By Jim Shaw, Founder and Partner at Shaw & Co
The impact of COVID-19 is going to be long felt. It will bring about changes to the way that we go about our day-to-day lives and how we interact with the world around us. However, in some respects COVID-19 has acted merely as an accelerator, shining a lens on areas of our economy that were already reaching the end of their useful economic life.
One of these areas is retail. Retail, and my argument focuses on this activity in its purest form, is increasingly less relevant in our technologically enabled economy. The function of a retailer no longer adds value to the customer or the manufacturer, and as is the way with efficient markets, the market will make this known in the most ruthless of ways. Retailers are fighting a losing battle and their demise is, in my view, inevitable.
My evidence? BHS, House of Fraser, Go Outdoors, Oak Furniture Land, DW Sports, Bonmarché Debenhams, Arcadia…. The list goes on and will lengthen apace.
Management teams of failed enterprises in this sector repeatedly cite issues with rents, rates and other structural baggage, or the well-trodden excuse of failing to adapt to online shopping trends as their customers migrate from physical to digital shopping.
However, those who have yet escaped the jaws of insolvency – attributing their success to a ‘growing online’ presence – miss the point. An online retailer is as endangered as a physical retailer in the new ecosystem. Any such ‘success’ by retailers to capture this new online traffic is simply a temporary reprieve. Does this extend to the almighty Amazon? Yes, it certainly does and I am sure Jeff Bezos knows it. Without fundamentally changing their value proposition, the inevitable remains. Retail is dead, offline and online.
To frame my argument, it is worth considering why retailers developed in the first place, and then why that purpose has now evaporated or at the very least, is evaporating.
Retailers, and specifically retailers of scale, developed in response to mass production manufacturing techniques of the first industrial revolution. No longer did the manufacturer make products in its back room four days a week and sell on its own stall on market day. It needed greater reach to get its vast quantity of products to its customers. And, in the same way its production processes had been broken down into repeatable and specialist subprocesses, so was the distribution model. The retailer was born.
They offered access to vast numbers of customers, distribution of stock nationwide making goods readily available, marketing, sales support and customer service to name but a few. In the eye of the customer the retailer represented the face of the brands, the trusted interface and gave a customer the confidence to purchase the products of otherwise faceless manufacturers. So successful were some of these retailers, they became ‘brands’ in their own right.
For this service and highly important part of the value chain, both manufacturer and customer were happy to see the retailer take on average a 50% margin. Into this grew the costs of prime retail space thus benchmarking the value of a square foot on the high streets of our towns and cities.
Today, each and every function traditionally provided by a retailer is under threat from technology. There is a changing business landscape of fulfilment centres, delivery networks and auxiliary business services each making it easier and easier to get product from manufacturer to customer.
Technology is bringing the manufacturer and the customer closer together every single day. The retailer will become squeezed with customer and manufacturer reapportioning the retailer’s margin between them. The technologies threatening retail are both new and old, but their combination is now finally presenting a real risk. It is beyond doubt that technology will continue to build a greater and greater headwind for retailers for whom it is only going to get harder to justify their existence.
Today, the landscape has shifted dramatically as search algorithms develop websites with deep specific product content coming to the fore. A broad-based retailer simply can’t use domain authority to fool increasingly intelligent algorithms. The manufacturer who sees this opportunity can develop its websites that are so rich in proprietary content that a retailer can no longer demand the top spot on a search result.
Furthermore, once that manufacturer has the attention of the customer, it has the opportunity to price at a level that will beat any retailer. One click on a website powered by a provider like Shopify, with payment processed through something as easy as Apple Pay, and a fulfilment arrangement with someone with global reach like DHL, 24 hours later the product is in the customer’s hands, nationwide – if not further. The manufacturer can now access 68 million people in the UK directly. The retailer didn’t even get a look in.
What about discovery and the important role a retailer has in introducing new products to its customers? Again, new technologies assisting online discovery make this value proposition increasingly obsolete. Online marketing based on IP addresses, search history, recommendation engines, social media and social influencers are all taking on this role. The retailer is again left behind.
What about customer service? When you do not physically meet the customer, this is as easily done from the manufacturer’s call centre as it is the retailer’s. In fact, in the arena of complex high value goods, the retailer is not equipped to give the specialist support needed.
And what of the desire to experience the high street? The high street has to change, there is no doubt millions of people will return to the national pastime of ‘shopping’ but shopping will change in its nature and will become focused on experience, and not moving volumes of goods.
But none of this is new – we are just 4 to 5 years ahead of where we might have been without COVID-19.
Are retailers in all areas equally at risk? No, I’d admit there is a continuum. My argument still falls down in places. Those most at risk are selling branded higher value products or specialist products and those at least risk are smaller value retailers like supermarkets. The customer looking to make a purchase of a single high value item will more readily hunt out the manufacturer. Clothing, well that sits in the middle with customers more likely attracted to a brand rather than a specific item. But in time, retailers will feel the forces of digital disruption and the ecosystem evolving alongside it.
About Jim Shaw
Jim founded Shaw & Co around his kitchen table in 2011. Since then his business has formed one of the largest specialist advisory teams in the South West. Jim has a deep expertise in mergers and acquisitions and advises clients across multiple sectors on complex M&A transactions. He has completed more than 70 M&A deals with a combined transaction value exceeding £0.5bn. He is a Fellow of the Institute of Chartered Accountants and has received several awards and industry recognition including South West Young Deal Maker of the Year in 2013 and nomination for South West Deal Maker of the Year in 2018. He is also listed as one the regions’ 42 entrepreneurs under 42 to watch.
About Shaw & Co
Shaw & Co is a boutique corporate finance advisory firm that helps SME business owners across the UK on funding, growing and exiting their business. The Bristol based firm was founded by Jim Shaw in 2011 and has one of the largest advisory teams in the South West. Shaw & Co have led some notable recent deals including the sale of Pukka Herbs to Unilever, the purchase of VoucherCloud from Vodafone and the sale of Nanopharm to Aptar Group Inc.