It’s been an interesting week in the UK retail market. Just as February retail figures showed food discounts were dragging value from the market; Morrison’s a major British supermarket chain announced record losses. In the same week, Phil Clarke, the boss of the now-ailing Tesco, declared that future success is as simple as “putting the customers back at the heart of your business”. But is it that simple? I wonder, has the financial model of big retailers taken them too far away from the shopper?
Retail used to be governed by a relatively simple model – increase sales by enhancing shopper loyalty and seek to maximise operational efficiency, reducing cost. The net-outcome was a shopper-centric business that delivered profitable grow.
Todays’ big retailers seem to be working a different business model. Today’s mega-retailers have huge balance sheets, with assets that include huge amounts of property and inventory. With so much capital at stake seeking optimum returns on this capital seems to have become an overwhelming priority.
You might conclude that big retail is no longer in business to sell stuff to shoppers but rather to make money from real estate and stock.
Four ways to win in big retail
If increasing returns on capital employed is your key outcome as a retailer, then operationally your goals become much more focussed on generating cash and your strategies become more structured around optimising returns on inventory. There are practical four ways to achieve this:
- Drive bigger margins – The first sure-fire strategy to win in big retail is to secure a bigger margin. If margins can be consistently increased, even standing still in sales terms can deliver yield improved return so big retail constantly seeks ways of enhancing margins.
- Pay slower – The second way to drive better returns on inventory is to hang on to cash for longer. Slower payment terms keep cash in the business, covering short-term costs and creating the potential for investment income.
- Buy less inventory – The third way to enhance returns is to invest less in the key component of retail working capital. Whilst this might lead to greater efficiency it can also lead to reduced availability which actually works against customer service
- Sell faster – The fourth but most risky way of driving returns is to drive sales. Encouraging greater numbers of shoppers to the store, more often and getting them to buy more was at the core of most retailers’ strategies in the 90’s. But today’s hyper competitive environments make this harder and more risky. Its perhaps because of this that price has become so important. There’s an overarching big retail belief that lower prices drive traffic and sales. Since most suppliers will pay for discounts, this is a cheap way of securing better returns.
None of these levers requires the retailer to be more “shopper centric” and perhaps, this is why so many big retailers are struggling.
Online retailers win shoppers because they use simpler model.
As traditional retail is coming under pressure from online, it’s worth noting that online retailers do hold to a simpler, more profit-led model: drive shopper loyalty and keep costs to a minimum. For example Amazon’s found Jeff Bezo’s has been quoted as saying, “We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.” Much of big retailer’s woes are now tied up in the difficulties they have in competing with this model and many are failing.
Can big retail win shoppers again?
Possibly yes, but, there has been a tendency over the last few years to put more emphasis on tried and tested financial strategies rather than to innovate in the shopper space. These retailers need to have more faith in their shoppers and more understanding about what they want. They also have to believe in themselves a little more. There’s plenty of talk about enhancing customer experience, and precious little investment against this in either retail stores or retail brands.
Big retail continues to try to be all things to everyone in a big box, when more agile competitors are winning by being more specifically targeted. Too many retailers are ignoring the opportunity to sell-down some real-estate in favour of having a leaner more shopper-centric models and, despite the talk of multi-channel, too many retail managers would have their cake and it by maintaining physical stores which are now surplus to shopper requirement.
Future success will therefore require some major re-engineering.
What does this mean for manufacturers?
In a nutshell, retail is at a turning point. It would appear that no retailer is too big to fail and a number of global players have stumbled in the past years. This is an opportunity for brands: as the way we shop changes, the structure of retail will follow. Manufacturers should be thinking ahead to how and where their future shoppers will interact with their brands. Phil Clark is right in his conclusion that the shopper-centric retailers will win so manufacturers need to identify these retailers and work proactively with them. This creates the opportunity to re-balance customer portfolios and to restructure investment and support accordingly.
Taking steps now to learn about changes in shopper behaviour and the potential growth customers of the future is likely to reap rewards. We specialise in supporting companies going through this process and would be happy to offer support. Please get in touch with me if you need help.