09 Nov 2010
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Business
UK Retail Industry - Time for a Change
Today’s successful retailers understand that the nature of retailing has changed. Heather Connon discusses how.
Which of the following have you done in the last year? Researched a purchase on the Internet before buying from a shop; actually bought something over the Internet; used a mobile phone to make a purchase; traded down to a cheaper version of a favourite product; visited a discount supermarket or general retailer? The chances are that even if you haven’t done everything on that list, you will be doing so shortly.
Retailing has changed radically over the last decade. The most obvious change is the rapid adoption of new technology: a decade ago Internet shopping barely existed; now British consumers alone are spending £5bn a month over the Internet and Forrester Research predicts that, by 2014, one pound in every £12 spent by consumers in the US will be spent online. Ten years ago, those of us who had mobile phones would have used them only to make phone calls. Today, we can use them to pay for car parking, to download music and to check bank accounts. Amazon opened its first online store in 1995 but is now a global business with sales in 2009 of more than $24bn (£15.7bn).
Plenty of other factors are also affecting the retail industry. The global recession is changing the way consumers spend. An ageing population’s buying trends differ to those of younger consumers. Moreover, spending power is gradually shifting towards emerging markets like China, India and Brazil, which have a rapidly growing middle-class.
SPENDING POWER
Retail companies have to move quickly just to keep up with changes in the market place. “The retail industry is becoming more complex and changing at an ever-increasing speed,” says the report Retail 2015: New Frontiers, by PriceWaterhouseCoopers and TNS Retail Forward. “Shifting demographics, household downsizing, more educated consumers, new channel formats – among other trends – require that the industry quickly adjust and modify existent models, approaches and processes to satisfy the needs of future customers in order to be successful and profitable. Retailing will become an industry that realizes, more and more, that it must tailor its offerings to select customers, as opposed to the mass appeal approach of the 1980s, in order to win over customers and foster greater customer loyalty,” it continues.
The impact of the Internet goes far beyond moving consumers from bricks – high street stores – to clicks. It means that anyone with online access can quickly and easily research anything they want to buy. That research can have a big impact on how we finally decide to spend our money.
Many retailers are trying to integrate their online and store offerings so that customers can move easily from one to the other. John Lewis is one retailer that allows customers to order online and pick up from the store. Some clothes retailers show outfit suggestions and catwalk models wearing a selection of clothes on their websites to help customers replicate the feeling of being in a store.
But analysts think that changes will also have to be made to the way stores are designed and where they are located if they are to continue to compete with online shopping. PriceWaterhouseCoopers expects fewer of the traditional shopping centres containing rows of stores. Instead, it predicts: “More lifestyle and neighborhood centres will come on board, where retailing mingles with non-traditional traffic drivers. These will be places where people can go to eat, entertain and live—not just shop.”
INTERACTIVE SHOPPING
Booksellers were among those to pioneer this; many large bookstores set up cafes in-store where shoppers can sit and browse through newspapers and books while thinking about what they want to buy. They were among the first to suffer Internet competition from Amazon, who quickly became top of the list for online retail shopping. For those who know which books or music they want, online stores are the obvious places to go. But for many other companies, browsing in-store will remain the most important part of the offering.
TJX, which owns TK Maxx in the US, is a classic example. Its business model is based on buying surplus stocks from other retailers and manufacturers and selling them at heavily reduced discounts. Unlike a conventional retailer, which will order its garments in bulk months in advance and carry substantial stocks, TJX stocks will depend on what is available at any time. That makes its business far less suitable for online.
“There are a couple of competitors which are online only but they have not taken off in a big way,” said Gary Robinson, an investment manager on the US team at Baillie Gifford, “TJX’s model is unusual in that it has no commitment to selling any particular line – and most of those who go into its stores do not know what they are looking for. It is easier to treasure-hunt in a store than online.”
TJX is a good example of a company taking advantage of another current trend among consumers: searching for value. It has been growing rapidly – its website boasts that it has only reported a fall in sales after taking account of new store openings once in 33 years – and the recession has helped it attract new customers. “The unusual economic environment continues to present us with major opportunities, and we are seizing the day! We are advertising more effectively and doing a great deal to make sure that our customers have terrific shopping experiences and believe that we will not only retain our new customers even when times improve, but will continue to attract even more customers”
BENEFITS OF RECESSION
The recession has helped it expand too, as the failure of retailers like Woolworth’s increases the amount of affordable retail space. “TJX has had the opportunity to acquire attractive sites at very favourable prices,” said Mr. Robinson. “For example, in Kensington – an area it has looked at for years – it has just been able to acquire a new site and it has acquired a couple in New York too.”
Another Baillie Gifford held investment, Wal-Mart Stores, is also firmly in the value retailing sector. This has benefited from consumers trading down, says Mr. Robinson. “The downturn has refocused consumers away from conspicuous consumption to cost-conscious consumption. Wal-Mart prices are significantly lower than the average US supermarket, but it still manages to have high margins. It is good at holding on to customers once they try it for the first time and discover that it has equivalent brands at lower prices.”
Wal-Mart is one of the most international retailers, with around a quarter of its $400bn of sales in 2009 coming from overseas, including operations in emerging markets like China and Brazil as well as its ownership of Asda in the UK. Much of the future growth in consumer spending is expected to come from non-domestic markets as the proportion of middle-class people, with higher disposable income, grows.
At Baillie Gifford, Monks Investment Trust has recently taken a holding in Renhe Commercial Holdings, which is developing and managing a number of shopping centres in China, while Edinburgh Worldwide Investment Trust has held shares for some time in luxury goods retailer Hermes, reflecting another apparent conundrum: even in a tougher economic climate, the demand for – and supply of – luxury goods remains.
WORLDWIDE SCOPE
In the report Hidden Heroes: Emerging Retail Markets Beyond China, Deloitte and Planet Retail say China: “offers the promise of great riches for the world’s leading retailers and their suppliers.” “There are other big emerging markets that offer great promise.”
International expansion is very hard for companies to get right – many retailers have tried and retreated. The Internet may make it easier: Next has said it has moved the focus of its international ambitions towards the Internet. But the logistics of delivering to many different countries will be only slightly less hard than working out what goods and retail formats will appeal to consumers in different countries. Those retailers that can unlock the secrets will be able to buy themselves a prosperous future.
Zara - Successful Retailing
By Heather Farmbrough
Stock does not stand still for long at Zara, the flagship brand of Inditex, the Spanish holding company. The key to success in all the Inditex chains is a tight production and distribution process, which enable it to respond to new looks and customer demand rapidly.
At Zara, each store feeds back sales information and requests for merchandise to a logistics centre and within 24 hours in Europe, or 48 in Asia and America, the goods arrive at the store. New merchandise is also sent to all stores twice a week. As James Anderson, manager of Scottish Mortgage Investment Trust and an investor in Inditex says, “The management regards itself less as a retail business than a logistics one.”
With direct control of fabric supply, Zara makes many of its most fashionable lines at the Group’s own factories in North West Spain. Despite considerable overseas expansion, it has not neglected its home market: the architecture of many of its Spanish stores, such as the Salamanca shop, is impressive.
Zara has recognised the importance of new technology such as the iPad and online retailing. Anderson likes its overseas expansion strategy, which has stuck to major cities with a large, fashion-conscious population and avoided regional head offices. He also approves of the way in which Zara only uses its own 200 or so designers and how it refuses to predict trends. As he comments “They don’t say ‘this will be popular in the UK, or that designer has a following’: all they do is concentrate on supplying what’s being sold.”
Please remember that ongoing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount invested.
Investing in emerging markets is only suitable for those investors prepared to accept a higher level of risk. This is because these markets could go down or up more than the main international markets.
The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
This article contains information on investments which does not constitute independent investment research and accordingly it is not subject to the protections afforded to independent research.
Heather Connon
Heather Connon has been a financial journalist for 25 years, working on publications including the Observer, The Independent and The Evening Standard. She currently contributes to the Guardian, Prospect Magazine and Money Observer, among others.
Heather Farmbrough
Heather Farmbrough is the editor of Trust.