After much speculation it has been announced today that another cornerstone of the British high street, Toys R Us have entered into administration along with electric giant Maplin.
Two major high street players to fall casualty in the same day is a real blow to the retail sector. With Carpetright issuing profit warnings, and reports that both New Look and House of Fraser are going through a difficult trading period many are mooting whether the retail sector is in real trouble.
I have heard and read many expert commentaries by retail and product specialists such as myself, on why the high street is in difficulty. Some cite Brexit, a weakened pound driving up the cost of goods, a failure to innovate, and the rise of Amazon as the most popular theories to be attributed to poor performances. In recent years, retailers have seen their operational costs soar as minimum wage and the introduction of mandatory pensions have hit their bottom line. A great many are selling more items than ever before but are making less money. The brands they are purchasing from are being hit by the same regulatory burdens, coupled with higher cost of goods – with few items being produced in the UK, but rather the EU or China where the Euro and Dollar exchange rate has added up to 15% to their costs (maybe now is the time for the Government to really start investing in UK manufacture?)
The obvious answer would be to raise their prices; but this too is fraught with difficulty, when the same items can be purchased on Amazon, often with free next day delivery, for a a third less. Several years ago, bricks and mortar retailers had the advantage of speed – as it would often take at least 48 hours for an online purchase to be delivered, and would usually cost a few quid in P&P. Many of us now have Amazon Prime accounts and this comes at a cost to the high street who cannot compete with a slick operation that requires far less margin to make a profit.
The smart retailers, the ones who will survive, know that they need to do something different. Toys R Us sell predominantly branded product. When you are selling branded product, you are greatly exposed to the threat of Amazon and online retailers selling from their back bedroom, who are happy with a 20% margin instead of the industry norm 60%+ and you then have to slash your prices to win the sale, hitting your gross margin, and resulting in selling far more units but making less money. The prevalence of Google Shopping has been a game-changer for brands and retailers, giving consumers visibility of exactly where something can be bought for the cheapest price.
Many retailers that I have worked with have come up with innovative solutions to adapt to the changing climate. John Lewis for example, have chosen to focus on stocking boutique brands that are not readily available in their competitors stores. Instead they are embracing brands who have a strong presence in the independent sector, who are not saturated online, not listed with Grocers, and this is a testament to a retail brand who really understands their position in the market – John Lewis is somewhere where you can go to find unique, quality products that you may not have seen before coupled with exceptional customer service. They have tapped into the foodie culture (perhaps as a result of owning Waitrose), and the overall shopping experience is relevant to consumer demand.
Other retailers are choosing to reject branded goods in favour of own label. This is bad news for brands, but enables the retailer to take all of the margin between the cost of goods manufactured and the retail price, without a brand taking their cut (which is exactly how Aldi and Lidl are able to offer groceries so cheaply). It also prevents Google Shopping price comparison, and perhaps most importantly – removes them from having to price match (for those who have a price match promise), as their own label is not stocked outside of their own outlet.
For survival and prosperity, retailers need to really understand who their customer is, and work hard to find something that they cannot obtain online, or offer something worth trekking in store for. Brands, especially emerging brands, need to consider where their product is offered online and protect their brand equity by perhaps sometimes saying no to a particular route to market (easier said than done when you’re a start-up needing to get some cash in!) Maintain control over where and how your product is sold, uphold your brand guidelines and remember, that fortune favours the brave.