Having been branded “complacent” and “pathetic” by City analysts WH Smith has a lot to prove after its first profits warning in 15 years.
The group will make profits of 115m, down 10m on last year, but more dramatically down on analyst estimates which ranged from 128m to an inflated 142m.
The problem lies with WH Smith Retail, the core 450 store stationery chain, where the group says profits will fall by 17 per cent this year to 68m. It blamed the general level of consumer spending and also said it was losing out to superstores, like Tesco and Sainsbury’s, which have started to sell newspapers and magazines.
It could also add to that list the success of other chains within the group like Virgin/Our Price and Waterstone’s which it says have performed strongly and in sectors which clearly overlap with the main chain.
The WH Smith solution is to market its way out of trouble. The City remains sceptical about whether marketing will be enough and analyst forecasts for the year to June 1996 have responded accordingly – slashed by as much as 20 per cent to between 115m and 130m.
The profits warning and the explanations which went with
it led to analysts damning
WH Smith for taking the main store chain for granted for too long while it “fiddled around” with the other subsidiaries. It stands accused of having taken its eye off the ball.
Indeed, when the company issued its profits warning its share price fell 40p to 326p. After it explained itself the share price fell a further 25p.
The marketing solutions outlined by the company which fell so flat with analysts include: Project Enliven (MW February 3) aimed at revamping its stores to make them more attractive; increasing its multimedia departments, offering family-based CD-Roms and opening children’s departments; and boosting its ad spend to 14m in 1995/96, up from a Register-MEAL figure of 11m for last year (though the real figure was thought to be nearer 2.5m) – most of the money coming from suppliers.
Unfortunately for a chain
banking on marketing to get it out of its difficulties, its marketing department has been weakened by frequent changes at the top over recent months.
Last July marketing chief Dean Cowley, who had been with the stationer for ten years, was forced out following a restructure when marketing was divided into products and brands; then his replacement, Esther Horwood, general manager brand marketing, left at the start of this year (MW December 16). In the meantime, WH Smith parted company with its agency Bartle Bogle Hegarty, which had held the account since 1991, only to reappoint it a few months later in a bizarre turnaround. Don Sloan, the former Woolworths’ marketing director, was then recruited as head of brand marketing to replace Horwood.
Such disruption and inconsistency does not augur well for its new solutions. Nor does it give the impression of a marketing department with a strong vision of where it is heading.
Predictably, WH Smith disagrees. It claims to have been planning these changes for up to 12 months – which makes the personnel changes in its marketing department and its apparent quandary over its advertising agency more, not less, disturbing.
The City believes the store’s problems are more fundamental than it is willing to admit and cites the success of the Next retail chain to show that sales can be maintained even in a generally tough retail environment. It also noted that rival news-agent Menzies reported that results for the year would be satisfactory, even though trade was “undeniably tough”.
“Its essential problem is that it is too inconvenient for the consumer to include a number of WH Smith’s key items in the weekly shop,” says analyst Sean Eddie of NatWest Securities.
WH Smith admits some of the factors which the company has to contend with are here to stay.
“There are some structural changes to the way consumers shop and they are not the sort that you reverse quickly or in some cases reverse at all. In some areas supermarkets are here to stay, in videos and magazines, in a way that’s eroded our market share,” says WH Smith director of corporate affairs Kevin Hawkins. He comforts himself with the thought that the surge in magazine sales through supermarkets has now levelled off.
Increasingly successful specialist stores, including its own music and book outlets, have also played a part in eroding the company’s dominance in some product areas.
So are its proposed changes enough to turn things round? Who’s right, the store or the City?
Richard Hyman, chairman of retail research specialist Verdict, has more sympathy with
the store than the City does. However, while recognising the strength of the brand, he suspects something more than marketing is required.
Project Enliven gets short shrift. Hyman describes it as “uninspiring” and suggests looking hard at the company’s cost base – staff, stores, buying and distribution – will bring more fundamental results. The management could be justifiably accused of being slow to react and also too reactive in its approach, says Hyman. But, above all, he points out that the retail sector is having a rough time and there are more retailers producing figures like WH Smith than there are those emulating Next.
He disagrees with analysts who suggest WH Smith is off the beaten track for consumers, calling it the “store of first resort” for many of its core products, though he admits it must do more to strengthen this aspect of its business. He says newspaper and magazine sales in supermarkets will always be impulse buys for shoppers and says because of this sales will never make a big impact on the market. Like WH Smith, he believes that supermarket newspaper and magazine sales are here to stay, though.
“The profits warning was fairly shocking given the numbers involved but some of the comments in the press were way over the top: to liken WH Smith to Woolworths as some did is grossly incorrect,” he says.
Woolworths lacks the cohesiveness of WH Smith, it finds it difficult to add value to its product range; nor are its store locations as good.
Overall, he says, WH Smith is fundamentally sound, with a strong product offer which hangs together well and good store locations. He believes it has all the prerequisites for success.
WH Smith has no doubts that the changes will work; the issue is the rate of progress which will be made in what is a harsh environment.
“We’ve said [to the City] ‘Please don’t rush away and put zillions on the bottom line for 1995/96’. After all, it took us 18 months to turn around Virgin/ Our Price – though that was in loss and now it’s in profit. This is on a bigger scale; it’s more complex. And we will not get any help from the Chancellor,” says Hawkins.
WH Smith has not turned from a fundamentally strong company to a “no hoper” overnight. But the company’s plea for the City to take the long view of its marketing strategy will be to no avail if it shows no progress by next year.