Thursday, August 18, 2022

Do secondary revenues help or hinder retailers?

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.”

READ MORE:  Retail profit margins to drop by 5% this year: study

Webloyalty’s UK managing director Guy Chiswick said this trend has been seen before: “These measures are similar to the methods airlines implemented in the early 2000‘s, when their sector was in a similar predicament.”

However, there is evidence to suggest this process occurs only when companies have the means to experiment.

Huismans added: “There has been a historical trend of experimenting with other services during periods of large growth, the 1980s to 2010 predominantly.

“In our view, retailers have already tried secondary incomes and moved away from them. The lure of other markets with margins that strengthen the business has been strong in the past – it always will be if you‘re succeeding and growing in a low margin sector and have the cash to invest into higher margin sectors.

“However, the risk of neglecting core markets (where the large majority of money is made) is too big to push significantly in this space in the near future.

“There is one big exception to this though – retailers across the board have woken up to the fact that they have purchased and developed more space than is required for the UK consumer

“The space race, a trend in retail for at least three decades, has largely ended in the UK. Now we are seeing a big trend of sub-letting space of their existing stores.

“There are examples of this everywhere: Asda are sub-letting space to McDonalds, Sainsbury‘s are sub-letting to Timpsons, Bupa, Thomas Cook and Starbucks. Tesco are sub-letting space to Costa, Decathlon, Sports Direct, and are in conversations with many other brands.”

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