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Retailers need a radical rethink
A bunch of merger deals might look good on paper, says Matthew Lynn. But it won't fix the cracks in Britain's retail sector.
Asda is reported to be weighing up a bid for B&M. Sainsbury's has taken over Argos. Tesco is buying Booker. And no doubt the files of investment bankers across the City are bulging with other potential mergers between the country's largest retail chains. As the industry slips into deeper and deeper trouble, the major chains are looking at combining to keep themselves afloat. But while a burst of mergers and acquisitions (M&As) might paper over the cracks, it's not a long-term fix. Worse, it may prove to be a distraction in the far harder, but more important task, of reinventing what a shop looks like for the 21st century.
No one knows whether Asda is serious about taking control of the discount B&M chain. If it does, it will add to a rush of deals in the sector that includes the takeovers of Argos, Booker, and the acquisition of Poundland by a South African retail group soon after it itself had acquired its rival 99p Store chain.
Sure, you can see what retailers are up to when they start looking around for M&As. It has been a brutal few years for retail. A ferocious pace of expansion, with out-of-town retail parks springing up next to every main road, has seen a massive increase in floor space. At the same time, online retailing has eaten into the market, real wages have stopped growing, and the government has relentlessly pushed up business rates (and councils have raised parking charges). This has turned into a serious problem, forcing lots of shops out of business.
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Mergers can help. If they reduce total floor space, then that makes what remains a bit more profitable. But this is only a short-term fix. Retailers need to reinvent themselves for a world where most shopping will be done over the internet. Here's how they can start.
First, they need to turn themselves into experiences. People can order just about anything they want over their phones, but they will always go out if there is something exciting to do. Clothes shops can experiment with fashion shows, bookshops with author events, electronics retailers with spaces where you can try out the latest technology, and food shops with cookery classes and wine tastings. There is no end of ways you can entertain people, and make some money at the same time. But it takes training and investment, and a different mindset from the pile-it-high-and-sell-it- cheap philosophy of most retailers.
Next, they need to move online themselves. Sure, plenty of retailers have thrown up their own websites and started offering click-and-collect services. But very few have so far used that as a platform to start developing new products and services. From personalised products, to home deliveries, or tailored clothes, smart retailers should be able to think of lots of new ways the web can create products you can't get elsewhere.
Finally, they need to diversify into services, such as recommending or fixing products. The Apple stores are the best example of this, with glitzy arrays of the latest kit, and armies of assistants plus they are a great experience as well.
Takeovers are just a distraction from getting on with that. They postpone the reckoning, when rising costs and shrinking sales finally overwhelm a retailer. True, in the short term they might make things better. Shareholders get a quick boost to the stock price. But in the medium term they will make them worse. Retailers will spend years trying to do deals, and integrate very different companies, when in reality they need to be thinking about how they turn themselves into something completely different.
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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.
