Life on the margins of the high street

Philip Duffy, Partner, MCR, draws on his retail sector experience to put forward his view of the lie of the land ahead

2008 has seen the start of a particularly chilly January for the retail sector with little to suggest much sign of imminent improvement. The downward trend in retail began last autumn and continued until the end of 2007, with December proving to be a wholly disappointing time for retailers once its trade had been accounted for.

UK retail sales rose 0.3% on a like-for-like basis, compared with December 2006, whilst sales for the year were up 2.5%. In fact, 2007 saw the worst December figure since 2004. Within these figures are high street and internet sales which have performed differently with internet sales
doubling this Christmas.

This doesn't actually sound too bad, after all sales are still up and it is only the worst December since 2004, and there have been good ones in between. But the real issue is what has happened to margin, particularly on the high street.

Whilst sales figures throughout the Christmas period were widely reported there's been relatively little comment on profit margins. This will dictate whether retailers survive, so it's not surprising that many have been reluctant to comment. The margin achieved is crucial and will determine the fortunes of retailers over the next few months.

Property prices falling
The media has been full of stories of woe from the high street about poor trading figures and much gloom about the prospects ahead, but in this case not without some substance.

Interest rates are being brought to task by some, with the Bank of England under pressure to reduce interest rates by a full half-point. However, this isn't necessarily the answer. Let's remember that much of the consumer retail boom has been driven by increased property prices. As house prices now start to fall in many regions, it therefore stands to reason that this will have a direct impact on the numbers of consumers hitting the high street as fear of loss of equity unsettles them and halts spending.

An obvious impact of continued weak sales is an increase in administrations and insolvencies and already this year we've seen reports in the papers of potential high profile administrations. This is no coincidence, as clothing and footwear sales actually fell in December for the third consecutive month. I reckon that March particularly could have a sting in its tail for many as quarterly VAT and rent are due to be paid in the last week of March and the first week of April. So, those that have witnessed poor sales and/or margin in December and survived past January might come a cropper at the end of March.

In addition Easter is in March this year and the weather will have a particular impact. If the weather is good then summer stock may sell well but left over autumn/winter stock will be further devalued. If weather is bad between now and Easter then a short sunny break might be the order of the day which takes consumers and their cash out of the retail market.

Value brands squeezed
Those likely to find current trading conditions particularly tough are certain value brands, many of which sell their products through high volume retail outlets or smaller lower rental outlets. The ones who will maintain or improve market share are those that buy well and offer a good retail experience. Customers are generally loyal and will remain that way if they get good value and good service.

Too many of the value brands are not investing in product or the appearance of outlets as they try to cut costs in an attempt to make each individual outlet profitable. Controlling costs is important but not at the expense of the overall offering. The main areas of expenditure for any retailer are wages, rent and of course, product. Wage costs are critical in the retail process. Whilst it may be tempting to claw back a percentage from wage costs, it's also very short-sighted. Reduced wages means a reduced workforce and less people serving customers - and it is customers who are the lifeblood of any retailer.

Good service goes such a long way to maintaining customer loyalty that consumers will often go to the same store if they feel well looked after.
Treat us badly and just one poor experience can put us off for good.

Review rental agreements
Conversely, it's worth remembering that the commercial property sector is being squeezed as well and this could offer some room for manoeuvre for cash strapped retailers. Now is definitely the time for leases to be reviewed, particularly rent payments. Imposing a new lease which reduces the rent could ensure that the retailer remains in positive territory, whilst keeping commercial property agents or developers similarly in the black, safe in the knowledge that their building will not go empty.

Retailers also need to review their sourcing and supply chain strategies. Successful retail is about buying at the right price and companies should be going direct to the source of the product rather than through an agent. It is common for many Far East agents to pass themselves off as manufacturers but in fact they are consolidators of several separately owned manufacturers.

Like all the business sectors we work with, the message of not chasing turnover at the expense of margin applies equally to retailers and we'd urge anyone involved with a struggling retailer to talk to us in the first instance.
Our experience of working with retailers of all shapes and forms and in all stages of growth and restructuring has given us an insight that we believe is second to none.
This experience allows us to come up with the best mix of solutions to put them back on track.