Retailing in Britain: Traditional Retailers vs. Discounters

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Themes: Strategy
Pub Date : 2005
Countries : Europe
Industry : Retailing

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Case Code : COM0081
Case Length : 5 Pages
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Tomeet the competition, traditional retailers relied on discount sales.However,marketwatchers believe that they cannot sustain on discounts in the long termdue to their cost structures. They say that the trick in discounting is not squeezing as much as the retailers can out of their supply chain and cutting prices across the board, but the ability to decide where the pricesmust be cut.Marketwatchers advocate that people notice price changes in the products they frequently require, such as eggs or disposable nappies. For the goods that the customers pick up as a conveniencewhile they step in to a store, like toothpaste or deodorant, are less price sensitive.

Besides the competition fromthe discounters, traditional retailerswere hit hard in their staple apparel business inwhich prices started falling continually.By 2004 the real price²¹ of a jacket, for instance, was 30%less than it was ten years earlier. Asmost of the appareal productionmoved to low-cost countries, there was notmuch to be saved out of the supply chain. In this scenario the retailing chains which operate globally, were benefited as they could charge a premium for their global fashion perspective and they also could leverage on their global networking tominimize costs.

Further, the discounters,with their inherent lower costs, were undercutting the department stores by offering chic clothes at low prices. According to Kellogg's Professor Blattberg, anothermajor factor favouring the discounterswas the trend towards casual businesswear. This trend had a huge impact on the sales of formal clothing,which had been a staple apparel line for traditional department store. "People simply don't buy asmany suits or ties as they used to."²²

Onemore factor that affected the traditional retailerswas a sharp decline in overall spending of the customers. It was noted that asmajor chunk of customers who drove themarkets traditionally had grown older, the spending got diversified into a variety of services like education of their children, vacations, healthcare expenses, insurance and other services. This reduced the household budget for generalmerchandising. Consequently, the customersmoved towards discounters,meeting their budgetary constraints compared to the high streets.²³ Strong pound also played its part by adding to the woes of traditional retailers.On one plank, high value of the pound increased rents and services, on the other, itmade imported goods cheaper, which lured customers.

Mounting competition unearthed the weakness in traditional retailmanagement.Many chains over-expanded, but, as some of the country's biggest employers, they could not close shops and fire people, fearing public backslash. As a result, profitmargins dipped, even though sales increased. Grossmargins in retailing fell from 30.1%in 1994 to 26.5%in 2000. The British retailerswere ill-equipped to operate in such competitive environment, as the decisionmakers in British retailing industrywho rose up the ranks fromthe buying departments, lacked customer perception. According to RichardHyman of Verdict, a British retailing consultancy, "Old-guard retailers are a victimof their own success. They are not equipped to deal with this new focus on the consumer."²⁴ On-line trading started increasing in Britain in comparison with other countries , as price and convenience of buying round-the-clock attracted the customers.

Decreasing profits, which in turn reduced the share prices, made many British retailers vulnerable to takeovers. In 2002,Arcadia Group, which owned women's apparel stores such as Topshop and Dorothy Perkins, was taken private by retail entrepreneurPhilipGreen. In 2003,mass-market department storeDebenhams, high-end department storeSelfridges, and women's retailer,Oasis Storeswere taken over by a consortiumof private-equity firms called Baroness Retail, led by CVCCapitalPartners and Texas PacificGroup;Wittington Investments ofCanada; andNoelAcquisitions, owned by Baugur Group, Iceland's retail investment group. In the same year retail private equity deals in Britain amounted to $5.2 billion. The amountwas 49%greater than the amount in 2002.²⁵ In 2004, tillMay, Britain had witnessed $2.2 billion worth of such deals.

Analysts predict that many other British retailers would fall prey to mergers and acquisitions. Commenting on the takeovers, Richard Hyman, chairman of Verdict Research Ltd., a retail consultancy in London, said "There will be quite a bitmore of this, the environment is right, and it's ripe."²⁶ Bankers opined that possible future targets include Marks & Spencer GroupPLC andWoolworth’sGroup PLC. Cost cutting throughmergers and acquisitions is believed to be ameans, in order to keep profits growing. Richard Hyman, observed, "The retail industry ismaturing. Operating-cost inflation is outpacing retail-price inflation. The only response is to raise volumes, either by pinchingmarket share or buying it."²⁷

21]Existing Price adjusted for inflation
22]"Reinventing the store", www.economist,com, November 23rd 2003
23]In the United Kingdom, a principal street where the main stores are located is called high street. Traditional retailers have their stores in these localities
24]"High Street woes", op. cit.
25]Cohn, Laura "Reinventing British Retailers - The Hard Way", www.businessweek.com, May 10th 2004
26]Ibid
27]"When you can't sell the goods, sell the shop", www.economist.com, January 16th 2003