High street icons show there is a way back from the brink

This week it’s Marks & Spencer. Last week it was Sainsbury’s. So it is possible to turn retail businesses around, even for mammoths of this scale, but it is no easy task. Stuart Rose and Justin King deserve the plaudits because this is the equ

Marks & Spencer and Sainsbury’s have turned their businesses around, despite the toughest retail conditions for a generation. To maintain that recovery they will have to focus on growing top line sales and developing customers, says Richard Hyman

This week it’s Marks & Spencer. Last week it was Sainsbury’s. So it is possible to turn retail businesses around, even for mammoths of this scale, but it is no easy task. Stuart Rose and Justin King deserve the plaudits because this is the equivalent of pushing water uphill.

Today’s retail climate is the toughest I have seen in 25 years of watching the industry. So much so, that the economic models of most of the competitors out there have either had to be changed or will be changed. Certainly a lack of change will precipitate a slow and painful death. There is a complex spectrum of interrelated economic and structural factors driving all of this, but one headline actually encapsulates the whole thing.

Reduce costs or sell more

During this year, retail sales will grow by 2% but retail costs will grow by 4%. These numbers vary by sector and company, but the basic principle applies to everyone. The implications are quite simple: unless a retailer can lower costs or sell more units, the financial hit from this gap goes directly to the bottom line.

After several decades of relatively easy prosperity, many retailers have entered this new era with rather heavy and cumbersome cost structures. Moreover, these costs were supporting structures that were predominantly geared to the support side of the retail equation (property, supply chain, IT, finance, operational management and so forth) rather than the selling side. This reflected the fact that for years, growth generally came from physical expansion rather than organic sales growth, and investment was targeted accordingly.

Recent years have seen some spectacular results from people able to re-engineer retailers’ costs, focusing on the compelling attractions of businesses that are highly cash generative. The leading exponents of this have been Philip Green, John Lovering and Rob Templeman. However, the new economic realities of UK retailing are here to stay and the pressures that flow directly from them are beginning to bite harder.

With sustained negative retail price inflation, consumers are able to buy more items for the same outlay each year. A great example of this is womenswear. Today, the typical adult woman in Britain is buying twice as many items a year as she did ten years ago. Maintaining this from the retailer’s point of view is a challenge, and in my view, it is rapidly becoming the ultimate challenge.

Drive the top line

In today’s retail climate, managing costs tightly is a given. It is really about driving that top line – selling more. It is against this background that consumers (perhaps belatedly) are finally taking control.

Sainsbury’s and M&S had a number of things in common. They were UK business icons, considered to represent the “state of the art” on almost every front. But this encouraged an inward looking culture that sold what it bought. The buying department was king and these supply-driven retailers were tremendously successful.

However, once direct competition grew and consumers began to have real shopping alternatives, these old models were found increasingly wanting. The retailers who understood demand and were able to translate that knowledge into proposition development really started to capture market share/ companies such as Next, Primark, Tesco, and Asda.

There can be no doubt that the cost bases of M&S and Sainsbury’s have been transformed and are much closer to the vastly more demanding trading climate of today. Yet it is in their approach to customers that the recoveries are truly rooted, and where the difference is really being made today and in the future.

We have so much more capacity in terms of floorspace today than ever before and this will not go away. No retailer can sustain successful performance without having the capacity to drive market share, to sell more. This depends on truly understanding what drives demand, getting under the skin of customers and critically, turning that understanding into relevant propositions on the shopfloor. How else are we to be persuaded to buy more of what we already have lots of at home?

The early stages of recovery are inevitably focused on the cost base and some excellent improvements in performance are possible. However, these are by and large one-off gains. Sustainable recovery will be defined by the top line. Rose and King are doing fantastic jobs, but both know that there is some way to go, and that their fortunes will ultimately be determined by how well they can manage their relationships with customers.

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