative stores”, but as an integrated part of their consumer offer.

Companies with an optimum number of stores can integrate their online commerce/service offer with bricks and mortar and move forward.  But – and this painful – not enough stores are being closed, yet.  This in large part is due to the challenges leaseholders face when managing their real estate legacy – leases are long, penalties are onerous, and landlords are struggling to see where replacement tenants will come from.

Winners and losers

Leaving the food sector to one side, I envisage a future where large, successful chains, selling unique merchandise, are able to sustain a reasonable sized store-base, with customers using the brand’s services through any combination of physical and virtual contact points.  These companies will be able to leverage their use of technology to stay ahead of their competitors, but they must always look forward.  Retail legacies are of no more real value than the beautiful company histories that retailers used to commission – interesting for the archivist, irrelevant to the customer.

This means embracing technology that has the capability to kill much of your bricks and mortar offer – because if you don’t close down your weakest branches, someone else will shut down the whole lot.

As an example, one techology that has been talked about and tested for a long time is the virtual changing room.  This is a great gadget for boutiques – but can you imagine the fractious queue for the magic mirror in a small provincial Top Shop on a wet Saturday afternoon?  Much more efficient to provide the technology as an app that customers can use through their online-enabled 42″ TV screens in the privacy of their own homes.  I can easily envisage “magic mirror parties” at home – much more fun than a chick-flick.

Winners will run forward with new applications, and will be unsentimental about store closures.  They’ll have uniqueness on their side – must-have products available nowhere else.  Physical shops will still matter, but they won’t be required in the numbers that they have been historically, adding weight to the “fewer, better stores” trend.

There will be more losers.  If you’re selling branded merchandise available from multiple suppliers, if you’re selling products manufactured in the Far East and sold, unchanged, around the world, if you’re selling a product with limited touch-and-feel qualities, if you’re selling generic or commodity products, then the road ahead is a very thorny one.  Is marrying Comet and Game likely to be a good idea?  Rephrasing the question, and assuming (rather rashly) that both business’s unwanted legacy real estate can be disposed of, are the brightest and best within Comet and Game able to focus on a future in which physical stores are just a part (a small part), and leading-edge technology will enable them to sell more products, more effectively and more profitably, than Amazon?

We have moved on very quickly from dead record shops and dying book shops.  Any sector, any shop, that cannot provide a vivid reason for customers to continue to shop there starts to look like a showroom for online brands to exploit.  (Shortly afterwards, it looks like an empty store.)  But does this mean (roll of drums) the Death Of The High Street?

I think not.  It means the radical reshaping of the high street, though, and without getting all butchers-and-bakers-and-candlestick-makers, it does mean combining the best of the past with the most desirable elements of the future.

It means far fewer shops – 20% less, 30% less?  The number will vary depending on the prosperity and lifestyles of the local customers, or the effectiveness with which that high street (or shopping centre) can act as a regional or national magnet.  But the good town centres of the future will either be local, or super-regional – in-between won’t stack up anymore.

It means a high street which (as the supermarket chains have figured out) provides the staples you need in a hurry, and (as the best independents have figured out) a choice of goods that you simply can’t buy anywhere else.

It means a high street that provides entertainment, community, and relaxation – not one where hours are spent in unpleasant shops, buying commodity goods.  There’ll be more meeting up (facilitated by phone, of course), more coffee, more chat; more escapism, more novelty, less stress.  Because there are fewer shops, there’ll be less traipsing.  Parking provision might even improve (well, I can dream – though more shoppers’ buses would be welcome).

Manufacturers will run showrooms – if the value chain in many categories has eliminated the margin a physical retailer requires, then technology companies, for instance, will have to follow Apple’s lead and provide opportunities for consumers to see their goods, prior to buying them at the best price from whichever online supplier works best for them.

So the future of the local high street becomes a blend of entertainment, uniqueness, staples and showrooms.  Customers would appreciate this, but it would require some categories to disappear completely, and others to reinvent themselves.  Can the retailers, the landlords and local/central government – if government post-Portas is paying attention – do this, or will too much business transfer to Amazon before the necessary changes are made?


Tools of Change: the Front of Store New York presentation

I’m just back from New York, and the very stimulating, content-packed Tools of Change conference hosted by O’Reilly Media.  On Tuesday morning I gave a short talk on a couple of my current thoughts.

Regular readers of the Front of Store blog will be familiar with some of this, but (a) we’re bringing on new readers all the time, and (b) there’s new stuff here, as well as new thoughts on older stuff.

Marriott organisation scored a little less than 10/10 for our session, so our panel had to canter through their presentations with minimal time for questions.   So this post consists of my presentation, fleshed out and extrapolated, with slides where appropriate.  Here we go, with a cheerful message that echoes much post-Portas thinking, including Justin King’s speech last night.

First up, it was important to remind a “book world” audience that, although the book sector is undergoing revolutionary change at the moment, all retail categories and locations are being affected by consumers switching from physical stores to online shopping.  As I noted, the growth in online selling is changing the entire complexion of the retail industry – not just bookselling.  Whole swathes of real estate will become redundant.  And in the UK, we are leading the world in online retail penetration.

Around 60% of all adults shop online in the UK and, as this blog noted last month, approaching 10% of all UK retail spending is now online, including about 7% of all food and groceries.  Bain’s comparison between Britain and other developed countries underlines how far ahead we are in the UK; in United States, France, Germany, Sweden, only about 30% of adults are shopping online.  Of course, China is joining the race from a standing start, and will quickly build their online share.

Again, these statistics and projections have already made one appearance at Front of Store, but they serve to emphasise that sales in many UK retail categories have already been hugely diminished by eCommerce.  As far as books are concerned, Amazon and the supermarkets sell around 50% of all printed books, but of course total unit sales of pBooks, whatever the channel, are now being diminished again by the Kindle.

The most vigorous illustration of the impact of channel shifting came from Tesco, the UK’s biggest supermarket chain, where CEO Phil Clarke has indicated that Tesco will be shrinking future store sizes, and reducing their instore non-food commitment.

So, in terms of book sales, it isn’t just these guys who are getting hammered by the internet:

It’s these guys too:

This is a pretty quick shift for supermarkets, from “voracious baddie” to “another victim”, but it has fundamental ramifications for publishers.  Supermarkets account for around 20% of all UK book sales.  Sales of physical books will fall in supermarkets, so the commitment of Tesco and its competitors to books will be reduced appropriately.

Given the pace of growth in ebook readership – and the crossover between the most effective ebook content (narrative works, eg fiction, biography etc), and supermarkets’ key adult categories (narrative works), supermarket to books will be reduced.  The impact of this on the publishing industry will be more fundamental than the loss of a specialist chain.  The supermarkets sell the mass-market stuff that pays for the literary stuff.  Are publishers planning appropriately for this very significant shift?

However, physical retail still matters, and will continue to matter even as the number of specialist booksellers falls, and the commitment of the supermarkets wanes.  A considerable number of consumers will still want to buy print books from physical stores – and, by-the-bye, I’m going to guess that the average publishing conglomerate would prefer a situation where orphan sales didn’t automatically default to Amazon.

A couple of weeks ago, I sat on the judging panel for a book marketing award.  Despite these major channel changes, only one of the entries, out of a field of about 30, placed its physical books anywhere other than in traditional outlets – bookshops, supermarkets and the like.  Publishers must consider alternative retail channel strategies.

Here’s why:

There will still be bookshops in the future.  But the democratisation of reading and access is going into reverse (at the same time as the library sector is under fundamental threat).

In the future, great little bookstores will serve communities of real book lovers – educated, affluent, intellectual people.  They’ll run events, sell online and offer click-and-collect, home delivery and all sorts of customer-first offers.  They’ll support their sales of books with gifts, toys, stationery and coffee, catering to a wide area… they’ll be just like little superstores.    Critically, they must be integrated into the ebook food-chain, because the recommendation of a good bookseller cannot be replicated through any online “search-and-browse” mechanic.

Deliberately provocative, I noted that there’ll be plenty of these bookstores in the sort of places that people like me and the conference delegates live and work – London, Oxford or Edinburgh, New York, Boston or San Francisco.

But the economics won’t work in smaller, poorer or less well-educated communities.  I don’t believe – and I’m not sure if anyone believes it – that there will be room in the near future for 300 Waterstones or 700 Barnes & Noble stores.  The two-century long surge in long-form book reading driven by 19th century serialisation and rail travel, and by 20th century drug stores, book clubs, mall stores, superstores, air travel and fancy vacations, is coming to an end.

But we’re also seeing the first signs of Ebook sales flattening, as new technology diminishes the importance and visibility of the book, and provides device users with many viable alternatives to books.  School kids and commuters aren’t carrying paperbacks like they used to – they’re playing games on their iPhones.

We – the whole of the book trade, not just Amazon – needs to format and sell books and content, to maintain pertinence for the mass-market.  This isn’t about existing heavy readers transferring to eReaders, as most of those interested in the US and UK have already made the switch.  Instead, it’s about the next generation of uncommitted potential readers.

Long-form reading isn’t going to die, bookshops won’t disappear, and great writing will persist.  But there’s a risk that the audience for all of these things will diminish significantly – and, as I noted above, the withdrawal of physical books from everyday retail locations will cause a large proportion of the customer base simply to stop buying books.

We saw this when Borders closed in the UK – around half of Borders’ total sales just disappeared from the market, instead of transferring to other retailers – and this was nine months before the Kindle arrived in Britain.  So while people living in nice places will still have great bookshops, the places in between won’t be as well served.  The industry will then have to persuade people to start reading long-form again, buying physical books or content online.  Whatever the format, it’s a fundamental challenge for the industry.

Thus far, I’ve just been discussing the big English language markets.  However, change is afoot in continental Europe.

I’ve just described scenarios in Britain and America.  But suddenly, the protected European markets are looking vulnerable.  Countries like Germany, France and Spain have significant market and cultural controls in place, which have ensured historically that printed books are sold at the same price (or, in France, with no more than a 5% dicount) – the publisher’s RRP – whatever the outlet.  Specialist bookshops, supermarkets, Amazon have all had to abide by the law.

In the past few months, everything has changed.  Kindle and Kobo have started to take off in these key territories, and of course – as Rudiger Wischenbart demonstrated at TOC in Frankfurt – the selling prices (the RRP) of ebooks can be 20%, 30%, 40% lower than pBooks in those territories.  This means that consumers in France, Germany and elsewhere are seeing seriously discounted book prices for the first time ever.

No amount of cultural legislation can create price parity between very different formats.

The Fnac expansion story and the stability of Thalia in Germany both start to look suspect in the new market conditions, where economic squeeze and technological change look as though they will finally upset those stable, mature European markets.  Managing massive change – which was recently an operational problem only in English-speaking territories – has rapidly gone global.

To conclude, we can see what is happening, but we don’t understand how the consumer market for books will settle; I believe that publishers need to be driving that future much more pro-actively.  As my final slide notes:

So, there are a lot of unknowns, and a great deal to think about, to plan and deliver.  I very much hope – indeed, I’m pretty certain – that among the Tools of Change delegates were those who can and will fashion the future, rather than being buffeted by economics, technology and Our Friends In Seattle.  This market is big enough for more than one player, so whether you’re a legacy player or a new start-up, you need to make yourselves some good luck, and create a future publishing/bookselling industry that you want.

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My eBook, A Year at Front of Store, is available in all Amazon Kindle territories – United StatesUnited KingdomGermanyFranceItaly and Spain.