Retail Apocalypse - Q1 bad, Q2 better?

UK High Street Retail is facing one of its toughest battles.

There are retailers putting up a fight (Moss Bros & Kingfisher) – and unfortunately some 2018 casualties (Maplin & Toys R Us). It is expected that 2018 will be the worst year for store closures since 2008 – with New Look, Mothercare, House of Fraser, M&S, Carphone Warehouse & Carpetright looking to reorganise their battalions.

In the last decade the online share of the retail market has doubled to 18%. However, in Q1 2018 rising business rates, low consumer confidence and reduced footfall have caused comparisons to the US Retail Apocalypse.

 

What happened in Q1?

  1. Output – according to ONS output grew just 0.1% in Q1
  2. Beast from the East – extreme weather was one of the contributing factors to footfall decline. The Office for National Statistic (ONS) claimed the impact of weather on the economy ‘was limited’ whereas the Bank of England (BoE) believes it was 'largely weather related.' Go figure.
  3. Service Industries - grew by 0.3 per cent quarter-on-quarter, overall performance was pulled down by falls in the consumer-facing areas of retail, food and beverage services.
  4. GFK Consumer Confidence – in March this was at -9 (27 months without a positive score)

 

How is Q2 shaping up?

  1. Bank of England – bullish about underlying GDP growth of 0.4% a quarter
  2. ONS – despite a 1.6% retail sales increase in April – very cautious on the rest of 2018
  3. Footfall – April/May decline of 4.8% was an ‘unprecedented decline’ according to the British Retail Consortium
  4. Consumer Confidence – rose 2 points to -7Consumers are optimistic about personal finances but not about the economic situation

 

In short – nobody really knows what will happen but there is one key reason to be positive – regular pay growth in Q1 (2.9%) is comfortably above inflation. The BoE feel that spending and growth is just around the corner.

Imagining yourself sitting in a Toys R Us board meeting in 2008. It’s easy in hindsight to think about what should have been pushed to the top of the to-do list. Investment in the front and back end of e-commerce? Investment in data & analytics technology and talent? Investment in diversification?

But what about the retailers of today? For simplicity let’s consider them as online & offline.

 

Online Retail

The UK is the third largest global market for e-commerce and lead globally in e-commerce as a percentage of sales. The crucial battleground over the next 5-10 years will be how major brands and retailers chose to take on Amazon (among others) by investing heavily in direct-to-consumer. Chose not to and they risk becoming peripheral to a point where they can’t fight back. Despite the e-commerce revenue growth, the global e-commerce conversion is 3%. Amazon will be doing much better than this. To improve conversion - investment in emerging AI businesses (such as Sentient Technologies) could be a smart decision.

Thinking about the back-end of e-commerce, Alex Schlagman of SaveTheHighStreet spoke over the weekend on BBC about the need for Private & Public Sector to work more closely together. He is taking on a big challenge but a refreshingly positive voice in the industry and a champion for the smaller retailers.

 

Offline Retail

One thing that all retailers will be sweating about will be the knock-on effect of store closures. Decisions on key locations could have a major impact.

In the longer-term, retailers will need to understand and act upon new data sets to gain competitive advantage. E-commerce players have a slight advantage – access to daily market performance data (through GFK for example) is straightforward. This provides them an understanding of their performance vs the market and therefore agility in adjusting pricing and product selection accordingly. 

The offline world is not quite so simple. Market performance data is harder to access and there is a lag issue. This leads to more head scratching and too much retrospection. Even more of an issue – as I outlined earlier – sometimes this data contradicts. 

 

So on a day to day basis a retailer may know their sales are down but they probably don’t know:

  • What the market is doing?
  • Whether they have a brand problem?
  • Or a pricing problem?
  • Or a footfall problem?
  • Or a competitor problem?

 

Not knowing this when the competition does feels like a pretty serious issue. Perhaps serious enough to become the next casualty.

 

Using Location Data to out-think the competition

Working out where consumers are and whether they are walking into your store or a the competitor next door is half the battle. It doesn’t guarantee that the customer will make a purchase but it’s a strong indicator of performance.

We are excited to announce our partnership with Location Sciences. This allows us to access location data for a significant percentage of UK consumers. At an aggregated level – we can see where people shop, whether they are loyal to one retailer and what they do if they are nearby but not shopping.

We think this type of relationship represents the future of consulting. Helping retailers with an external lens of what is really happening on the High Street and serving daily insights to them is a game-changer.

Our data & analytics division can combine this location data with data from our clients – i.e. sales, customer segmentation, marketing, staff patterns, weather, promotional. There are many possibilities:

 

  1. You are a Private Equity firm – you use the location data to understand footfall trends which helps you to decide which sites to open, close or expand
  2. You are a Casino – you use the data to understand footfall share on an hour by hour basis to work out exactly when you are winning or losing customers against the competition. You also look at dwell time in your casinos vs the competition
  3. You are a High Street Coffee chain – you use the data to work out your performance vs the competition at crucial times of the day and decide whether this changes your opening hours and food strategy
  4. You are a Kitchen supplier – you use the data to measure online to offline attribution – how effective you are in converting new customers from your website into the store
  5. You are in a Strategy/Planning department – you use location trend data over the last 12 months to understand how key competitor events/promotions affect your performance. You can also look at important times of the day to understand what other leisure activities your customers are participating in
  6. You are a Fashion Retailer – you use location data to work out customer overlap over a 3-month period. For example, which competitors you share customers with over the Christmas period

 

Location data is not a silver bullet but it can certainly help retailers pinpoint the problems they have and then begin to address them. It also provides an external baseline for a good or bad day. It will become even more powerful when combined with transaction data so share of footfall can be compared with share of wallet. We believe that it will lead to more informed decision making and empower retailers to act rather than remaining in Retail No-man's land.