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Opening new stores isn’t the answer for UK retailers

UK retailers are at one in acknowledging the rapid pace of change in their market, and yet many are still persisting with store opening programmes. It’s the retailers with the best online strategies that are going to prosper going forward.

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It’s taken some British retailers a long time to come to the realisation that consumer shopping habits have changed rapidly and forever. The big disrupter has been the massive take up of online shopping. No longer does the UK consumer head to the high street or the out-of-town retail park to snap up everything they need. They may still head to the shops, but will often just use this as a window shopping exercise to inform choices before heading back home to find the cheapest deal online.

But as online retail sites improve, and choices for picking up and returning goods proliferate, even physical window shopping is less necessary. Consumers can get what they want fast online, at a good price driven by highly visible competition. They may even not know what they really want, but they are soon pointed in the right direction by prompts like ‘you may also like’ and ‘what others looked at’.

Which is why some of the recent comments from the retail sector appear puzzling.

More stores boost top lines, but may not be the future

Take John Lewis for example. It’s an unlisted partnership, but it’s also a bellwether for the UK department store sector. Excluding its Waitrose grocery business, John Lewis reported a 4.5% increase in gross sales for the six months to end-July. Profits fell due to the wage increases being implemented across the sector and investments it is making in IT and its supply chain and distribution network, but let’s focus on the sales figures. 

Sales in its shops were down 1%. Meanwhile, online sales represented 34.5% of total merchandise sales, a big increase from 30.6% a year earlier. Given this shift from bricks-and-mortar to online is industry-wide and has been accelerating in recent years, you’d think this would be a signal to John Lewis management they should be focusing online. Apparently not.

‘Our strategy for shops continues to be anchored in convenience and experience – giving our customers a reason to visit shops and inspiring them when they are there. While sales through this channel were down 1.0%, 65.5% of our merchandise sales come from branches and three-quarters of our customers buy in shops’ it says.

‘Online sales represented 34.5% of total merchandise sales, up from 30.6% last year. Because our customers continue to value the convenience of digital and mobile shopping to complete their purchases, we have fully integrated our desktop, mobile and app, and have introduced services such as the Personal Style Edit and 'Find Similar'.’

The focus appears to be as much on shops as online, and indeed the company is going to open to two new shops this year – in Leeds and Chelmsford. This appears counterintuitive. John Lewis used to produce a sales breakdown by store, although it stopped earlier this year. Before it stopped, this useful table was showing a clear trend: new shops tended to do well for a while, but overall more of its shops were reporting falling sales than rising sales. At the same time, online sales were soaring.  

Online growth is much faster than in-store growth

There are more examples, such as Dunelm Group. In-store like-for-like growth in its recently-ended financial year was a paltry 1%. Growth in home delivery sales was 23.2%, meaning it now accounts for 7% of total revenue, up from 6.1% a year earlier. So again, online growth is soaring ahead of in-store growth. The answer to this from Dunelm’s chief executive John Browett is: ‘We remain particularly focussed on extending the Dunelm offer to more customers and have opened six new superstores in the year. This will be ramped up in the current year with nine planned openings, three of which are in the London area where we are excited by the clear opportunity for growth.’

More stores then. Counterintuitive?

Cheap fashion retailer Primark, owned by Associated British Foods, has been the most successful high-street retailer of the last decade, reporting a six-fold rise in sales over that period. However, Primark’s like-for-like growth fell for the first time in 16 years in its most recent financial year. This needs to be put in context – clothing and footwear sales in the market as a whole were down and Primark maintained its market share suggesting it’s an industry-wide problem and not just Primark. But it does suggest Primark’s future is more difficult, and that’s unsurprising given the shift online.

While it does have a website, it doesn’t sell online. It relies on low prices and very high volume to make its profits and has previously said that selling online would be too costly given online customers have come to expect benefits like free returns. It may have to think again. Look at the double-digit growth rates being reported by online-only retailers ASOS and, which attract many of the young customers that also shop in Primark.   

UK grocery sector looking at online strategies

The retail sector that’s been best at taking advantage of changing consumer trends over recent decades has been the grocery sector. For thirty years the likes of Tesco and J Sainsbury transformed UK retailing by giving consumers what they wanted when they wanted – more choice, bigger stores, and non-grocery extras. Tesco, in particular, took a lead in online retailing in the UK, although online grocery sales remain low at about 5% of total grocery sales. 

However, the grocery companies became so large and entrenched they found it hard to change course when the next changes in consumer habits took place. The financial crisis made consumers more price conscious, sending them in their droves to German discounters Aldi and Lidl, and at the same time the big weekly shop declined in popularity in favour of more frequent, smaller shops. Quickly, those huge out-of-town supermarkets were no longer the place many shoppers wanted to go.

Tesco and Sainsbury’s were quick to react, moving fast to take control of the convenience store market. But the margin-sapping price war that’s ravaged the sector in recent years has also made all the supermarkets halt their store opening programmes and in some cases they’ve been contracting their store estates. The focus is now very much online, as US web-giant Amazon starts to move in on the UK grocery sector.

Multi-channel strategies should favour on-line growth

Sainsbury’s acquisition of Argos is not just an effort by the grocer to grow through takeovers and become Britain’s biggest seller of general merchandise, giving it a further boost in its battle with Tesco. The rationale is clearly based on giving it a better online future.

It will retain a big bricks-and-mortar presence, but it will shrink the Argos estate massively instead putting pick-up and returns points in Sainsbury’s stores. That may also help solve the problem of what to do with all the under-utilised space in those giant supermarkets. It also gets control of the Argos online delivery business, which has developed into one of the fastest and most responsive in the UK. In fact Argos has been described as Britain’s Amazon with stores, striking a deal with eBay to be a click-and-collect point.

Those retailers still bolstering their revenue figures by opening more and more stores should look carefully at all this. Those retailers without an online strategy need to look again. The trend is against them. Shops won’t disappear completely, and online retailing is competitive and hard to do well, but with online shopping in the UK predicted to grow by a further 45% over the next five years, that’s the growth area. A so-called ‘multi-channel’ strategy – that’s both bricks-and-mortar and multi-device online – is all well and good, after all some 89% of all UK retail sales still touch a store according to Verdict, but the focus should be on the online part of this strategy in terms of future growth.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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