What’s in Store for Retail?

Reports of ‘the death of the store’ have been greatly exaggerated, although knowing exactly what to do with the real estate itself remains something of a work in progress. It’s all part of the enormous challenge of reinventing dated and expensive retail models at a time when customers expect nothing less than a seamless multichannel service.
 
David Adams, Senior Independent Director at JJB Sports, says: “I’ve been involved in some very interesting discussions about right-sizing store changes. I think some people are too glib to just say that you ought to get out of stores as quickly as possible. It’s not that simple.”
 
As ever, the ability of retailers to adapt will be dictated by the financial position of the business and the imagination of those who sit on the board. Clearly, there are some awkward questions for directors to address:

• Do stores still add value? 
• With so many channels, how do you get a single view of the customer?
• In a flatlining economy, where does growth come from?
• Do you have the talent in the organisation to deliver? 
• How do you encourage innovation and also manage risk? 
 
It’s interesting that a purely online operator like Amazon is looking to open its first physical store, reinforcing the point that bricks and mortar has a future, if the business proposition is sound. David says: “I’m not sure the store is the centre of the business anymore, but I do think it’s a crucial element. It may well be that you increasingly look at your stores as a distribution network; it’s part of your grand representation, but it’s also a place for research and finding information.”
 
Destination unknown

For traditional retailers, a new kind of ‘space race’ is underway, which goes beyond just thinking about the store itself. Helen Dickinson, Partner and Head of Retail at professional services firm KPMG, says: “The leading retailers are looking at how to move from the current model, which is complex and laden with legacy issues, and therefore expensive, to a model where there is ‘one view’ of the customer across all of the channels, and the back office supply chain is set up to deliver against that. It is a whole shift in terms of thinking about profitability.”
 
Retailers are yet to find a formula that delivers what customers want in ways that are profitable. However, looking ahead, the question for retailers is not: ‘How do I make money from stores and websites?’ but: ‘How do I make money out of an individual customer or customer segments?’
 
Innovation and transformation are the order of the day. A pity then that this coincides with a true beast of an economy, marked as it is by uncertainty, around inflation, the sovereign debt crisis, trust in our financial institutions and the new superpowers emerging into the global market. 
 
Dominic Swords, an economist at Henley Business School and a Criticaleye Thought Leader, says: “It’s a tough proposition for retailers, and is compounded by the volatility in commodity prices. Energy and oil prices in particular, as well as depressing real incomes for consumers, are having a huge, direct effect on retailing because they’re so dependent on transport and the logistics dimension of the value chain. 
 
“Over the past decade, retailers have been able to find many ways to absorb these increases, either by taking a cut in margins or by finding much better efficiencies, through the value chain, suppliers or stocking and delivery systems. However, you do wonder how much further cost efficiencies can be achieved before they are felt by the consumer. These factors will tend to drive restructuring in the industry.”

Saul Estrin, another Criticaleye Thought Leader and Professor of Management and Head of Department at the London School of Economics, comments: “Over a five-year horizon, the view is that the UK economy will flatline and that most of the risks are on the downside. If the eurozone does crash, the spillover effect is likely to be extremely serious. At best, the most you can hope for is that the UK will grow extremely sluggishly. And that would be classed as a good outcome.”
 
Retailers, especially the large ones, are on the front line. Saul continues: “Competition is going to sharpen as the barriers to entry of the big supermarkets, which were mainly defined by their land bank and geography, are based on a model which is 30 years out-of-date. 
 
“It seems likely that the hallmarks of a successful retail strategy for the coming five years will be flat revenues and declining margins. In order to counteract this, there has to be some sort of access into growing markets, which for the most part, British retailers have failed to do well.”
 
Every industry goes through a period where it is reborn. Mike Hayes, who until recently was CEO of SEGA Europe & America, oversaw major reforms as the organisation made a fundamental transition from hardware to digital gaming. He explains: “The tensions of implementing these changes have mostly been internal, structural ones. You are fundamentally changing your business so there will be a land grab. 
 
“We decentralised the brand, putting it into individual studios, then redirected the studios to different platforms, which creates internal tensions. I don’t see this as anything other than perfectly natural and legitimate – a strong management with a strong strategy should be able to overcome this, as everyone understands what was going on.”
 
The risk level is high for those calling the shots, even in sectors where the opportunities are enormous. Justin Ash, CEO of private-equity backed dentistry provider, Oasis Healthcare, says: “There is little room for error, especially in the PE environment. Growth plans, therefore, need to be well-justified and researched, subject to challenge and perfectly executed.”
 
Retailers are in the eye of the storm in terms of the impact of the recession, innovation and changing customer behaviour. For Paul Danos, Dean of Tuck School of Business and a Criticaleye Thought Leader, it’s vital that the issues, no matter how ugly and complex, are tackled head-on and that all opportunities are seized. “In this environment, you can lose creativity and risk-taking in leadership,” he says. 
 
Helen adds: “The hard thing is that retail is a very immediate industry and you have to keep a close watch on today’s business. However, there is a shift in how things are being done and that requires strategy, vision and defining a clear path in how you achieve change.”
 
Please get in touch if you have any comments about the issues raised here.
 
I hope to see you soon.
 
Matthew
www.twitter.com/criticaleyeuk

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