Consumers are a demanding bunch. They want more choice, convenience and above all, a great customer experience. Yet they don’t want to pay more for the privilege! Satisfying the modern customer poses considerable challenges to today’s retailers. Can anyone but the consumer prosper in this environment?
Strong house price growth, combined with steadily rising discretionary incomes and lower savings ratios (left-hand chart below), has provided UK retailers with a robust consumer backdrop. In 2015, consumer confidence hit its highest level since 1997 (right-hand chart). Unfortunately for UK retailers though, this healthy consumer backdrop has not translated into healthy profits. Rather, shifting consumer demands and competitive pricing dynamics have caused considerable challenges for the sector.
Meeting these demands has required material IT and infrastructure spend. While many retailers have systems that serve both their physical store and online propositions, these tend to be distinct solutions and are rarely capable of delivering the integrated end-to-end logistics required for omni-channel retailing. The extent of this challenge was highlighted in a recent survey by PWC, which stated that only 19% of global CEOs believe they can fulfil omni-channel demand profitably.
The shift in the way we view product (ie, surfing the web not strolling the high street) has materially advantaged online pure-plays such as Amazon and ASOS. The online competitors regularly enhance their service, for example Amazon recently introduced a one-hour delivery time for its Prime service customers based in London. It costs £6.99 per delivery and £79 a year for the subscription, not quite free but the logistical achievement should be admired. The British consumer’s appetite for online retailing has increased (as the following chart shows) partly due to lower delivery costs and more faith in the ability of retailers to meet delivery times. These trends pose major challenges to the fixed-cost high street retailer.
Last Christmas was particularly brutal for the high street with a 4% decline in footfall year on year. It has been suggested that the only option open to high street retailers is to either accept declining market share (FT: death by 1,000 clicks on the British high street) or to try and compete through omni-channel retailing. But as we’ve said, delivering a true omni-channel experience is expensive, complex and so far, few have achieved it profitably.
One of, if not the best example of omni-channel retailing, John Lewis, processed more than six million click-and-collect orders last year, up from 350,000 in 2008. Last July the retailer introduced a charge of £2 for orders under £30, highlighting the issues with making the omni-channel service profitable. Click & collect has become an increasingly large proportion of sales and has overtaken home delivery as the preferred method of purchase. This trend highlights the importance of having a physical presence on the high street. John Lewis continues to roll out further stores to better serve its customers. However, these stores are increasingly ‘destination experiences’ (such as cookery schools and wine tasting) rather than mere shops.
Possibly the key to the success of any omni-channel retailer is the efficiency of its logistics infrastructure. It is arguably the search for such efficiency that spurred Sainsbury’s recent bid for Argos, currently owned by Home Retail Group. Since it announced its five-year transformational plan in 2012, with the aim of turning Argos into the most efficient e-commerce and multi-channel operator, Home Retail Group has spent more than £170 million annually on capex to build its ‘hub and spoke’ distribution network. That is a considerable investment and Argos’ achievements and failures serve as an example of the costs and difficulties in meeting consumer demands.
Sainsbury’s believes there is about £120 million of revenue and cost synergies in the potential tie-up. However, the idea of combining grocery shopping with Argos’ retail proposition is the real prize. The combined group would have a 25 million weekly footfall and a combined store estate of 840 Argos and 1200 Sainsbury’s stores, supported by the prized Argos infrastructure network. The Argos customer experience shows that Click & Collect (following chart) is becoming more prominent than home delivery. The combined group could be well placed to meet this shifting demand.
In one of the strongest consumer environments in the last 25 years, retailers have really struggled to deliver on profitability. The high street is clearly still relevant, with a large store network enabling customers to conveniently collect online shopping. It’s an idea that Amazon (and Alibaba in China) are even considering, as click & collect economics are much more profitable than delivery. The requirement for consistent upfront investment coupled with the increase in operating expense could lead to structurally lower margins across the industry. At the moment it appears consumers have got themselves a good deal.
 Global Retail and Consumer Goods CEO Survey: The Omni-Channel Fulfillment Imperative, PwC on behalf of JDA Software, December, 2014
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