Sunday 23 November 2014

Store closures of 20% en route to store-level assortment, and more?

The emerging sense that UK multiples are sitting on redundant space representing around 20% of their estates means that large store disposals will have to begin, in order to convince the City that the capital base is being brought in line with current market demand.  This in turn will impact how suppliers manage their major customers, in terms of reward for risk and investment.

Moving to store-level profitability
Obviously, the multiples will reassess their estates via store-by-store re-evaluation to identify which of the larger outlets fail to produce an acceptable level of profit, ideally using ROCE, the driver of share price.

A starting point would be to highlight every store that is delivering less that the corporate average ROCE, and since the corporate ROCE is in fact an average of good and bad, eliminating the under-performers would automatically raise the corporate ROCE.

Selling off redundant space
Next step would be to attempt to sell the redundant stores.  This will not be an easy task, given the rationale re viability of alternative use in our recent blog.

In extreme cases, this means lowering the price (thereby possibly challenging the book-value of the remaining stores in the estate) to a point where a sale is possible.  Any such write-down below book-value then causes a hit on the P&L, thereby resulting in a reduction in profits.

More importantly, the simultaneous issue of ‘for sale’ notices by the multiples could depress all UK store values.

In fact, given most retailers’ gut-response to slowing sales, we might be on the verge of the first price war in retail property history, possibly opening the door to BOGOFs, multi-buys and even loyalty-points!

Moving to store-level autonomy
Seriously, this new focus on store profit margin and ROCE has to lead to the treatment of each outlet as an individual market.  Specifically, a 70,000 sq. ft. store, with say 400 staff and an annual sales turnover of £100m, means that the store’s CEO is in fact in charge of a medium-sized UK business, and is likely to demand equivalent autonomies at operational level, complete with Balance Sheet and P&L.  In practice, this means having the freedom to decide on an assortment that matches local need, rather than the blunt tailoring dictated by a head office 200 miles away.

What it means for suppliers
From a supplier point of view, this development spells the end of ‘national coverage and distribution’ and instead sees the introduction of ‘patchwork presence’ that matches real need for the brand at local level.  This will in turn calls into doubt the cost-effectiveness of ‘national’ and even regional advertising compared with the 1:1 pinpointing of social marketing…

Impact on how we market brands
In terms of brands, our repeat-sale ‘relationship’ with the consumer becomes a series of SKU-by-SKU sales, available to buy wherever, whenever, however the savvy consumer chooses, with no channel off limits.  In practice, this means regarding each successful 'sale' as a springboard to the next, with every tin they open containing more than they expect - not 25% empty to help disguise a price increase that fools no one - least of all a savvy consumer, already trained by the banks and politicians to trust no one, and helped by the most sophisticated price-comparison kits ever available, costing a fraction of the saving on the first purchase.

In effect, the consumer is giving us all a second and possibly final chance to get it right...

...and all because of a creeping realisation that the UK is over-shopped and currently unfit for purpose. 

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