Death of the department store?
Strong(ish) retail sales figures for January from the ONS, disappointing Q3 figures from Asda and the future of Laura Ashley temporarily secured despite mounting losses.
8 minutes to read
• Amazing that retail sales figures that lack credibility have been interpreted as some sort of triumph by the media. Seasonally adjusted retail sales values grew by +2.2% in January year-on-year, with volumes (net of inflation) up +1.2%. The non-seasonally adjusted (i.e. actual, non-doctored) numbers saw even stronger growth (values +3.7%, volume +3.0%).
• In their questionable wisdom, the media majored on the month-on-month seasonally adjusted figures including fuel (when actually they should look at year-on-year non-seasonally adjusted excluding fuel). By some even more questionable fluke, these figures were positive (values +1.2%, volumes +0.9%). But these figures are simply not credible, implying as they do that we spent more in January that we did over Christmas and Black Friday combined. And store-based retailing (non-food +0.9%, food +0.7%) significantly out-performed online (+0.2%). Very suspect.
• Proving the old retail adage that bad numbers take longer to count, Asda reported disappointing sales for the Christmas period. For the last three months of the year (to 31 Dec). like-for-like sales (exc fuel) declined by -1.3%. Performance was held back by weak clothing demand, while the core food business was more stable. There was some evidence of customer trade up, with Extra Special sales growing by +5% over the quarter, while the online operation delivered double-digit growth of +10.3% year-on-year.
• The future of Laura Ashley hangs in the balance. The business posted a pre-tax loss of £4m for the 26 weeks to 31 Dec, against a loss of £1.5m for the corresponding period the previous year. Total sales fell -10.8% (-10.4% like-for-like) to £109.6m. Although it has secured a £20m loan facility from Wells Fargo and promoted Katharine Poulter to CEO with immediate effect, it faces an uncertain future. Ironic that many commentators are opining Laura Ashley dresses when the business has long de-emphasised fashion in favour of homewares.
Stephen Springham, Head of Retail Research:
Is the department store dead? A subject I have written about many times over the last 25+ years. The fact that I am still writing about it (and this is not an obituary) would seem to suggest otherwise, although the evidence for is admittedly very strong.
News emerged this week that no buyer has emerged for Beales and the remaining 11 stores are likely to close (following 12 earlier ones) and the business will sadly cease trading after 139 years. On top of the CVAs at both House of Fraser and Debenhams (and a fresh round of frantic landlord negotiations at the latter), coupled with ongoing under-performance at John Lewis, the UK department sector is hardly a picture of rude health.
But it would be premature to write the sector off outright and there are far too many generalisations doing the rounds. For a start, I would question the definition of department stores as a ‘sector’ at all, in my opinion they are a ‘channel of distribution’ and this is an important differentiation to make, rather just a nod to semantics. As I’ve said on many occasions before (usually in an online context), consumers shop brands, not channels.
Rather than all be lumped together, the various UK department store operators are actually very distinct business, with different areas of focus, market positionings and product mixes. Both Debenhams and HoF are fashion-focussed, the former majoring on mass-market own brands, the latter on 3rd party, largely upscale designer brands. Both dabble a bit in homewares, but health & beauty is the only product area where the two significantly overlap.
In my view, Debenhams especially is essentially a large floorplate fashion operator than a department store and in this respect, its closer peers would be Marks & Spencer, Next and even Primark. None of these three would necessarily be classified as a department store, but you could certainly make the case, especially in their larger stores. And maybe even include TK Maxx in the same context? If you expand the definition of department store to include these largely strong-performing operators (M&S the exception), the original exam question as to whether the department store is dead takes a far more nuanced context.
And, of course, not all recognised department store operators are struggling. Selfridges, Harrods, Harvey Nichols and Fortnum & Mason are all, by and large, continuing to trade very well. This obviously makes for an easy conclusion that the top end department stores are incubated from wider pressures facing their more mass-market peers.
This is over-simplistic. For a start, there are non-premium slightly under-the-radar department store operators that are still trading very well, Morleys being one such example (annual sales ca. £110m, pre-tax profit ca. £20m, operating margin ca. 6.8%). Their flagship (my local) Elys store in Wimbledon is a fine exponent of department store retailing and anyone that thinks department stores are dead would do well to visit (in marked contrast, the now closed Debenhams in nearby Centre Court makes for a very sad spectacle).
The common denominator between the likes of Selfridges, Elys and all the other department stores across the country that are flourishing (and there are probably more than we appreciate)? They are still relevant, have moved with the times, have strong brands and most crucially, have benefitted from ongoing investment programmes. High maintenance costs are a prerequisite for department store retailing, those that have embraced this and worked it into their business model are those that continue to prosper. Sadly, the likes of Debenhams and HoF have historically not been afforded this love and investment, hence why they are where they are now.
What of John Lewis? It is not in the same boat as Debenhams and HoF by any means, but it is definitely under-performing and in a degree of disarray internally. Over 50 senior managers left in the run up to Christmas and Managing Director Paula Nickolds, having only just assumed responsibility for both the department stores and Waitrose, departed post Christmas. Chair Sir Charlie Mayfield has also handed over the reins to Dame Sharon White, who despite considerable standing generally, has previously had little retail experience.
What has gone wrong at John Lewis? This is a very hard question to answer as so much is going on internally, effectively behind closed doors. It is very hard for outsiders to make any informed judgement. On the shop floors themselves, it is hard to discern that anything is fundamentally wrong at all.
My personal feeling is that John Lewis is simply trying too hard and has become too obsessed with Amazon. Rather than focus on what it does well and major on its own USPs, it is focussing too much on what its online pureplay competitor is doing. Its newer stores (e.g. Victoria Gate Leeds, Grand Central Birmingham and Westfield London) all present exceptionally well and include innovative digital, multi-channel and ‘experiential’ elements designed to embody the ‘store of the future’. But for all that, to my mind they lack the soul of many of the more established stores. The new stores may look great, but do they make enough money?
Other manifestations of being to obsessed with Amazon? Look no further than Black Friday. John Lewis was always going to get embroiled in Black Friday on account of its ‘Never Knowingly Undersold’ price promise. But to see it embrace Black Friday so whole-heartedly, a full week before the event itself is a great disappointment. I would advocate that John Lewis needs to review its price promise, but recognise the challenge of so doing – they can’t just renege on it overnight and appearing uncompetitive on price is a dangerous risk in an over-supplied retail market.
It doesn’t end there. At her initial address to the Partnership Council the other day, Dame Sharon White revealed that last year they had paid out £23m in goodwill to customers for “when we didn’t get it right first time”. This lays bare some of the complexities of successful multi-channel retailing and how much harder it is to walk the walk than it is to talk the talk.
John Lewis’ multi-channel credentials are far from flawless. On an anecdotal note, one click & collect order I personally made last year was not fulfilled to the correct location on two occasions. I was generously recompensed with two gift vouchers, with a combined value higher than the product itself. Recognising the importance of the customer is, of course, laudable - but it doesn’t make money. And if there is pressure on profitability, this creates other vicious circles. The Partnership Bonus will come under renewed pressure or even disappear altogether – a huge downside risk to staff motivation and maintenance of high standards of in-store customer service.
Very difficult to answer the question as to what has gone wrong specifically at John Lewis, but much to ponder.
But are department stores dead? We will inevitably see a reduced number of department stores across the country and this footprint contraction is already taking place. But at the other end of the spectrum, many will survive and continue to prosper. Fewer, but better ones. A direct parallel to the high street generally. Less space, but better space.