No doubt many investors in Game Group, the computer games retailer that went into administration in March (although its shops have since been bought by investment firm OpCapita), will consider themselves unlucky. Game depends on exactly the sort of discretionary spending consumers tend to cut when incomes are squeezed. And it is hardly the first retailer to fall victim to the economic malaise – the collapse of Woolworths in December 2008 presaged a string of similar failures.
However, those at Game who believe their travails can be blamed on circumstances beyond their control are indulging in wishful thinking. The truth is this is a company with an outdated business model. It failed to recognise the challenge from new entrants to its market.
As is so often the case, Warren Buffett has the best description of the predicament in which Game now finds itself. ‘It’s only when the tide goes out that you find out who has been swimming naked,’ he so famously said. Game’s failing business model wasn’t exposed until the economy began to stutter – with no recovery in sight, the company has been caught with its trunks down.
Nor, sad to say, is it the only skinny dipper. The high street sector is littered with examples of companies in a race to adapt before the realities of modern retailing catch up with them.
Take HMV. It’s over a decade since Apple launched iTunes and the iPod and yet the company has failed to come up with any sort of credible response to digital downloads. Ill-thought-out moves into accessories, live music and technology haven’t paid off. Now it too is struggling to survive.
What neither Game nor HMV seemed to recognise, at least until it was too late, was that the launch of internet-based rivals, as well as the incursion of the supermarket giants into their territory, represented more than just another competitive threat. Rather, these were trends of such power that the traditional retail model – a network of stores on high streets the length and breadth of the land – was no longer viable in the two retailers’ particular niches.
Denial is a common theme in the retail business. Look at Thorntons, the chocolate retailer that has in the past two years issued five separate profits warnings. All the familiar excuses were there, from tough trading conditions to competition from supermarkets. One downgrade was blamed on cold weather while another resulted from it being too hot.
During that whole period, Thorntons’ management never seems to have asked whether its business model was outdated in a world where supermarkets’ confectionary ranges are ever wider and where new entrants such as Hotel Chocolat have stolen the classy end of the market.
It’s always someone else’s fault. But if the retail sector’s woes are really just a product of the business cycle, why is business booming in parts of the high street? And why are retailers from other parts of the world still making a beeline for British high streets? Victoria’s Secret and Forever 21 are just the latest blue chip US retailers to enter the UK market.
It’s not just at the luxury end of the market where success is to be found. At John Lewis, for example, or Supergroup, or even Next, the tills are still ringing – generally because customers have been given new reasons or opportunities to spend their money.
Indeed, even in austerity Britain you’ll find that for every loser, there’s also a winner – and not always in the obvious places. Next is a good example. Sales in its stores have been flat in recent years, but the business launched its mail-order Directory arm in 1988, before many people had even heard of the internet. With decades of experience in non-store sales, distribution and logistics, the retailer’s online business is booming.
Or take the decidedly unsexy DIY market. In one corner, Homebase continues to disappoint. In the other, sales and profits are rising at B&Q. No prizes for guessing which of the two has spent the past four years doing everything from in-store DIY demonstrations to making YouTube videos for amateurs in need of direction – working out why customers are actually in the shop, in other words, rather than simply trying to sell them product.
Retail doesn’t have to be a straight fight between online and in-store. Piers Fawkes, president of consumer trends agency PSFK, says the retailers that will succeed are those that work out how to harness new technology.
‘Everywhere will be a store, everything will be available to buy and everyone will be involved in the sale,’ he says. ‘With the technology available to us, I can snap a picture on my camera phone of a friend’s shoes and get them shipped for arrival when I wake the next day.’
Not everyone is convinced the high street can be saved – even with the help of the former Harvey Nichols window dresser Mary Portas, who these days juggles her own retail consultancy with television work and advising the government on how to prevent more shop closures.
‘Sad as it is, the British high street is on borrowed time – Mary Portas is no Mary Poppins,’ argues John Ibbotson of the retail consultant Retail Vision. ‘Strong retail sales will return, but when they do come back it will be through the online channel.’
Richard Perks, retail director of market research giant Mintel, also warns the retail trade is running out of time. ‘No one owes a retailer a living,’ he says. ‘No one owes a high street a living. Consumers go to where they are best served – and that is as true of retailers as it is of high streets.’
There is no secret formula – other than a recognition that the status quo is not an option unless retailers want to go the way of Woolworths. Exciting developments in retail span everything from John Lewis’s continuing obsession with customer service to the Ocado app that lets you search for your entire shopping list in one go.
Helen Dickinson, head of retail at KPMG, believes the fact that some retailers are thriving despite the economic headwinds, demonstrates that the sector’s prospects are better than one might think.
‘There are retailers out there who deliver what the customer wants and needs – in terms of product, brand and price – which proves that if the proposition is spot on, it is still possible to outperform the market and the competition,’ she says. Equally, as Game and others are discovering, the price for failing to deliver is higher than ever.
Winners and losers in the increasingly bloody retail wars
The flotation of the online grocer last year was handled badly and the business’s reputation has taken a hit. But Ocado remains ahead of rivals on service – and its technology is impressive. If it overcomes problems at new distribution facilities, it can build sustainable profits.
The biggest name in online fashion retail, ASOS started out trying to source clothing worn by celebrities for ordinary punters. Now it’s an international trendsetter in its own right, with sales set to break through £1 billion by 2015, as its slick online platform continues to strengthen.
A good example of a traditional business reinventing itself: WHSmith’s high street stores are suffering the same pressures as others but its travel business is a stellar performer. Outlets in train stations and airports face little competition and enjoy a captive market.
JJB nearly collapsed last year and chairman Mike McTighe says it will take five years to turn the business around. That looks optimistic: although it has now revamped some of its stores, JJB is getting hammered by rival Sports Direct. And it has no answer to online rivals.
Once a priority destination for parents and parents-to-be, Mothercare has stood still for too long. Sales are falling in the UK because it is no longer perceived as a go-to destination for advice on buying for children, leaving it vulnerable to internet-based competition.
Home Retail Group
While Homebase is pedestrian, Home Retail Group’s other asset, Argos, is in real strife. Sales at the catalogue/store hybrid have been diving for more than a year in the face of competition from everyone from Amazon to Tesco. Expect a serious store closure programme.