Your Thoughts: The Retail Infection

Toys R Us has gone into administration, putting 3,000 UK jobs at risk. Equally, Maplin has come crashing down. In the past months more and more retail companies and big high-street names have hit the deck. Are these signs of an infected era in the retail sector? Is the retail infection a real fear at the moment? What are the prospects of more big chains failing?

This week Finance Monthly hears from a number of expert sources as we list Your Thoughts on the potential for a retail infection, the impact of online shopping on the high street, and the future we might see throughout the rest of 2018.

Dom Tribe, Retail Sector Specialist, Vendigital:

The collapse of Toys R Us is a clear example of the need for retailers to adapt to changing shopping habits if they are to survive. Despite losing significant market share to competitors such as Amazon and Argos, Toys R Us failed to implement an effective E-commerce model with expedited shipping options and also continued to rely on its large warehouses. Opened in the 1980s and 90s, these have proven highly costly to run, with difficulties around managing stock levels, and have been outperformed by its new smaller stores.

Toys R Us’ relationships with key suppliers also hit the headlines over the last year, with the chain demanding long payment terms and exclusivity on certain ranges despite no longer being the key player in the market.

Overall, this collapse emphasises the need for high street stores to continually take heed of customers’ changing shopping habits if they are to stay ahead of the curve and survive.

Mark Hinds, CEO, Polymatica:

Toys R Us and Maplin are both examples of businesses that, despite being deeply involved in technology, have simply been left behind by the fast-paced changes in retail in this decade. All the inventory, special offers and customer data in the world won’t help if you can’t combine them and act quickly to react to customers’ needs.

The sad fact is that we’re likely to see more retailers go this way until big-box stores can find a way to adapt to the changing habits of consumers. Understanding customer data will be critical for this – not only in understanding what will be the most effective strategy based on their existing resources, but also in having the speed and flexibility to adapt strategy in the field to ensure that what seems the best approach doesn’t turn out to be a dead-end. To do this, data needs to be put in the hands of those who actually need it – the executives, marketers and other operational staff who can build a new business. Data scientists have a valuable role to play, but there are so few of them available. Retailers need to make analytics available to people with specific business knowledge to help make data-driven decisions to navigate this changing retail environment.

Perry Krug, Principal Architect, Strategic Accounts, Couchbase:

The UK retail industry is undergoing huge upheavals, and Toys R Us and Maplin have found that out the hard way. It’s no secret that the environment in which massive physical stores like Toys R Us once thrived no longer exists: footfall and sales are down, rents and competition are up. Many retail parks and shopping centres are facing extinction and are a great example of the urgent need for revolution in retail. Stores like Toys R Us were among the first to recognise that customers want more choice than could be found on the average high street, creating sprawling estates in order to supersize the physical retail experience throughout the country. However, this now pales in comparison with ecommerce, which gives customers infinite-scale retail from the comfort of their own home – as well as newer developments such as Amazon Go.

All of the most successful retailer business models in 2020 will be digital-first or digital-only, it’s as simple as that. Ultimately retailers must meet the demands of the 24/7 global digital economy to guarantee faultless and reliable experience to customers, no matter what the scale or location. Physical stores have two roads ahead of them. Either they can continue doing what they’re doing, where further decline is the most likely outcome. Or they can try to function in parallel and support of ecommerce, by offering an omni-channel experience that merges online with offline experiences. For instance, this might mean being more boutique or acting as a showroom for big-ticket items that customers really need to try before they buy. Likewise, a business model like Amazon Go which successfully combines elements of physical and digital shopping experiences in one store may prove to be the blueprint for success in the years ahead, in which only the strongest and most innovative retailers will survive.

Charles Brook, Poppleton & Appleby Northern:

Even before the batteries have run down in the Christmas toys, people engaged in the retail market are already wondering which of the big high street and retail park brands are going to be the New Year insolvency story.

The only real surprise that Toys R Us and Maplins might be this year’s big story is the timing. I’d have expected this to happen a little sooner.

Both major on out-of-town retail park locations, both have considerable fixed overheads and both carry vast quantities of stock much of which relies upon significant discounting to carry them throughout the year between their peak sales period each Christmas.

With the New Year comes the first rent quarter and the largest VAT liability of the year and, whilst each business should have a healthy bank balance following peak season sales, they will also be facing the bills for all of the stock that they have hopefully shifted in the last quarter of the previous year. Together, these produce the retail equivalent of Thunder Snow.

This year it’s Toys R Us and Maplins, next year there will almost undoubtedly be someone else. We shouldn’t rush to assume that this is indicative of a particular trend in the current UK economy. Sure, Toys R Us has a high fixed cost base with significant retail properties with long-term commitments; it’s business model pre-dates internet shopping and arguably it has failed to move into that market as strongly as it should. Maplins operates in the most competitive sphere of internet sales yet it has expanded massively over recent years into retail parks and the high street; that is counter-intuitive and perhaps the strategy was misguided.

Whatever the outcome of any inquest into the failure of each company, what these cases remind us is that retailing is a highly volatile and sensitive business to be in. These retail leviathans are burdened by inertia and a lack of flexibility and when the economy turns against them they can find that it's near impossible to avoid a melt-down.

Phil Duffy, MD, Duff & Phelps:

Since 2011, the banks have paid out over £28 billion in compensation for mis-sold payment protection insurance. This has resulted in what some economists call “helicopter money”, large sums of cash distributed to the significant swathes of the population. Coinciding with the UK finally emerging from one of the toughest economic periods in living memory following the financial crash, it is easy to understand why people who were suddenly handed a large windfall may have had the confidence to spend it shopping for a treat for themselves, rather than saving it.

However, people do not exist in isolation from wider economic concerns. It is difficult to imagine now, but there was genuine economic optimism in the period from roughly 2012 – 2016. The economy was growing faster than almost any developed economy, the government’s strategy to recover from the financial crash seemed to be working and there were no major economic threats on the horizon. In this climate of optimism, and with interest rates at almost zero, it is easy to understand why people who were suddenly handed a large quantity of money may have had the confidence to spend it in a carefree manner.

The tide has turned. Brexit and its multitude of ramifications has caused a crisis in consumer and business confidence, with many now expecting economic turmoil approaching the level of the 2008 crash. This is causing many consumers to hold onto the little disposal income they have, resisting spending on all but essential items. This emerges clearly from the BRC’s Q4 2017 retail sales figures, which showed that sales of non-food items fell 3.7% on a total basis and 4.4% on a like-for-like basis. While wage growth has remained low since the financial crash, the compensation from the PPI mis-selling scandal was responsible for putting some money back into consumers’ pockets. With this now drying up, and a deadline for claims set at August 2019, retailers will be fearing a further softening in consumer demand and more hardship to come.

Leonie Brown, Customer Experience Strategist, Qualtrics:

Price is no longer a sustainable competitive advantage in retail - internet retailers have put pressure on the margins of traditional bricks and mortar stores and continuing to compete solely on cost is a dangerous game that has already claimed a number of high profile high street retailers.

In today's economic climate, experiences are the key differentiator. Consumers are willing to pay more for and be more loyal to brands that focus on experiences as the core selling point of their goods and services - to do that, brands really need to tap in to the emotions and behaviours of their customers.

Understanding what they expect, what drives them to spend more or return time and time again to the store lies at the heart of it. Retailers need to become more intelligent and understand their customers better than ever before and they need to act proactively on that intelligence. It's no use recognising that your sales figures are dropping if you can't understand why and then make changes to close that gap.

Rick Smith, MD, Forbes Burton:

The demise of Maplin and Toys R Us are both unfortunate but not wholly unexpected. We’re also seeing the likes of Marks & Spencer’s planning to close some of their stores to reduce costs and New Look also announced in February that a CVA may be on the cards as sales have fell but at least 10% of UK stores are at risk of being closed.

However, is the retail sector infected? Some may say yes but the problem is more about change and an inability to compete. There has been a huge shift in how and where transactions take place, moving from the high street to online.

Both Maplin and Toys R Us had online presences but they faced stiff competition from the likes of Amazon, who could offer the same goods for less due to a vastly different infrastructure and lower operating costs.

Another issue which won’t have helped is the current lower spending by consumers, people are still feeling the effects of wages not keeping up with inflation.

So what does the future hold in store for the retail sector? The future certainly looks uncertain, mainly due to millennials and their behaviour as these consumers will hold a trend for online shopping and social media for years to come.

Clothes stores may be spared as people still like to try before they buy. But, there are more online clothes stores springing up all the time that offer easy ‘try and return’ services which could cause real problems for clothing stores in the future.

We may also see more stores merging as they try to stay in business, similar to the Carphone Warehouse and Dixons group merger.

Retailers need to use this difficult period to shake up their operations and their stores in order to remain competitive in their industry, there is no room for firms that aren’t willing to change or become innovative – take advantage of the technology that we have these days to make their stores more of an experience for their customers because a good experience will keep them coming back.

Simon Willmett, Financial Director, Nucleus Commercial Finance:

The Woolworths administration was a decade ago and we seem to have been speaking about the demise of the high-street since then. Would I go as far as calling it an infected era? No. But, we are definitely facing challenging times.

The first quarter has historically seen companies that have stretched themselves financially succumb to poor Christmas trading. This, combined with lower January sales and VAT payments can be a death blow for business. With Maplin and Toys ‘R’ Us both going into administration on the same day, the weakness in their model is clearly highlighted and it has forced everyone to reconsider the market again.

The continuing growth of e-commerce, Amazon being the obvious example, but also larger supermarket chains expanding their product offerings has made the market very competitive. Chains will need to make sure their business model is suited to the invariable challenges that lie ahead.

Unfortunately, I don’t think the worst of it is over and there are a number of larger high profile chains that appear to be suffering various signs of distress. Whether these businesses will eventually fall into a formal insolvency process is unclear but what is certain is that they will all need some form of restructuring - whether that is formal (via a CVA for instance), or a refinancing, remains to be seen.

Alan Andrews, Marketing & HR Consultant, KIS Bridging Loans:

We believe that there’s a huge likelihood that the UK retail sector is being hit harder than ever by online retailers, particularly Amazon.

If you think of buying children’s toys, gadgets or electrical goods, what’s the first place you think of? Probably Amazon, not the shops that specialise in providing these products.

This is because they offer easy ordering, super-fast delivery and prices that are usually cheaper than anywhere else. This is great for your Christmas shopping, but not so great for the UK economy when we are ploughing our money into a company that sends most of its profits abroad.

Amazon are forever expanding their range of products and services, making themselves a competitor for most UK retailers. If they want to introduce a new product, they already have the website, the warehouses, the delivery services and the advertising to do so. This is near enough impossible for other businesses who want to provide similar services to compete with, when companies like Amazon can do it so much quicker and so much cheaper.

There was a time when Toys R Us was the new industry giant, closing down smaller independent toy shops itself. And now there’s something even bigger – threatening nearly every industry all in one go.

It’s sad to think that taking your children to a toy shop could be a thing of the past. I imagine that, in the future, the closest thing they’ll get to going to a toy shop is scrolling through an iPad.

We have to ask ourselves if this is what we want for the future. Are we our own worst enemy?

Saving a few pounds now could be very costly for the future. I believe that it’s very likely that more industry giants similar to Toys R Us and Maplin could start to close down as online retailers continue to grow and we put more and more of our money into them.

As these retailers start to close, thousands of jobs will be lost, as figures have already shown.

Prav Reddy, Partner, Charles Russell Speechlys:

The recent insolvencies across both the High Street and the casual dining sector indicate a steady acceleration in the number of retailers suffering financial difficulties.

As well as the administrations commenced by Toys R Us, Maplin and Jamie Oliver’s Barbecoa restaurant chain, we are also seeing an increase in the number of businesses in the ‘managed’ stages of insolvency such as House of Fraser, Mothercare, Byron, Prezzo and Jamie’s Italian. Generally, the downturn is being driven by reduced consumer spending, the continued penetration of online retail and food delivery companies and the depreciation in sterling which has increased the cost of imports for UK retailers.

It is very likely that there will be further insolvencies throughout 2018 in the retail sector (following a difficult 2017) and is fair to characterise the sector as being in an ‘infected era’. However, the extent to which this ‘infection’ spreads will ultimately depend on the ability of retailers to adapt to the challenges facing them (such as customer experience and retail locations) which would also include restructuring measures to address rising pension liabilities, expensive rents and embracing the changing retail habits of British consumers. As with any infection, businesses that are resilient to the challenges set out above and actively seek ways to protect themselves from the problems faced above are likely to fare better than those most exposed.

Simon Brennan, VP Sales Europe, Engage Hub:

These retailers failed to adapt to changing consumer demands. Other toy brands like Lego & Disney make a big effort to ensure that stores have a great in-store, interactive experience for children, encouraging them (and their parents) to visit the store. Pursuing a business model that saw little to no change in a decade, in the face of evolving consumer behaviour, left people with little reason to visit.

In research commissioned by Engage Hub to examine the fragility of the customer experience, over a fifth (22%) or consumers said that standards in customer experience had declined in the last year. This can partly be attributed to a stressful retail environment and a genuine decline in the same services that have always been offered. Equally though, it could be attributed to a rapidly changing consumer, that no longer perceives the standards or services of old as acceptable.

It’s widely accepted that traditional 'bricks & mortar' retailers, saddled with higher running costs and business rates, cannot possibly compete with Amazon et al by playing them at their own game. But the in-store experience and physical customer touch-points, are the obvious point of difference retailers need to exploit better.

It's not all doom and gloom though. Dixon's Carphone for example, the retailer that operates the Curry’s, PC World and Carphone Warehouse brands, reported a 4% rise in like-for-like sales over the past year. Having gone through their own growing pains, they invested heavily in the look and feel of their stores to compete with the likes of Apple. People still like to buy from people, and by offering aftersales support in the guise of Team Knowhow, the company is creating new revenue streams and human-centric services, suited to the modern consumer.

In fashion retail, the ability to try before you buy is as old as the trade itself, but online retailers like Missguided have shown what is now possible in store with their first forays into Bricks & Mortar. Blurring the lines between physical and digital, while creating two-way conversation with customers, Missguided use social media to engage a more tech-savvy demographic and retarget customers following service interactions.

The ability to combine online data with offline data to personalise offers and augment the instore experience is a lesson to more traditional competitors, as to what can be achieved with a data driven in-store strategy, rather than tinkering around the edges with store layout.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!