Wednesday, May 24, 2017

Do secondary revenues help or hinder retailers?

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A recent study revealed that an increasing number of retailers were turning to alternative sources of revenue to make ends meet.

Two in three retailers are investing in secondary revenue streams, according to the BRC and Webloyalty study Beyond the Core. This number is rising as pressure seemingly continues to mount from every avenue.

Earlier this week, the National Minimum Wage rose to £7.50 per hour. Just weeks before this, the Financial Times revealed that nearly 4000 retail jobs had already been lost due to the pay rise. One major retailer told the publication: “Automation that used to be too expensive is now cheaper than the people it can replace.”

Furthermore, recent business rates reforms were introduced last month, branded by the British Independent Retailers Association as coming “at the worst possible time” as it means many retailers will have tax bills that overtake their rent.

“The risk of diverting too much management attention, resources and capital towards other ventures threatens performance on the core business.”

It’s easy to understand why retailers are choosing to branch out in the current economic climate, but the associate director of retail consultancy firm Newton, Nick Huismans, said retailers were doing this long before recent cost burdens.

“A number of retailers have tried to secure secondary income, experimenting with everything from financial services — such as Tesco, Sainsbury’s and M&S — to hospitality, such as Tesco’s acquisition of Giraffe and its development of the Harris and Hoole coffee shop,” he stated.

“Unfortunately for Tesco these hospitality trials didn’t quite pay off and both have since been sold off. Tesco has also tried a number of other offers, including a video on demand service — Blinkbox, now sold — and consumer data expert Dunnhumby.”


READ MORE: More retailers turn to secondary revenues to boost profits


Big retailers like Tesco are more likely to be the ones cashing in on these revenue streams. 22 per cent of retailers with a turnover of more then £1 million gain 20 per cent or more from secondary sources, compared to just eight per cent for those making less.

For companies with such vast revenues and even larger estates, this represents a significant sum of money.

As consumer confidence declines and shoppers start spending, the retail sector could see a significant change in the way they operate.

“The space race, a trend in retail for at least three decades, has largely ended in the UK.”

Huismans believes this is unlikely, as retailers will be reluctant to divert too much attention when times are tough.

“Large retailers are facing huge competition in their sector and the risk of diverting too much management attention, resources and capital towards other ventures threatens performance on the core business,” he said.

“Ultimately, retailing margins are now much tighter and competition is fierce. Lower consumer loyalty to one brand and shop, cost pressures on wages and products, growing low-margin channels such as online and convenience are all eroding profitability for the big retailers.

“We believe the likelihood of the big retailers putting large resources into developing new income streams in this environment is low, certainly until the core threats of the here and now are properly addressed.”


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