- The cost of living crisis is still creating challenges for retailers – but there are reasons to be optimistic.
- Post-pandemic access to physical retail has driven consumer appetite, and the big industry players are reconfiguring their store portfolios to optimise their physical presence.
- The RTT questioned the viability of the online-only retail model, suggesting that most retailers would succeed by refining their omni-channel offering.
After years of speculation that online retail would cannibalise bricks-and-mortar stores, the high street is making a comeback – driven by the cost of living crisis, and a post-Covid appetite for real-life experiences.
The retail sector is emerging from a turbulent winter – characterised by its own high costs, rising interest rates, strikes in other sectors, and inflation hitting consumer spending power.
Even with the government’s support packages for households, including the energy price cap, retailers have seen volumes dwindle and profitability dented as households focus on buying essentials and trading down from more expensive lines.
At the first quarterly meeting of the KPMG/Ipsos Retail Think Tank (RTT) this year, members agreed that the road ahead was likely to be rocky in Q2 – however, going into the summer months, there are reasons to be optimistic.
They suggested the sector is potentially reaching an inflection point with inflation set to slow as energy prices stabilise, while the historically low unemployment rate and fast wage growth should bolster consumer confidence.
This is expected to provide a boost for retailers with physical stores, who have long had to watch their market share being taken by online-only players with no costs related to physical stores and overall lower cost of capital benefitting customer acquisition.
Now the tide is turning, as pent-up demand for in-person experiences after the pandemic is driving people to shops and leisure attractions. Meanwhile, value retailers, who often don’t have unprofitable online channels to service, are benefitting from more cost-conscious consumers opting to shop with them.
But the RTT stressed that retailers will still need to significantly invest in technology to refine their omni-channel offer – delivering not only exceptional experiences for shoppers but also driving down the cost to serve, especially while high levels of inflation continue.
Grocers, in particular, are taking a hit on margins as they absorb the cost of rising food prices and increase promotional offers to retain market share. The risk is that high food inflation could dampen overall consumer demand elsewhere in the wider retail sector.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ, said: “The economic challenges haven’t gone away and even when inflation slows, food and energy will still cost significantly more than two years ago which means shoppers will remain cautious about what they are spending. Food inflation is going to be the wild card for Q2 as it is not easy to call the peak and, if it remains higher for longer, it might impact the non-food and hospitality sectors as many households will still struggle to balance the books “
The buffer of savings some consumers built up during the Covid lockdowns has been eaten away by inflation, both in terms of its value due to rising inflation and because they’ve had to dip into them.
Explaining more, Ruth Gregory, Deputy Chief UK Economist, Capital Economics, said: “If we are right in thinking that pandemic savings are now less powerful, households will no longer be as able to use those savings to support spending, so real consumer spending may evolve more in line with real household disposable income.”
The performance of the sector is reflected in the RTT’s Retail Health Index (RHI), which dropped one point in Q1 2023, as rising costs continued to hit profitability.
However, all signs suggest the summer months will bring improvements as inflation continues to ease, employment remains high and retailers receive a boost from spending during the Coronation Bank Holiday.
Re-emergence of physical stores
It would be easy to think the cost of living crisis would push consumers seeking out rock bottom prices even further online – but that doesn’t seem to be the case. In fact, it seems that the market is rebalancing after the pandemic.
The RTT agreed that retailers with only a physical presence, particularly the discounters, were currently at an advantage compared to those having to subsidise unprofitable online channels.
Paul Martin, UK Head of Retail, KPMG, said: “If we go back to August 2019, we saw online growth dip to below 10%. Now, we’re in the same place again, albeit the market has grown by 50% overall. We’re seeing equilibrium in the sector, with online penetration lower than predicted during Covid. In fact, online penetration for non-food sales has dropped every month in Q1 of 2023. When compared year-on-year – non-food online penetration has fallen from 40.7% in March 2022, to 38.4% this year.”
The RTT also suggested that physical stores were more appealing to budget-conscious shoppers. Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd, said: “The big conundrum is how far the cost of living crisis has stimulated the return to store shopping, with the most hard-pressed consumers finding it easier to control their spending and check for price promotions in-store, rather than online.”
While the barrier to entry might still be lower for online-only retailers, they’re currently grappling with growing warehousing costs, including a rise in business rates, competition from ecommerce giants, and consumers who want a change from non-stop digitisation.
James Sawley agreed that the balance was tipping back towards physical retailers: “Some of the big winners are the discount stores who’ve achieved growth without being able to transact online. The pure-play ecommerce model has become increasingly challenging following the collapse of some big names. They have high supply chain and marketing costs, and it’s often a race to the bottom on pricing.”
At the same time, the RTT pointed out that while ecommerce brands are being acquired by physical retailers, investors are also eyeing up city centres, looking to transform existing spaces into a mix of retail and leisure attractions.
Jonathan De Mello, Founder & CEO, JDM Retail Consulting LLP, said: “Online retail has become too much of a crowded space in the post-Covid world, which has sparked a sea-change in physical retail. Big names in the physical retail world are snapping up online brands, and sometimes investing in entire shopping centres. There’s demand for former department stores, office and residential buildings, which can be repurposed as entertainment emporiums with shops and leisure attractions, like cinemas and mini golf. Online retailers, on the other hand, are not only fighting for spend from physical and other online stores, they’re also seeing their costs rise due to the hike in business rates on warehousing space. While online pure-plays will pay much higher business rates, physical retailers will benefit from lower rates across many locations.”
Members of the RTT were in agreement that the improving fortunes of the high street is being driven in part by a continued shift in consumer behaviours after Covid lockdowns forced shoppers online.
James Sawley, Head of Retail & Leisure, HSBC UK, said: “Humans are inherently analogue and there is some pushback on the increasing digitisation of our lives. My bet is that younger people who lived through the lockdowns will want to go shopping.”
This return to a more social customer experience represents a major opportunity for retailers which are prepared to invest in their physical presence.
Martin Hayward, Founder – Hayward Strategy and Futures, added: “The recent focus on online sales has been an own-goal for physical estates and now that consumers are starting to reassert their needs, there is a huge opportunity for investment in stores, inventory and staff.”
Perfecting omni-channel experiences
Even if shoppers flock to the high street, the RTT believes that the appetite for convenience driven by technology won’t go away. While it might not be cost-effective for the discounters to start investing in online channels, most other retailers will need to refine their omni-channel models so they can serve customers better at every interaction.
Maureen Hinton, independent retail analyst, said: “We are social beings and, post-Covid, there is a big opportunity for physical retailers to win more customers. However, this does not mean online is finished – the pandemic converted many agnostics to the channel and boosted online in sectors such as furniture where penetration was low. It’s about getting the balance right and offering the convenience of the omnichannel experience that consumers now expect. The challenge is how to do this profitably.”
Moreover, consumers are becoming less concerned about what channel they use but how well it meets their needs at the time.
Joe Marshall, Managing Director, Customer Experience and Channel Performance, Ipsos Retail Performance said: “The line between online and offline is blurring. Customers want to pick the channel that best meets their needs – it’s become very fluid. For omni-channel retailers who get it right, the future is positive. It’s more challenging for those who’re fixed to one channel.”
In the grocery sector, members agreed that retailers would need to strike the balance between offering different ways to shop and building customer loyalty. Mike Watkins said: “As consumers seek out different ways to shop for groceries, the challenge for the big supermarkets is to retain the loyalty of shoppers’ spend at their stores and limit the loss of sales to other store-based retailers. Whilst at the same time, maximising the longer-term growth opportunities in omni-channel and multi-mission retailing which are being driven by demographic and lifestyle changes.”
Members discussed whether retailers could subsidise less profitable channels in order to deliver an omni-channel experience. They concluded that it was possible – but only if it was underpinned by digital transformation across the whole business.
Paul Martin commented: “Whereas the big ecommerce platforms can prop up multiple channels, other retailers have to be smarter in order to avoid a race to the bottom. They can still subsidise different channels – but they have to fundamentally change the cost structure of the business and use more automation across the supply chain, including last mile. It’s interesting to see Switzerland discussing the option of nationalising last mile delivery due to there being too many delivery vehicles on smaller roads which could it make it more efficient. Geolocation analysis needs to be more accurate too so retailers can see exactly which channels will deliver the best ROI.”
Members agreed that digital transformation is still siloed in different departments – and horizontal transformation across the business is needed to ensure that each one works seamlessly together.
Miya Knights, Director, Zendu Contracting Services Ltd and Publisher, Retail Technology Magazine, added: “Margin optimisation and omni-channel are the key areas that retailers will need to concentrate on. At the moment, they don’t have the data to orchestrate their strategy successfully. They need to have the right technology to understand customer preferences, location, warehouses – with their systems identifying the most profitable segments and locations. They also need to be able to see that opening a store could generate, say, three times more sales volume compared to online.”
The RTT believes that stores can have a ‘halo effect’ by delivering value beyond the sales generated in store, as long as they’re located in the right areas. Consumers haven’t lost their love of technology, but they may use it in a different way. Using store mode on apps, for instance, is a way to deliver seamless in-store experiences, so people are less tempted to use their mobile to compare prices or make purchases with competitors online.
Miya Knights said: “The UK is one of the most voracious online shopping nations in the world and how consumers use apps in physical stores is important. Many of them will use their phone to pay, and retailers could encourage certain behaviours with a store mode on their app. Whatever channel consumers choose, retailers need to give them the confidence that they are buying the right thing first time, in order to drive sales and reduce returns.”
Members of the RTT are quietly confident that the health of the retail sector will improve towards the end of Q2 and continue on an upward trajectory over the summer months. Retailers and investors recognise the appetite for in-person experiences and are developing new destinations, tipping the balance away from online retail.
The extent to which retailers invest in different channels will depend on their model. There’s still room for online-only retailers, particularly niche ones, while some of the most successful discounters have avoided, or removed, home delivery completely. Most retailers, however, will tread a middle ground with an omni-channel offer, using technology to drive behaviours in-store rather than pushing people to make purchases online.
What’s clear is that digital transformation across every part of the business will be critical to realising this omni-channel ambition and competing with ecommerce giants. Consumers might be looking for in-person experiences but that alone won’t drive success.
Retailers must therefore be data-driven in their decision-making. With good-quality analytics, they’ll be able to see which channels are the most and least profitable; where cost-savings could be made and whether it’s worth subsiding less profitable channels. Moreover, every store opening must pull in consumers with the promise that they can interact with a brand via whatever channel best meets their needs at the time.
The stage is now set for retailers to strike back against their pure-play rivals as the summer months draw people out of hibernation. In an ever-changing sector, they’ll need to act quickly – maximising their data to identify emerging opportunities and refining their omni-channel models to improve customer experiences.
PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members
Paul Martin, UK Head of Retail – KPMG
During the Pandemic Online Sales experienced a substantial acceleration going from 18% to 35-40% penetration across all categories. (Insert Source KPMG analysis). The levels of online penetration we saw in March 2022 have since dropped significantly and today stand at approximately 28% of all sales. It is worth remembering though that this number is still 50% higher than before the Covid 19 Pandemic.
According to the BRC-KPMG monthly Retail Sales Monitor for March 2023 Online Non-Food sales decreased by 2.1% in March, against a decline of 29.0% in March 2022. This is above the 3-month average decline of 3.0% and above the 12-month decline of 5.2%. (Source BRC-KPMG RSM March 2023)
Online growth rates have fallen back to the same levels we experienced during the summer months of 2019 when for the first time in a decade we had seen these reduce to single-digit growth figures and this is likely set to continue for the next years to come with a forecast of 35-38% overall penetration by 2030 (Source KPMG analysis). This will of course vary heavily by category with online ratios being significantly higher in various non-food categories like apparel, footwear and technology in comparison to food.
This does not mean the online channel will not be an important route to market, equally highlighting that the physical store will remain the most prominent channel for years to come. This does highlight even further though that a hybrid approach of physical and online channels seamlessly integrated has to be the way forward in comparison to a single channel approach. This fact is increasingly demonstrating the importance of an omnichannel approach being the winning business model of the next decade.
The overall decline in online sales and projection of lower future growth rates is resulting in a series of key themes
- Profitability: It is no secret that delivering a profitable return for the online channel is often challenging and this has further increased during the current economic macro-environment. We have already seen a wide array of profit downgrades, warnings and business failures for online pure-players and it is likely that this trend will continue for the foreseeable future. For many omni-channel operators their online channel is weighing down on overall profitability
- Cost & efficiency focus: Therefore many retailers are focussing on reducing costs and driving efficiencies across their value chain. This is also leading to the removal of various previously seen as sacrosanct customer benefits like free deliveries and free returns.
- Omni-channel consumer insights: Tracking consumer behaviours across channels is becoming increasingly important although a single view of customer and product remains a topic many retail businesses have not achieved yet. Getting this right is critical for retailers going forward and should influence demand forecasting, stock allocation principles alongside pricing and promotion strategies (which should become increasingly channel and location focussed) to just name some of the deployment areas.
- Store openings: are back on the radar for many retailers although how businesses go about this should be profoundly different than during the days of the space race in the noughties. The sector still remains over- spaced in some categories, in others especially for value-based retail concepts there is opportunity for further store openings. Using next generation geo-location analysis methodologies should be deployed to determine the right locations for openings, refurbishment cycles and closures.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
Online retailers have had a bad press of late and in the case of those who had the gall to float on the stockmarket in 2021, on the back of their pandemic lockdown-inspired success in 2020, many of the criticisms are well justified.
The share price of the much-hyped THG fell by over 80% in 2022, whilst the likes of Asos, Boohoo and Moonpig all suffered share price falls of 70%-80% last year.
But, according to the BRC-KPMG Retail Sales survey, overall Online penetration was still a chunky 38.4% of all Non- Food sales in March (and including mighty Amazon the UK Online market would be even bigger), so it would be wrong to be too dismissive, despite the rush back to Store shopping.
March was another month where stores outperformed Online in terms of sales growth, but the BRC-KPMG survey highlighted that the gap between the two is narrowing with every passing month.
And, funnily enough, to prove the point that stockmarket investors look ahead, rather than dwell on the past, many Online retailer share prices have bounced back sharply this year: as of the end of April 14th Boohoo and THG were both about 50% up, whilst Asos was nearly 40% up and AO was about 45% up. And the US private equity approach to THG announced on April 17th has given Online share prices a further boost…
Whether the recovery hopes for “pure play” Online Non-Food retailers prove to be justified when it comes to Christmas trading remains to be seen, but it may that the factors depressing Online sales around the end of last year were mostly short-term in nature, aggravating the inevitable dip that followed when consumers (armed with confidence in the Covid-vaccines) were able to enjoy the novelty of shopping in stores again, post-lockdown.
The postal strikes before Christmas certainly reduced consumer trust in those Online retailers who relied on the Post Office for deliveries, but that disruption seems to be behind us now, thankfully. And although some Online retailers have had to introduce charges for returns, even the most fanatical Online fast fashion consumers must have realised that free returns were never going to last for ever.
A bigger conundrum is how far the cost-of-living crisis has stimulated the return to store shopping, with the most hard-pressed consumers finding it easier to control their spending and check for price promotions in-store, rather than Online.
The underlying attraction of Online shopping, in terms of the convenience of timely home delivery, certainly haven’t gone away but the pressure on many consumers to tighten their belts may explain why Online Grocery shopping has lost its attraction and the Ocado share price is a shadow of its former self: having fallen over 60% in 2022, the Ocado share price has not joined in the rally in Online Non-Food retailers in 2023 and has fallen further.
There is a good reason, of course, why discount retailers like Aldi and Lidl (as well as Primark and B&M) have not got involved in Online shopping and that is that they don’t see how they can make money out of it…so the Ocado business model is still unproven.
While the debate goes on whether the recent dip in Online shopping sales growth is structural or cyclical, one thing that is clear is that the multi-channel approach adopted by the big supermarkets and the big fashion chains (ie of being there for the consumer, whichever way they want to shop, instore or Online) has been vindicated.
Yes, stores are taking back spend, but the decline in online sales growth does not predict the demise of online retailing; what is happening is a post COVID rebalancing of consumer spending and the maturing of the online channel. That said, being an online specialist is not a comfortable place to be currently.
During COVID online came into its own because it was our major access to purchasing, but humans are sociable beings – we do not like being isolated, permanently housebound, we want to interact with the physical world. Hence our
return to physical stores, and the bounce back in spend – arguably more by default than the actions of physical retailers.
Meanwhile, online is up against strong comparatives. The online share of retail sales was peaking in the high 30%s during the pandemic, but as the online and physical channels re-balance, the internet share has fallen back – in Feb 2023 it had a 25.2% total share. That said it is still ahead of its Feb 2019 share of 18.3%.
Being up against both strong comparatives, and the re-establishment of physical shopping, online will underperform physical stores for the majority of 2023. However, COVID has converted many online agnostics to the channel. These consumers have discovered the benefits of the channel in terms of convenience and choice – especially useful at peak times such as Q4/Christmas (as highlighted in orange in the chart above).
COVID also attracted consumers to less mature online channels, such as the home related sectors. These two factors will speed up sector penetration over the next five years as GlobalData forecasts in the chart below (dotted lines are pre-COVID forecasts, solid lines post COVID).
Each sector will eventually settle at its own peak online penetration level and it will be up to retailers to establish the right balance between physical and digital shopping. The winners will be those that conquer the omnichannel model. The key factor in getting the balance right and driving market share gains is understanding what consumers want from the physical world as well as the digital. This is a factor behind Walmart taking on Amazon so successfully – its credentials in, and understanding of physical retail. Amazon meanwhile is struggling to build a successful physical, and eventual omnichannel, retail presence. In the UK Next is a good example of successfully managing to balance online and offline retail and be profitable.
In the future, being an online pureplay can be a real weakness as consumers navigate towards those retailers that offer a combination of channels and the flexibility and choice this model delivers.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ
Many structural changes in food retailing accelerated over the last 3 years and one of the most dramatic, is that online sales now account for 11% of all fcmg sales up from 8% at the end of 2019. NielsenIQ (NIQ) expect this share to remain at this level as the emergence of omnichannel shopping is one of the lasting legacies of the change of behaviour that happened as a result of the pandemic. Shoppers are now more agnostic about where they shop with price, convenience, and range more important than which channel.
The shift of grocery spend to online was happening anyway, led by the digitally native Gen Z cohort and the changing lifestyles of the rest of the population. So the question is really not that stores (i.e. superstores, supermarkets, discounters, and convenience) are striking back, but how much of the 89% share of wallet will bricks and mortar retain over the next 3 years.
Strategically the larger superstores are facing a pincer movement: some of the weekly grocery shopping is shifting to Aldi and Lidl (amplified by the current cost of living squeeze) and some of the large trolley shop spend is being cannibalised by their online business. There is also an underlying trend to shop little and more often which benefits smaller stores including Convenience stores.
However, Tesco for example say that online now accounts 13% of sales and it’s likely that this can be profitably maintained by the further use of store fulfilment and click and collect. However across the industry, the growth of grocery Home Delivery is less clear as this addressable market is probably 75% saturated and online orders are currently 10% smaller than last year. So pure play online retailers will need to attract more shoppers, as well as encourage existing shoppers to shop more often and spend more. Which adds more costs than those incurred by stores where it’s easier to transition shoppers to a cost effective online model.
Even so, the future is probably bright for online food retailing as a whole as over 1 in 4 households continue to shop online for groceries every 4 weeks (NIQ Homescan) and this is not significantly lower than at the end of the pandemic. This suggests online should retain around 11% share of fmcg sales and could even increase to 13% over the next 3 years. To do this would require more click and collect, maybe some new entrants and a bigger uplift from rapid delivery (including from the hospitality channel) which presently is less than 10% of the overall online grocery market (NIQ Fox Intelligence).
As consumers seek out different ways to shop for groceries, the challenge for the big supermarkets is retain the loyalty of shoppers` spend at their stores and limit the loss of sales to other store-based retailers. Whilst at the same time, maximising the longer term growth opportunities in omnichannel and multi mission retailing which are being driven by demographic and life style changes.
James Sawley, Head of Retail & Leisure, HSBC UK
From a Bankers perspective, online retail is having a tough time right now. Astonishingly, after all the talk during lockdown times of an irreversible shift from stores to online, consumers have seemingly voted with their feet and online shopping penetration has, largely, returned to pre-covid rates. Online pure-play is a key area where we as a Lender are seeing distress, this is driven by several factors. Firstly, for some, the normalisation of demand has been faster and more material than expected, which when combined with over-optimistic forecasting from management, has led to a stock overhang and the resulting stress on cash flow. We have seen this trend most notable in retail categories which had the largest benefits from covid, such as cycling and outdoor furniture. Secondly, the post pandemic trading environment has exposed the fragility of the cost model for the pure-players. Elements of the business model have become more expensive and less reliable, such as the dependency on couriers (as we saw at Christmas with the Royal Mail), warehousing and logistics, the reliance on (very few) social media and search engine platforms to drive traffic, and the cost and availability of seasonal warehouse staff. This year, DCs will see their Business Rates increase significantly. The third factor is I believe the key reason why we are seeing a number of online retailers struggle and fail, that of competition. The level of investment which ecommerce attracted through covid, and the theoretical infinite level of potential competition, means the online marketplace is not only slowing/shrinking, but the competition is overwhelmingly fierce. Take fast fashion as an example, the dominance of boohoo, Zalando and ASOS in the West drove the emergence of the likes of Shein to invest heavily in customer acquisition and supply chain, taking market share. Online consumers are fickle in nature, loyalty is science fiction.
Meanwhile on planet real world, operators and landlords have been fighting back to drag consumers off their sofas and back to physical shopping locations. We are after all, flesh and blood. We possess an innate need to interact with the physical world. Landlords and some local councils have been busy curating shopping locations which are both multi-purpose and awe-inspiring, encompassing the perfect blend of retail, hospitality, and experiences. As a lender we believe that multichannel retail is the optimal model, one that appeals to every shopping mission and consumer preference, but one that also mitigates the cyclical nature of the market, enabling brands to divert investment to the various channels depending on the prevailing cost environment (rent, rates, online marketing, labour etc). Retail is a very tough industry, diversification, agility and scale are key to survival and prosperity.
Martin Hayward, Founder – Hayward Strategy and Futures
One of my favourite pieces of advice to retailers gripped with excitement by the latest technological innovation that they are sure will change their fortunes is one of caution….
“Always remember that in a digital world, consumers remain resolutely analogue”
From retail executives, there has been an exaggerated excitement over the last few years about the potential for consumers to be served remotely, in a supposedly low cost and efficient fashion.
Of course, there are many instances where an online direct to customer channel is hugely useful and of great consumer benefit. Think back to the birth of mail order catalogues from Sears et al in the USA where customers in remote areas were able to order from a full inventory of products that they had no hope of finding in their rural stores.
Many executives have extrapolated this real need into an assumption that in today’s world, even if they have access to a store, consumers should be encouraged to shop online because it’s more convenient and efficient.
For many though, the dream hasn’t quite worked that way. Home delivery remains uneconomic for many retailers, the costs of transport, packaging and returns out-weighing the benefits. Add to that a looming debate about the environmental and ethical impacts of individual items being chauffeured to homes in an endless stream of vans and it all looks a bit less appealing.
The recent focus on on-line sales has also been an own-goal for the physical estate.
Relentlessly pushing customers towards the on-line channel at the expense of in-store stock has been a massive own- goal for John Lewis in particular. As Mary Portas said in her recent open letter to John Lewis management:
“At a time when we crave the constancy and comfort of brands we can actually trust, you’ve been chasing the new. But here’s the thing: that’s not what we really want from John Lewis. And here’s the other thing: that’s not what younger generations want from you either.”
Why would anyone wish a world upon their customers or children where all interactions are remote, where all purchases are delivered to home and there is no need to venture out of the house?
If your life is reduced to “Alexa, send pizza” then it may be time to think again. (Investors in Deliveroo and Just Eat are already being forced to question whether this is the golden ticket they thought it was).
Which brings us back to analogue humans.
We are social animals. Efficiency is not what we need as we all find ourselves towards the top of Maslow’s hierarchy of needs in our advanced economy.
We need interaction, inspiration, excitement, smells, tastes and noise.
This is even more true as we escape the clutches of lockdowns that deprived so many of the fundamentals of a social existence.
So, it is no wonder that shops sales are rising at the expense of on-line, but it isn’t generally down to the efforts of the industry, but more that consumers are beginning to reassert their needs. Imagine how much further retail can be re- invigorated if management actually focus on improving the in-store experience.
The time is ripe for re-investment in stores, inventory and staff.
All that is now needed is for retail executives to also get over the patronising virtue signalling in their missions and advertising (Again John Lewis management seem to be more obsessed with ‘diversity and inclusion’ than running their stores – this disconnect is also underlined by the recent redraft of their mission statement from ‘the happiness of all our members, through their worthwhile, satisfying employment in a successful business’ to a rather delusional ‘working in partnership for a happier world’) and start to connect with their customers rather than trying to lecture them.
Jonathan De Mello, Founder & CEO, JDM Retail Ltd
Physical stores have seen a resurgence of late – having been hit hard by COVID, which led to a wholesale move to online across a wide range of retail categories. Whilst online retail as a % of all retail spend remains slightly above pre- COVID levels, the online space as a whole has become very crowded indeed. Moreover, retailers with traditionally physical portfolios raised their online game considerably as a result of COVID. This increased competition – coupled with falling demand for online sales – has led to poor performance of late among several major online players, and financial issues/administrations in the case of Made.com, Missguided, In the Style and more. The significant recent performance disparity between physical/omnichannel retailers and online pure-plays is highlighted in the table below, which summarises reported year on year growth in Christmas sales in 2022.
Whilst various warehousing and postal strikes certainly exacerbated matters, In the Style, AO, Boohoo, ASOS and others performed very poorly over Christmas 2022. Given the table below depicts value not volume growth in sales, from a volume perspective the picture for these businesses was even more dire. This, together with significantly increased costs throughout the supply chain and large inventories of unsold product (as many over-ordered given rapidly escalating demand during COVID) creates a very uncertain picture for some of the worst performing pure-plays in the near to medium term.
With the exception of WH Smith – whose high performance over Christmas is largely down to the recent travel boom we have experienced – the majority of physical/omnichannel retailers posting very strong results (ie: volume as well as value growth) were those with relatively unique propositions/positioning. This includes the likes of Fortnum & Mason, Fat Face, Aldi, Lidl, Primark, White Stuff and Seasalt. It is notable also that the only online pureplay to post strong Christmas trading results was Sosandar, who are also positioned slightly differently to many of their online fashion peers. In today’s ultra-competitive UK retail sector, a clear point of difference is key.
In the context of the future for online retailers, it is hard to ignore the machinations of Frasers Group and Next over the past couple of years. As well as acquiring brands in the physical space, they have also recently snapped up a range of distressed online pure-plays – as the graphic below illustrates. As other online retailers struggle this year, it is very likely Frasers Group and Next will act again. Both are also investing heavily in their physical store footprints – taking increasingly larger stores to provide a physical and highly curated home for the many brands they now own.
Finally, as if to add insult to injury for online pure-plays, business rates changes have now kicked in from this month. The rateable value of DC’s/warehousing has increased significantly since the last revaluation – well beyond the upward cap of 30%. This is essentially a ‘stealth’ online tax, given physical retailers will benefit from considerably lower business rates across many trading locations – whilst online retailers will pay much higher rates on their warehousing. It is unfortunate timing for them, and – in light of reduced demand for their products – we could well see a major online pure play fail over the course of this year/into 2024.
Miya Knights – Director, Zendu Contracting Services Ltd
Digital-first retail players are paying the price for assuming a pandemic-fuelled growth trajectory that was always unsustainable once stores fully reopened.
They wanted to believe 20% year-on-year online growth would last. But, now that COVID-19 is moving into an endemic phase, the latest retail sales figures suggest those days are long behind us. That doesn’t mean, however, the influence of online will diminish too.
Even though stores are striking back from a sales perspective, retailers ignore the impact of digital on all of their sales at their peril. Especially given current economic conditions, the search, browse and discovery phases of the shopping journey all still take place online.
Regardless of the target customer’s spend or mission, the influence of online should not be underestimated. Here, consumers today largely fall into three groups: at one end, the outgoings of some households are outstripping income, forcing them to borrow.
So, while UK household debt is soaring, spending caution is proportional to how quickly those in the middle are burning through pandemic-accrued savings. High income households unaffected by rising costs are still fuelling luxury, travel and hospitality demand.
Yet, each group is shopping online almost as much as during lockdowns. Some are browsing, while many are comparing. The difference today is that, compared to three years ago, only those more cash rich and time poor are converting and buying.
The rest are either shopping around for deals or buying, albeit fewer, discretionary items online. Here, high volume, low-value sectors such as grocery are bearing the brunt of the impact of slowing online growth. Just look at Ocado, whose annual losses are ballooning.
Although LMVH recently reported “softer demand” for fashion and leather goods, forecasts are that the luxury sector is proving more resilient now than after the 2008 financial crash. Yet, online is proving just as important to the channel mix for grocery as it is for luxury.
Recent data, from app marketing specialist ConsultMyApp and analytics service provider Applyzer, found the volume of people searching for the Tesco Clubcard App increased 815% over the last 12 months. The Asda Rewards app has seen a 709% increase in searches.
Consumers turn online when searching for the best deals, as well as before making large, discretionary purchases. But, thanks to the no or low-touch impact of the pandemic in stores, they are also more willing to get online while out shopping, using their mobiles and apps.
A recent global consumer survey found 78% of consumers regularly use retailers’ mobile apps, and that they are increasingly using them in-store to streamline their shopping journeys or seek out special offers or deals.
It also revealed that 74% of respondents are likely to use the brand’s app when shopping at its physical storefronts. Sixty-four percent of UK consumers said they use their mobile in-store to make contactless payments, while 61% use mobile scan-and-go apps.
The beauty of embracing online in-store is the omnichannel view it affords the retailer. Consider Zara’s “store mode”. The favourite click-and-collect stores can help the fashion retailer optimise store location, stock replenishment and inventory management.
This can also help rightsize store staffing, to cope with traffic peaks caused by fulfilling online orders, not to mention with visibility of known customer activity in-store. Stores may well be striking back. But how many store sales originated online? If you don’t know, don’t write off online. Ask yourself: “Does my app need a store mode?”