Current Trends and Issues in the Retail Sector

The recent decline in European consumer confidence has put severe pressure on much of the retail sector and the knock-on impact on company values may present acquisition opportunities at attractive price multiples. The European retail sector has gone through many changes in the past decade and continues to develop apace. Factors such as the entrance of US volume player Wal-Mart are only likely to accelerate trends in this sector. An analysis of these retail trends therefore can provide an important backdrop to considering any deal in the sector.

Market Maturity

There are signs in the more developed markets of Western Europe that the retail sector is reaching saturation after substantial growth over the past decade.

This will lead to a slow-down in the sector’s rate of expansion and increase competition for consumer spending. As shoppers are offered an increasing number of ways to spend their leisure time, they are tending to visit high streets and shopping centres less frequently.

Out-of-Town Shopping

In the UK the government has introduced legislation to prevent the continued unabated development of out-of-town shopping destinations. Whilst existing developments still provide some growth opportunity, there will undoubtedly be a slow down in the “move to out-of-town”. The development of out-of-town retail developments in Continental Europe has lagged behind the UK and, in consequence, any move to legislate against them will be at a comparatively earlier stage.

The Rise of the Specialist

Success stories in retail tend to be individual companies rather than whole sectors or formats. There is a tendency to focus on the core competencies of a retailer’s business. The UK high-street chain Dixons, for example, is concentrating solely on electrical retailing in its various guises (white goods, brown goods, computers, communication products) and is not seeking to diversify from its accepted expertise in this area. The view is that Sears is not an expert in any of these areas, merely a generalist. In the case of Marks & Spencer, the situation is slightly different – its expertise is seen as delivering consistent quality under the guise of one brand, St Michael.

Consequently it can move into a number of markets (home furnishings, food, financial services, clothing) as long as it continues to maintain its brand strength.

For similar reasons to those outlined above, together with the advent of the out-of-town warehouse discounters (eg. Costco), traditional store formats such as the department store and the small independent retailers are having a difficult time. In the UK, department stores Allders and the recently floated House of Fraser have been disappointed with their recent results. There is also a move to consolidate in the department store sector as seen with the ongoing Vendex/KBB deal in the Netherlands.

The Advent of Global Retailers

The last decade has seen the true emergence of global retailers, those retail groups operating around the world that are playing a key role in shaping the future of the market. The role UK-based Kingfisher plc has taken in a consolidation of the electrical retail and Do-it-Yourself (DIY) sectors can be seen from recent deals.

The entrance by Wal-Mart into the European retail market is likely to prompt further consolidation moves as the incumbents react to the entry into their domestic markets by the world’s largest retailer, together with its buying power.

Demographics.

Retailers remain acutely aware of the increasing proportion of older and more sophisticated consumers in the population, with the “Baby Boomers” now well into middle age and the “Generation X-ers” approaching their thirties, while improved medical care is having an effect at the top of the demographic range. The key initiative seen as a differentiator in attracting such consumers is improved customer service (also seen as a method of deflecting margin pressure).

Increased leisure time and a change in the perception of shopping means that it is increasingly seen as a “leisure activity” by consumers – and is marketed as such by retailers. Successful retailers increasingly target their offers towards two consumer categories: those with an emphasis on value and those for whom time pressure is key.

*The value-driven consumers spend more time and effort on shopping and are unlikely to be brand-driven, looking instead for durability. This group is weighted towards middle to lower socio-economic groups seeking lower price points.

*The time-driven consumers place greater importance on leisure time, demanding a better shopping environment, a higher level of service and choice of products. This group is more economically active and will respond to higher price points.

Retail concepts targeted towards either grouping (in terms of the price/quality mix) have proved successful. The continuing growth in middle class consumers (above and beyond underlying population growth), who are relatively young, brand-conscious, technology-aware and materialistic, augurs favourably for retailers responding to the time-driven consumer.

Focus

The most successful retailers have achieved recognition from the consumer for a specific facet of their offer, be it the quality associated with Marks & Spencer’s St. Michael brand or the value for money that Wal-Mart offers. Both these retailers exhibit the importance of brand management in terms of the retailer itself (Marks & Spencer and Wal-Mart as branded marques in their own rights), any proprietary brand(s) (St. Michael) and in terms of branded merchandise with a unique proposition (“best value” in the case of Wal-Mart).

Alternative Product Delivery Mechanisms

The advent of mail-order, e-commerce, home delivery and home shopping presents traditionally store-based retailers with great opportunities for access to new consumers or increasing sales and maintaining the loyalty of the existing customer base. The mail order success in the UK of the Next Directory has prompted existing retailers such as Marks & Spencer to set up or expand mail-order operations and has also led to a growing number of mail-order-based retailers such as Arcadia’s Racing Green. In addition to lower costs (property, display, people) mail-order has the added advantage of allowing more sophisticated targeting of the retailer’s customers. E-commerce has seen great success for certain types of products e.g. books, CDs and even wine, with companies such as the Internet Bookshop already having a large volume of sales. Waterstone’s plans to compete with this by launching its own online bookshop. It should be noted, however, that e-commerce has not so far taken off as rapidly as predicted.

With the rapid development of communication technology, the possibilities for home shopping are increasing. Most major companies have Internet sites where it is possible to view their products. An increasing number also have online ordering systems where customers can choose and order products instantly. This is likely to become widespread in the grocery and bookseller sectors of the market. Another new system for home shopping is through interactive TV, made possible by cable TV, which is a cheaper option to set up for customers without a computer and Internet access.

In terms of home shopping and home delivery products, there have been as many schemes launched as there are retailers, none of which have really managed to capture the public’s imagination. This is still a market that has yet to evolve into maturity.

The new channels do, however, also represent a threat to the store-based retailer. Retailers without any store network (as opposed to traditional retailers looking to add new delivery mechanisms to their existing store portfolio) will have a substantially lower cost base. Where public awareness can be drawn to a new channel and (some of) the cost benefits passed on, the cost benefit will allow retailers that rely solely on new channels to compete aggressively on price and convenience to grow rapidly, as in the case of Internet Bookshop.

Customer Loyalty Initiatives.

Customer loyalty is the key trend of the moment in the UK. Following on from the lead given by Tesco, both Sainsburys and Safeway have launched their own loyalty cards, as have other non-food retailers. The great opportunity offered by these cards lies in the data that the retailer is able to collect on its customers’ buying habits. This will allow extremely focused mail shot targeting in the future. The current limiting factor for retailers is the enormous computing power needed to support such systems. In a way, Marks & Spencer has been able to collect such information for years via its charge card system.

Outsourcing

As well as focus in terms of retail offer and proposition, the modern retailer is now faced with the opportunity to focus on operational core competencies.

Distribution has traditionally been the centre of outsourcing debate in retailing, but reference to a recent Retail Week survey demonstrates the myriad of outsourcing opportunities. By way of indication, these include third party stock/inventory control and stocktaking, outsourcing of customer service facilities and information technology.

European Single Currency

UK retailers appear to be far less prepared for monetary union than their European counterparts. The timing of this issue, coinciding as it does with the Year 2000 question, means that resources are instead being devoted to the computer problems associated with the millennium. In the 1997 Deloitte & Touche Annual Christmas Retail Survey, 66% of retailers claimed that they were ready for the Year 2000 date change, whilst 87% said they were not prepared, or did not know if they were ready for the European single currency.

Apart from computer systems issues, the major impacts of the single currency on retailers will be on price points, transparent pricing, customer information and cash handling [see Retailing in Europe survey].

Technology/EPOS

Apart from the lead that technology provides in terms of route to market, there have been significant developments in the management information systems (MIS) used by retailers, which can facilitate rapid growth. A retailer successfully operating from 50 stores with strong MIS can easily expand to many times that size.

Retailers face potentially significant upgrade costs (if they have not already incurred them) to accommodate Year 2000 issues and the new challenge of dual currency pricing with the introduction of the euro.

Conclusion

Any retail investment must be contemplated against a myriad of issues in this fast-moving sector. Favourable underlying trends and new operational and technological developments mean that strong returns are available from the right opportunities.


Table1:Significant Kingfisher Acquisitions in Electrical

Retail and DIY

Sector Company Country Date

Electrical Retail Darty SA France 1993

Electrical Retail (+Furniture) BUT SA France 1996/1998

Electrical Retail BCC Holding Holland 1997

Amstelveen BV

Electrical Retail Wegert Verwaltungs/

Promarkt Holding

Germany 1998

DIY Castorama France 1998

Source: Corpfin UK