With the aftermath of the 2008 global financial crisis still evident in latest annual reports – Tesco, Sainsbury’s and Morrisons showing losses, and only Asda/Walmart being an exception at 3.9% net margin – it needs to be borne in mind that online, almost the only growth-source in town (the discounters don’t count as their growth is via surrogate labels or own brand), and the global financial crisis are intimately connected in terms of cause and effect…
In other words, whilst online popularity is providing sales growth opportunities in helping suppliers and retailers avoid missing any opportunities to make a sale, E-Retailing is encouraging us to buy only what we really need, thereby reducing waste, and is also helping to reduce buffering in supply chains, via demand-based forecasting…
Meanwhile, the emergence of the savvy consumer, no longer outsourcing their purchasing decision-making to marketers and retailers (they trust no one), demanding demonstrable value for money – with the means to price-compare and make like-with-like comparisons (and buy!) in the aisle – insists upon buying anywhere, anytime, and in any way they choose … all taking demand from the market.
Moreover, the savvy consumer’s increasing tendency to ‘make do’ in terms of postponing purchasing is also reducing market demand. For instance, in the case of cars & home entertainment, by retaining the family car, mobile phones, laptops, and home entertainment devices, even for an extra year, effectively reduces demand. In the same way, personal grooming sales are being compromised by consumers ‘squeezing more from the tube’, whilst ‘austere eating’ is driving reductions in out-of-home eating – even by 1 meal in 3, in-home stretching of sell-by limits and re-heating of some meals, are all reducing market demand.
So, whilst our targeting of, and response to, the consumer is becoming increasingly productive via omni-channel optimisation, the net result has been to absorb pipeline excess, thus resulting in flat-line sales (better quality sales) but little or no volume growth.
In the meantime, eight years of falling profits and flat-line sales, combined with increased online efficiencies and consumer insights, have caused major retailers to re-assess their assortments to find that whilst overlap and duplication can be tolerable sources of back margin in good times, these surpluses become liabilities in a persistent downturn. This is leading to major range re-sets such as Tesco’s 30% SKU cull, in turn revealing that in 50,000 sq. ft. stores, upwards of 20% of space can be surplus to requirements.
The same navel-gazing has revealed that 80% of sales are made by 20% of the range, with ‘20% of SKUs selling but one pack per week’ in some cases.
Normal businesses faced with these excess space issues would quickly sell unprofitable stores, but retail is special. As you know, the price of prime retail space is driven by sales/sq. ft. but no other business (except Apple @ £4k/sq. ft./annum) can sell £1,000/sq. ft./annum.
Moreover, by applying a 2% depreciation rate per annum to their stores, retailers are saying that their assets have a 50 year lifespan – a 50yr lock-in – all leading to the fact that any sell-off of spare space would be at a loss. Whilst in good times, assumptions of 50 years of unchanging market conditions was understandable and even re-assuring, with the benefit of 20/20 hindsight, the structural changes resulting from closer, smaller, faster and more frequent shopping can be seen as inevitable, fundamental, and permanent (in City terms, anything longer than a year is ‘permanent’ i.e. see long term debtors in the balance sheet).
Thus it can be seen that Bricks & Mortar retailers have limited options available in attempting to restore historic levels of profitability, making online development even more appealing. However, apart from set-up costs and meeting consumers’ online expectations, fulfilment of online orders presents additional challenges to profitability.
For instance, say the cost of fulfilling an online order is £20, and market willingness-to-pay is £5 per delivery, then the Bricks & Mortar retailer loses £15 per online order. In other words, the more they sell online, the more they lose…
Major multiple retailers in the UK have limited scope for the degree of change required to achieve the acceptable levels of profitability (ROCE 15%, NPBT 5%) that will relieve some of the pressure on their share prices, and need help from trade partners.
In turn, suppliers need to balance risk and reward in terms of making appropriate levels of trade investment in the right customers, all on the basis of fair-share dealings, as a minimum prerequisite.
And all of this without mentioning the Amazonian elephant in the room, a beast that recently overtook Walmart in terms of market capitalisation…