Structurally the retail industry is on its uppers and a fillip from Christmas is far from guaranteed because deep discounts have been widespread across the sector since early October. But I don’t want to add to the doom and gloom that already hogs the news headlines.
No more doom and gloom please.
There are some positive aspects that should be focused on and some key factors that will define the sector over the near term that retailers would be well advised to take notice of if they are to navigate out of the present difficulties.
Retailers have to fundamentally understand their customers and deliver the products they want. The best example is John Lewis, which consistently delivers what customers’ most desire and with an exemplary level of service.
It could be said that in today’s retail industry the product has become the commodity and service the differentiator. One of these differentiators is multi-channel. Many naive merchants believe the internet is the panacea. It’s not. The solution for future-proofing a retail business is a fully integrated multi-channel offering.
Whereas John Lewis is at the stage of offering free Wi-Fi in its stores many other merchants are slow to the game and are not clever enough to collect and interpret the data they are accumulating across their channels.
It is also imperative that retailers understand the impact of social media and use it as a marketing tool to communicate with consumers. This is free marketing. But are the executive managements of retailers using it personally? I suspect not. This is why many retailers have been less than committed to using these new digital mediums – they don’t understand the influence it can have on consumers purchasing decisions.
The clever, smart retailers who are social media advocates will no doubt be thinking about how to exit unwanted stores and are seeking professional advice to help them. They will be considering the optimum places to open new units having recognised that national coverage now requires a lot less units than before the internet disrupted the status quo.
But whatever channel strategy retailers employ it is all rather meaningless without having a handle on the financing and working capital constraints within their businesses. There is far too much of what I call ‘ostrich capital’ in the sector, whereby a head-in-the-sand approach is taken to working capital.
This is no way to manage your working capital.
With significant pressures faced by merchants – as a result of volume declines and a squeeze on consumer’s disposable incomes – proactive balance sheet management is required.
What’s needed is better communication with lenders, an understanding of the new environment, and the engendering of a culture of strong store and management information. This will help create a ‘we’re-all-in-this-together’ mentality and ensure there are no surprises for stakeholders.
Merchants must also adapt to an environment where ‘hidden influencers’ (such as punitive financing structures) are playing a role in decision making. In 2012 there is a significant amount of debt due for refinancing and the big questions will be – how can it be refinanced when the banks are not lending, or how can it be repaid when there is insufficient cash in the business?
Hardly helping matters are the new European banking regulations under Basel III which are driving banks to risk weight their capital on a sector basis, with retail regarded as one the riskiest sectors. The impact is a higher cost of capital leading to a reduction of bank exposure to the sector and retailers left with an uncertain future.
But before we drift back into the doom and gloom scenario we must remember that the tough climate is also presenting plenty of opportunities for retailers to enhance their businesses through defensive acquisitions and in turn ensuring consumer loyalty. Consider Morrisons’ purchase of Kiddicare and the Waitrose acquisition of Duchy Originals.
Many of the solutions to retail’s woes might not exactly be original but there are still many businesses in the marketplace that are failing to adhere to even the most obvious of diagnoses. These are the ones that will fail while the rest do at least stand a chance of prospering in the future – if they take the medicine.
Dan Coen is Business Development Director at Zolfo Cooper