Learning curve

As the ink was drying on the contract that saw its chain of newsagents sold to WH Smith for 68m, the management of another John Menzies subsidiary was hiring a new marketing director.

On the surface, the hiring seems less significant than the WH Smith deal. But Fiona Davis has been recruited to make toy retailer the Early Learning Centre an attractive takeover proposition. Along with other managers, hired in the past 12 months, she will prepare it for sale or “demerger” within the next five years (MW May 7).

Her arrival puts the spotlight onto what was once a jewel in Menzies crown but, through a mixture of strategic mistakes and more intense competition from the likes of Toys R Us, ELC has been under-performing and has subsequently fallen into a loss-making position.

Her arrival will also accelerate changes in the store’s positioning with a more radical move away from both its “early” and “learning” tradition. Store redesigns and packaging are also on the agenda.

The situation became so severe that in January, when John Menzies announced its results for the six months to November 1997, Menzies chief executive David Mackay blamed the toy stores for doubling the group’s annual losses from 5.2m to 11.4m.

The results, and predictions from the likes of Mintel that sales in the UK market may grow by as little as five per cent in the next five years, seem to have shocked the Menzies board into action.

It plans to concentrate on its specialist wholesale and distribution interests. These include: the news distributor John Menzies Wholesale; the home entertainment distribution and book wholesaler THE, which includes Nintendo among its clients; upmarket stationer Smythson of Bond Street; and Funsoft, which distributes multimedia products.

That left no place for the newsagents or the Early Learning Centre. Davis’ appointment marks the near completion of the management team – it now only lacks a stores director – which is charged with the task of turning a loss-making chain into an attractive target for potential buyers.

ELC managing director Mike France, appointed six months ago, says Menzies is “very, very supportive”. Menzies clearly needs to make the chain attractive, but for Davis, poached from Wallis where she was also marketing director, it is a difficult situation to walk into.

The toy retailer ousted chief executive Ian Duncan and managing director Andrew Crankshaw last July. The pair had worked at the chain for 16 and 13 years respectively. Six months ago it appointed France and Peter Ellis as deputy managing director.

Its attitude to marketing is illustrated by the fact that when asked last week, France could not name Davis’ predecessor. The 221-strong chain’s last advertising was a Christmas ad campaign created by CDP.

The management reshuffle suggests a management buyout could be among future options. France says: “When Menzies does demerge we will see what happens. The team’s focus is on delivering a valuable business.”

But the concern of Menzies’ Mackay was less about ELC marketing and rather more about its commercial success. In January he said: “Our distribution services businesses have performed well, but this has been offset by retailing losses, particularly in Early Learning Centre. We are working towards having Early Learning in a position to be demerged within three to five years.”

The results showed that retail losses increased by 5.2m to 11.4m, figures Mackay squarely attributed to “increased trading losses at ELC”. Its like-for-like sales were down 4.8 per cent over the period.

ELC has called in the Helena Packshaw Associates consultancy to turn the situation round. Packshaw, ex-marketing director of Bhs, attributes the chain’s poor figures to moving away from its core market – toys.

She says: “The brand took its eye off the ball when it introduced clothing and nursery items in the late Eighties. Clothing has been experiencing a downturn and nursery is dominated by Mothercare. The move demanded larger stores in prime sites at very high rents.

“It wasn’t thinking about the toy business when that market was undergoing fundamental changes, such as the impact of Toys R Us.”

While unwisely investing in clothing and nursery products, the chain paid less attention to producing new toys, and keeping up with the latest trends in the market. Neil Mason, senior retail analyst at Mintel, says: “The large multiples like Toys R Us were moving into fads and big brands and ELC was not stocking those types of products. It had changed its product range, but not in the way the market demanded.”

The children’s clothing market changed shape in the early Nineties with the rise of sportswear brands like Nike and Adidas. At the same time Asda launched its George clothing range. But ELC failed to respond.

ELC also suffered in this period because of the imitation of its brand by retailers like Woolworths which stocks the Chad Valley range. France admits Chad Valley took market share from ELC.

The chain is now turning its back on the nursery and clothing markets – some might argue a little too late. It signalled this by putting 16 of its largest stores up for sale in February.

A more fundamental problem facing the 221-strong chain is its positioning. Clive Vaughan, research manager at Verdict Research, says: “It is an AB brand and the store network has been pushed beyond AB areas. Its network needs pruning.”

But France says he has no intention of reducing the number of ELC outlets – apart from those already up for sale. Instead the store is to have a broader, more mass-market, appeal.

“This brand was built on middle-class values but the fact is the C2 population spends more per head on toys,” says France. “That group is disfranchised by today’s brand. It feels we are too worthy so we will move towards a wider market.”

Part of the plan is to create a more “fun” image for the store. Packshaw says: “We have done a large amount of work on the brand to discover its core values. These are quality, safety and education but not so much fun. We want to inject the magic of learning – to have kids’ eyes light up when they come into the store and shed the middle-class ‘thou shalt learn’ image.”

In keeping with this, the chain recently introduced Barbie, Teletubbies and Thomas the Tank Engine to its stores. They had previously been deemed unsuitable. And it is also attempting to attract older children. Its core market is pre-school kids but the chain plans to introduce electronic learning toys and computers, which appeal to over-fives and parents.

France says: “We are aiming to target children up to the age of eight. We will sell everything for under-fours, but for four- to eight-year-olds we will not compete with the likes of Toys R Us in terms of breadth of range.”

Watering down its pre-school and educational positioning could stimulate a rethink of its name. Packshaw says: “A name change is extremely unlikely, but I wouldn’t rule it out. With every strength there is an inherent weakness.”

It is its emphasis on learning and on under-fours that will come under most threat from the planned changes. If the chain becomes more mass-market and broadens its appeal to older children, it risks alienating its customer base.

Mintel’s Mason puts it succinctly: “It hasn’t got a choice.” But France’s comment about not competing with Toys R Us for the four- to eight-year-old market suggests that its attempt to go “mass market” may be only partial, not least because its store sizes do not allow for large stockpiling.

Toy buying will be crucial to the new-look ELC. Ninety per cent of its stock is own-label, according to France, and the remaining ten per cent is what will be needed to attract the new customers. There is not much room in the stores for broad ranges, especially now that the chain is selling and splitting its 22 largest outlets.

Verdict’s Vaughan says: “ELC needs to get a share of some top-selling toys, but the danger is you will miss the latest fad. With small shops the onus is on you getting that right. Woolworths can accommodate a poor line, but with small stores you have to pick the winner every time.”

A key barrier to growth will no doubt be that the toy retail market is stagnant. The market in real terms (at 1992 prices) only rose by five per cent between 1992 and 1997, and is expected to rise at the same rate over the next five years, according to Mintel.

The market’s value is being masked by price wars. Argos and Woolworths have the largest share of the UK market and, along with Toys R Us, they have the buying clout to offer low prices. Mintel’s Mason says: “The margins for toy retailing are very small, growth is not great and the market is very competitive, especially with supermarkets such as Safeway entering the arena.”

Independent toy shops are feeling the full force of this. Mintel’s June 1997 report on UK toy retailing says: “The independent sector of the market has been in a state of decline for a number of years and is likely to continue in the same way for a number of years to come.”

If the new-formula ELC is to be a success, it will have to steal share from the independent sector – but with less buying clout it is less capable of this than the big three. But Mason says: “ELC is expecting to take share from the independents, so there is room for growth.”

France expects the chain to return to profit this year. “There are easier tasks around but there will be a turnaround this financial year. Now is the first time in three years that we are gaining market share. It will take two years to reach healthy profitability.”

France is right, there are much easier tasks than altering a brand’s core values to win new customers in a low-margin market with very limited capacity for growth, all within two years. But that is the task he has set himself and the new management team – a team that now includes Fiona Davis who has the job of communicating these changes to make the Early Learning Centre attractive both to consumers and potential buyers.

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