Survival of the fittest

The jungle that is UK retail is getting tougher. Consumer debt, stealth taxes and new necessities, such as mobiles, Sky TV and second holidays, are all taking their share of wallet. Added to these challenges are rising operating costs, minimum wages, increasing energy bills and a government seemingly committed to boosting shop theft.

These pressures are further compounded by space growth of 3–4% per annum, so 0% like vs like is the new norm, a big problem when costs are rising 4–5%.

The 'get out of jail' card of direct sourcing and the productivity of Chinese manufacturing is not such a safety valve as it was, as the yuan strengthens and Chinese costs increase.

As retailers and marketers, we know this. It's only the government that is not completely sure. All it is sure of is that regulation interference and paperwork is the cure.

So for us the question is, how can we succeed in a win or lose marketplace? Nature tells us that the survivors are flexible; they are bold and adapt to new conditions.

The three key words other than 'location' in retail are 'new', 'value' and 'exclusive to us'. They always have been and always will be key. The customer must want you to survive. Retailers have got to meet an unmet need of consumers, while avoiding the big predators.

Specialists and supermarkets attack mid-size generalists; Tesco meets a massive spread of needs, so any middle-ground specialists must be special to survive.

The internet should and will own the retail of hard goods brands for the time-stressed consumer.

Only service can save the shed operator.

In all this blood and gore, why as a retailer should you be allowed to live and flourish? What do you do that is different, better and hard to replicate that people want today and will want tomorrow? Traders must be clear who the customer is and what need they will fulfil. These may be obvious truths but they are not universal.

Here are some lessons from my experiences in the retail industry.

SOMERFIELD

Working with Somerfield identified a clear range of issues. Somerfield wanted to be like Tesco and Sainsbury's, but that was not what its customers wanted. Somerfield was a poor Tesco, but it had the potential to be a good supermarket.

The Somerfield customer has different needs to the Tesco customer. For instance, 70% of Somerfield's transactions are with empty-nesters over 45. They want smaller pack sizes, different brands, promotions that say a little bit more, not just 'two for one'.

Somerfield needed to be about local and top-up. It serves the customer who walks to the shops and the relatively leisured, not the timestressed, multi-car, multi-person young family.

Furthermore, the Somerfield range was too fragmented. Best sellers were out of stock because of all the non-sellers on the shelves.

Recognising and fixing these issues has turned Somerfield around.

DEBENHAMS

At Debenhams, before it was taken private, duplication was mistaken for choice. The range was wide but too many items were doing the same job. Too much space was tied up by slow sellers awaiting bi-annual sales.

Progressive markdown of slower lines to allow room for the fresh and new, is now and was then the conventional wisdom in clothing retailing, but Debenhams was not doing it.

We were clustering our offer too tightly, not offering a wide price architecture for trading up or communicating super value at entry price.

The real differentiator, 'Designers at Debenhams', had been nine years reaching lift off. It is the key to the 'Exclusive to us' factor for Debenhams. Fixing the 'Designers' range three years ago, means Debenhams will be one of the winners in the jungle.

PEACOCKS

At Peacocks in 2000 we had a business that sold non-fashionable, basic products to a value-conscious mum for her family, but not for her. She wanted fashionable clothes but lacked money, not taste.

Chief executive Richard Kirk was brave. He positioned the business 15 years younger and ditched undifferentiated basics in favour of more fashionable lines.

The supply base had to be changed and the lead-time shortened. New sources of supply in the eastern Mediterranean and Balkans were critical. Because of this bold move Peacocks has trebled profits in this decade – another survivor.

HOW TO BE A RETAIL WINNER

1. Winners do not confuse costs with productive resource. Any fool can cut cost; the skill is maximising value between revenue and cost. Winners save where they can and spend where they should. They know a sales prevention officer and an admin 'jobsworth' at 100 metres.

2. Delivering really great customer service is the last frontier for most retailers. The pressure of cost ratios and the difficulty of recruiting the right people makes this tough. The easy part is understanding what customers would like and what they are prepared to pay for a given service. The real difficulty is delivery.

Retailers know the importance of people development and training, but it is hard to be the unpaid school for shopkeepers or the teacher of last resort for the government. But services can be sacrificed for great value.

For example, IKEA persuaded customers to pay for distribution costs in return for great value and instant delivery. And Freemans, the mail-order business, changed its cost structure by getting housewives to act as local delivery couriers.

3. Expensive space means more fixture density, and fewer duplicated, slow-moving service lines. At Homebase, for example, the mezzanine floors added 30% to space, 10% to sales, but 25% to brand contribution. Fixed costs did not grow as space did.

4. Expensive labour requires simpler store operations and clearer presentation of products and promotions.

5. M&S has shown the importance of differentiated, relevant advertising in the fight for the shopper's pound.

6. Responding to pressures and presenting them as a plus, such as cutting out plastic shopping bags; introducing degradable packaging are common-sense adaptations to the pressures we are under.

7. Value for money in capital expenditure is critical. Spend for functionality and consumers, not for prizes and designers. Debenhams cut capital expenditure per foot by 40%, Somerfield is doing even better than that. Both companies' new stores look better than their predecessors.

8. New channels and incremental sales counter a difficult like vs like outcome. The internet should now be 5% of a mass retailer's sales mix.

9. Debenhams has shown the importance of international development through ownership in Ireland and franchising in Asia, the Middle East and eastern Europe. We have also just signed for ten stores in India.

10. A great brand can trade anywhere. For example Fired Earth, knowing its brand was strong, moved from relatively high-cost high street locations to low-cost, large-floor-space character outlets out of town. Customers travelled long distances to get to a Fired Earth anyway, so why not get them to come somewhere cheaper to trade.

LESSONS LEARNED

The real lessons for retail survivors and winners are about culture, style, the organisation and the people you employ. Flexibility means reducing your 'break even' point, turning fixed costs into variable ones, outsourcing to generate more options and lower fixed burdens.

An innovation culture is key: creating a spirit of 'can do' not 'too frightened', 'too politically difficult' or 'can't be bothered'. Trialling, measuring and acting on new initiatives is critical.

Furthermore, winners build personal accountability, give power to the line and dismantle committees. They create a climate where everyone can put forward ideas and get a hearing if they have some facts to back them.

They value numeracy; the answer is always in the numbers. Too many retailers are uncomfortable with the numbers and are not sure how to analyse their business to get the clues to action.

So winners listen, evaluate and act. They use all the power of their people. They offer something different, relevant and hard to copy. They know 'location', 'value', 'new' and 'exclusive to us' are key. They never stand still and admire their past successes.

Speech to the Marketing Society Retail Forum 17 October 2006.

This article featured in Market Leader, Winter 2006.