Lessons for the retail renaissance
What a year that was! Without doubt, the most challenging I have ever seen. However, I believe it is clear to see what is happening, why, and what needs to be done to be a winner in this market. A painful revolution is beginning – it’s a necessary stage en route to a retail renaissance. I am not suggesting it will easy, but knowing what the key issues are and how to deal with them must surely be the key.
On 3rd january 2015 I posted a Paper “Is Retail Good Enough at Retailing?” My answer to my own question was “no”. Twelve months on we have seen the consequences of this. In reality, this has been an elephant in the industry’s room for many years. This fundamental deficiency is the result of a market where for 50+ years demand has outstripped supply – retailers haven’t needed to be good at retailing. just good at managing the cost side, the supply chain, the physical expansion and balance sheet – profitable sales would follow and so too would growth. Those days have gone and will not return. Sales and selling must go to the top of the agenda.
We have had a City-driven narrative lasting many decades that has focused on costs rather than sales. And so too has much of the industry, at least companies of a certain size. Naturally, small business can never adopt this balance of focus – they would die. And big businesses can learn much from smaller ones. The focus must be on the market and the key players in that market – customers. No retailer I know understands its customers well enough, nor does its leadership team spend nearly enough time comp shopping. This massive knowledge gap has led to blurred and bloated product offers. The bulk of retailers I know offer too many options – there needs to be a much better understanding of what their customers want, and what they
don’t. A pre-requisite of this has to be clarity around exactly who the target customer is and the ranging model edited with her in mind. Avoid catering for customers beyond this core group. Too many retailers chase peripheral sales at any cost, and carry slow turning SKUs as a result.
A major lesson can be learned from the small group of stand out retailers who are winning today. They understand the value of customer focused, edited ranging. Retailers like Aldi, Costco, Lidl, Primark, Home Bargains and B&M all enjoy superior trading economics precisely because of this. Offering massive choice is a model that will only be viable for a diminishing number of retailers going forward. Understanding that there are some sales you simply do not want will be an increasing prerequisite of survival in the market that is unfolding.
There will be a retail renaissance – a reset of industry economics. The winners will need more room to develop a more dynamic, innovative and customer-responsive industry that adds sustainable and scalable value. But first, there must be some pain.
A fundamental consequence of growing industry capacity is the switch from a seller’s to a buyer’s market, with customers in the driving seat. Only retailers who truly understand this and act to place the customer at the heart of everything will win. This is not a matter of spending lots on research – it is a way of thinking, a way of operating and a way of trading. After 12 months of solid discounting, virtually none of it planned, there should be no doubt who is in charge of this industry now. And this lack of understanding has forced most of the industry to respond in a potentially life threatening way – educating customers to only buy on promotion. To not trust the price because it will probably be lower next week.
Who owns the sales line in a retail business? I am never too sure. Everyone knows who is in charge of all the components of the cost line but to be unclear about the single most important element of the business speaks volumes (pun unintended!). I don’t know a single retailer with a Sales or Revenue or Turnover Director. There are Brand Directors and similar, but I simply don’t buy the idea that they own that top line. The owner of the top line needs to own the customer relationship. And the customer view should plug directly into them. It rarely, if ever, really does.
And then there is digital. The arrival of tech in general has been a huge opportunity but for many, it will turn out to have been a far bigger threat. As the technocrats have grown in retailing, the merchants have declined and today, there really are very few. Online is great but it dilutes margins and no one has really worked out how to add value in a sustainable way. Online and tech have revolutionised the industry’s ability to get in front of the customer. But having done so, all it can think of to say to that customer is about price and discounts.
Online is still much more about buying and much less about shopping. The overwhelming bulk of retail growth has driven the former by stimulating the latter. And online is progressively diluting the added value fundamental to driving shopping. It is accelerating the shift in industry economics we are seeing today. It has added massive capacity without adding demand and in so doing, has helped drive down prices and margins. Pandora’s Box is open and cannot be shut.
However, ensuring online is an opportunity and not a threat requires retail leadership teams to understand its strategic implications. Retail needs to find services online that customers value enough to pay for. So far, they have failed. Tech-based services have all too often proved to be a zero sum game, impossible to defend because everyone can have them in a matter of months. A way to embody a brand’s essence into a tech service is what is required. Meanwhile, chasing too much online sales growth too quickly will progressively dilute margins. As I say earlier in this Paper, there are some sales you do not want. This parallels what has been happening all year with permanent price promotions. Chasing sales at any price carries a cost – brand and margin dilution.
The industry is changing fundamentally. The past has become virtually irrelevant as a guide. So too is overseas – UK retail now leads the world in terms of structural change and is today, the most intensely competitive market on the globe. We have an opportunity to set the standard of strategic response. To demonstrate state-of-the-art retail thinking. This will require a greater degree of openness to new thinking and flexibility than we have seen in 2015. I believe there will need to be quite a bit more pain before the retail renaissance can begin, but it will. And the key is about understanding that it is all about the customer. Everything else depends on that understanding.