Friday 28 October 2011

State of the (Retail) Nation...

So, recently my colleagues and I at Tata Consultancy Services (let me reiterate at this point that all views expressed in this blog are my own etc etc) were lucky enough to sit down with Tim Danaher, editor of the Bible aka Retail Week, to discuss the key trends/issues impacting the retail landscape in 2011.

A synopsis follows, no major surprises (which is reassuring otherwise I'm missing a trick both as a consultant and a blogger!) but it was very valuable getting insight from someone like Tim who spends all day talking to a breadth of retailers, with a much farther reach than us mere mortals could hope for, gaining a unique understanding of the challenges they are facing, and how they can best respond to these..

1. The Economic Climate is Still Challenging

Us consumers are still having a hard time of it financially, against a backdrop of continued uncertainty (such as the current Euro crisis, the state of the job market and stagnation of the housing market) and a real squeeze on our disposable income with high inflation and much lower growth in salaries. Tim quoted the depressing statistic that there was a 7.9% year on year fall in the disposable income of the average family in August- the largest annual fall on record. In short, we're still struggling, and therefore Tim reported that not many retailers are feeling optimistic about trading in the current climate.

2. And Customers are Changing too..

A theme close to my heart that we've discussed before- the way consumers are shopping is changing, in two fundamental ways.

The first is that as a result of the above, we are increasingly disciplining ourselves, making do, and focussing on the things we need rather than the ones we want. Interesting examples of this include the upsurge in interes tin crafting, making or mending rather than buying; and the news that Tesco will be making a number of redundancies in it's F&F fashion team in response to a downturn in its non-food sales, perhaps as we are watching what we put in our shopping basket much more closely these days, and simply can't afford an impulse clothing purchase at the supermarket, as our shopping becomes more 'considered'...

Leading me neatly onto the second change- the 'customer in command' as I've called it in previous posts. Customers are increasingly using every means available to them to research their buying decisions, and becoming more discerning, before parting with cash, with a cross channel approach- using the internet and social media to check products, prices, ratings and reviews, before checking out the item or shortlist (and perhaps purchasing) in a store. We are also becoming increasingly expectant in terms of the way in which we shop, and the service we will receive- and if you haven't got a consistent shopping experience and offering across multiple channels (store, e-comm, m-comm, even f-comm) you'll be left behind. So the really smart retailers are those such as the Aurora fashion group who are innovating to delight the customer- with the launch of their Shutl 90 min delivery service, and transactional Facebook sites coming soon.

3.  Managing Costs Hasn't Been Easy Either..

So what other challenges retailers are facing? Well aside from customers who are less willing/able to part with their cash, and are a lto more savvy and demanding then they ever have been, retailers are also taking a hit in terms of their own costs, as commodity prices (particularly cotton) have caused a major headache for some time, in addition to the expense of maintaining a store estate with inflexible property costs, and more specifically inflexible landlords. Its true that we may be over the worst in terms of commodity costs and  some landlords are starting to see the light in terms of providing the flexibility that is required in the current climate, but nonetheless these conditions are "accelerating a strutural change in the retail market"- as retailers focus on fewer, more important store spaces- as Aurora and Wickes have recently announced they will be doing, (especially as customers are making fewer shopping trips to the bigger destinations) with an increasing proportion of sales come through other channels (e-comm, mobiles, social media, etc) in the future.



4. But How to Respond to these Challenges?

Tim was quite clear on this one- the big winners will be those businesses with a strong,  consistent, scaleable (including international) multi-channel offering and experience. This just keeps coming up, yet its surprising how many retailers are still behind the curve on this one. Retailers need to continue investing in this area despite other cost pressures, so I expect to see more evidence of this as they realise that multi-channel is becoming the minimum expectation for the new generation of 'channel agnostic' customers.

It goes without saying (but we'll say it anyway) that without a compelling proposition in terms of Quality, Experience and Value your shoppers will simply go elsewhere these days, as businesses have found to their cost. Expanding into different product offerings or services (such as Tescos opening of beauty salons within three stores, offering no-appointment beauty treatments.. spray tan whilst you get tonight's dinner?) is a good way of ensuring your offer to your customers remains enticing.

A rationalised store base with the right types of stores, including different/innovative formats, in the right places, will be another strategic (and cost-saving) activity we'll see more retailers taking on soon.

Interesting to see how all this will impact on our local high streets that Mary Portas is so valiantly trying to save. I suspect (especially following the riots this year) there will be little incentive for many businesses to keep a number of secondary & tertiary sites on their books when they need to rationalise and focus on the high profile destinations we are increasingly flocking to, to cut costs and to address the changing mix in sales channel we are using to shop through. Will some of those spaces be taken up by pure play e-tailers moving into bricks and mortar, perhaps following the lead of NBrown who've made the move with a Simply Be store in Liverpool? If they are to meet customers' multi-channel expectations, e-tailers may need to start considering this.

5. And finally...

Things will continue to look grim and uncertain economically speaking, for the foreseeable future, and customers will continue to be squeezed by high inflation. Christmas will of course come but will be less of a boon to retailers as customers remain cautious, and wait for the discounts they know will be offered if they hold out long enough..

But, as Tim reminded us, its not all bad news, as its clear internet sales continue to soar, with an increasing amount of activity coming through mobiles and tablets. Those retailers who are innovating and staying ahead of the game are doing well despite difficult conditions (showing customers will buck their cautious spending patterns in the right environment and for the right offer) and a number of UK retailers are doing well with their overseas ventures.

And on the long-term horizon- at least interest rates are set to stay low, and of course there is the small matter of the Olympics in London this year too....



Many Thanks to Tim for giving up his time to discuss these matters with us, let me know your thoughts too!