Online penetration of the UK retail market is now 18%, higher in many sectors and far higher than in most other developed markets. In non-foods, the figure is 25%. Fifteen years ago, online retailing barely existed. Today, retail on the web generates around GBP 60 billion in annual sales. Over this period, it has not attracted any genuine incremental spend but cannibalised revenues of physical stores and added costs along the way. Meanwhile, not only has physical space contracted, but it has expanded.
The key driver of massive structural change is chronic overcapacity. There are simply too many mouths to feed. The resulting pressures on trading economics have been magnified by Brexit and a UK consumer economy that is broadly flat. The majority of our retailers now have too many stores, which leasehold commitments make difficult to shut. So, we have static sales, rising costs and intensifying pressure on cash flows.
Many retailers are not in great shape to deal with the squeeze. Most leadership teams learned their trade in growth markets where you built new stores and business expanded. Today’s market is more about capturing business from the guy next door. The net result of this relentless pressure is growing the number of bankruptcies and restructurings that try to reshape the cost line but, all too often, fail to strengthen the sales line.
Trading pressure is impacting everyone but not to the same degree. Retailers like Aldi, Primark, B&M, Selfridges, Costco, Ted Baker, Home Bargains, Asos and Zara are all trading very well, even if each is having to run faster. They all are 100% clear who they target, and that knowledge defines everything they do. It sounds so simple and obvious, but it’s what most of the industry has lost sight of.
Our market restructuring will be long (three to five years) and very painful. The differences between winning and losing are not about online versus offline, or about having the latest tech wizardry. Engaging your core customer and avoiding diluting that engagement is critical.