By Mark McMenemy, Head of UK Retail at professional services firm Alvarez & Marsal -
Tough times for retailers
It is hardly breaking news that retailers are going through a tough time at the moment. The cost of occupying space such as rent, rates and utilities, has soared in recent years whilst sales have struggled to keep up. Online shopping is a rapidly maturing channel, offering consumers both convenience and price advantages over traditional stores. Inflation is having a severe impact on household spending, as well as driving up the cost of the petrol needed to travel to shops. It’s not surprising that many retailers are feeling the pressure.
Single brand advantages
Single brands are, in many ways, better positioned to deal with economic downturns than retailers. Retailers thrive on volume and, during good economic times, utilise operational leverage to great advantage. By maximising space efficiency, they can earn huge rewards from an upwardly mobile variable top line but fixed-cost base. The opposite of course is true in difficult times and this is where brands have an advantage. They enjoy a higher level of flexibility as they do not have retailers’ three-to-five-year commitment to bricks and mortar, fixtures and fittings, and equally, none of the related fixed costs and overheads. Instead, single brands can position themselves alongside multi-category retailers – avoiding the commitment and costs of state-of-the-art points of sale, merchandising and buying and logistics processes and systems.
This means they can be more flexible in targeting a particular segment or customer base, and more streamlined in terms of their sales channels. A single category retailer will inevitably be undercut by the hypermarkets, but brands which sell their products within carefully chosen multi-category retailers can usually retain more control of their identity and, crucially, their inventory. Instead of having to bow to pressure to fill the space of a single category retail outlet, brands can develop smaller ranges, limiting their inventory exposure. Furthermore, brands have greater scope to obtain rapid feedback before a season on acceptability of range and price and so can limit manufacturing to match demand. Retailers usually do not have this luxury, are obliged to take higher risks with quantity and are often forced to suffer the consequences in markdowns.
Importantly in this time of austerity, single brands have greater potential to occupy a distinct and lasting place in people’s minds. Retailers on the other hand run a higher risk of failing in periods of economic uncertainty and often do not have a core brand identity to fall back on. Brands’ identities also provide the advantage of allowing them to distinguish themselves through advertising.
Brands in the retail space could be in trouble
In tough times, retailers will only stock the strongest brands and will be reluctant to ‘trial’ new initiatives. Frequently, brands do not always feel that retailers do their products justice in terms of space allocation or prominence of positioning. They may seek greater control over the brand and any extension to it into sub-brands or new categories. Whatever the reason, some brands conclude that they would be better placed to develop their own retail offer and consequently open dedicated stores, moving from brand development and distribution into retailing. However, the skills required are very different and the consequences of getting it wrong can be fatal to a brand. Some single brands which have followed this route are now struggling to overcome the challenges that the retail sector faces in these troubled times.
So what should single brands in this position do? Encouragingly, there are a number of options. Finding a partner who is selling complimentary but not competing products to share the space can create a new level of interest, increase footfall, and greatly reduce the burden of fixed costs and overheads as well as the pressure to fill the space. Indeed, the concept of sharing space is becoming increasingly common on the high street, even within traditional retailers. Secondly, finding new sales channels is an effective way for brands to regain greater control over who they sell to; for example, upmarket chocolate brands might consider building partnerships with coffee shops, hotels and airlines. Thirdly, if store downsizing is an option, this is clearly preferable to continuing to develop product ranges that are too broad, and which will inevitably result in excessive markdowns. More fundamentally, these markdowns could eventually damage the brand. If none of these options are realistic, another possibility is to look towards franchise operators. Both in the UK and particularly abroad there are sophisticated franchise operations covering multiple brands which can use their size to drive economies of scale for back-of-house activities, logistics, field operations teams, property and, of course, financial muscle. A brand with strong consumer recognition but with an ailing retail arm may be a very attractive add-on for a franchise operator.
It is a clearly a difficult time for brands and retailers alike. But while in good times retailers’ strong top line growth will have a multiplier effect on the bottom line, they are more exposed when the economy is in reverse. Brands are by definition more flexible if they choose wisely to remain a brand and don’t get caught up in the retail pressure cooker. For those that do, these survival techniques may prove useful. But right now, if you are a good brand you should ‘stick to your knitting’ - it’s easier to be a single brand than a retailer.
Note: The views expressed here are those of Mark McMenemy and do not necessarily represent the views of Retail Gazette.