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Bids and deals won’t save the retailers – they’ll have to get radical
If traditional retailers are to stand any chance of surviving, they need to reach for the skies, says Matthew Lynn. Click and collect isn't going to cut it.
It's not just the stuff in the shops that seems to be permanently on sale right now. The shops are too. Every week there are fresh rumours of bids and deals among the big retailers. Sainsbury's is eyeing up Argos. Billionaire Mike Ashley has been building a stake in Debenhams. Even the once-mighty Tesco has been the subject of bid speculation.
It's no surprise. Traditional retail is in deep trouble, and companies often cope with structural change by consolidating. The hope is that, if they can cut costs and selling space, it might bring some sanity back to the market. As an added bonus, a merger usually makes comparing like-for-like sales very hard, and the accounts can be incomprehensible for years. That buys some time for the management in a very difficult market.
But the trouble is that mergers won't fix any of the underlying problems. What the major retailers really need is complete reinvention. A wave of bids and deals while lucrative for City bankers, lawyers and PR men will only get in the way of that.
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The simple fact is that, after a huge building boom in the 1990s and 2000s, which ringed every town with massive sheds, we have too much retail space. Margins were pushed too high British retailers were making fatter profits than US or European rivals. Competition grew as the likes of Zara, Gap, Aldi and Lidl hit the market. Business rates were pushed up and local councils squeezed motorists for cash with exorbitant parking charges. On top of all that, the internet came along, and we could all buy everything cheaper at Amazon or eBay.
Mergers don't fix any of those issues. They won't make Amazon go away nothing will do that and they won't cut taxes. At the margin, they may reduce space (but only if they involve store closures), and they may allow some costs to be cut, and so make prices more competitive. But the impact won't be huge and it is hard to see any of those benefits in Sainsbury's proposed acquisition of Home Retail Group, the owner of Argos.
What retail needs is leadership leaders with the vision radically to transform their businesses. Companies can reinvent themselves. IBM, for example, has done it several times (from making adding machines, to mainframe computers, to selling software services). It is not easy, but it is possible.
So what kind of changes should retail chiefs be looking at? If there is too much space, they need to use it more creatively. The UK desperately needs more housing, as well as more office space for the rapidly growing number of small businesses. Getting "change of use" permissions from local councils is always hard, but it would be a lot easier if the alternative is to board the shop up. They need to cut prices further, using cheap manufacturing and lower-cost distribution to offer more value to customers, instead of fattening their own margins.
Primark and Aldi can do it there is no reason why everyone else can't do it as well. They need to get creative about the web. They should forget about "click and collect" rescuing them there is no long-term money to be made in turning yourself into a slightly worse version of the Post Office. Instead, why not invest in drone fleets? One-hour delivery to your house of anything you order that would give Amazon Prime a run for its money.
Any of those strategies would be radical and different. They would be hard work, and involve some risk, but the alternative mergers, bids and deals also consume vast amounts of management time and energy. Next time a retailer proposes a big merger, shareholders should just tell them to forget it, and get on with fixing some of their real problems.
A tough Christmas on the high street
says Takahiro Hasegawa
Shares in video-games retailer Game Digital also plunged after it said that the arrival of a new generation of consoles was hurting margins and sales of older games. On the plus side, supermarkets Aldi and Lidl continued to expand their market share, while Morrisons did better than expected. And online sales grew 15% (compared to 1% growth across the retail sector), boosting internet retailers as well as John Lewis, which reported record festive sales.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
