The retail note - 4 August 2017
Stephen Springham, Head of Retail Research, breaks down the latest sector headlines.
4 minutes to read
- Asda’s under-performance was laid bare in its filed accounts for the year ended 31 December 2016. Revenue fell by 3.2% to £21.7bn. Like-for-like sales were down 5.7% in an overall grocery market that grew by 1.5%. In addition to implied market share losses, operating profit slumped by 19.2% to £845.3 million. For further comment, read below.
- Better than expected Q2 figures from Next, albeit boosted by the weather. The business reported a -2.1% decrease in sales for the period to the 29 July 2017. The drop in sales was fuelled by a decline in markdown sales of -14%, as the retailer went into the end of season summer sale in July 2017 with 5% less stock than the previous year. Full price and Directory sales both increased., by +0.7% and +11.4% respectively.
- A week after it was linked as possible takeover target for Asda, B&M has itself acquired the convenience store chain Heron Food Group for £152 million. B&M will acquire all of Heron’s 251 stores, predominantly in the North of the country. B&M are hoping to expand Heron’s store portfolio by opening 10 to 20 new stores per year and will no doubt develop a convenience offering within B&M outlets.
Stephen Springham, Head of Retail Research:
Few commentators would draw parallels between two of the main retail headlines of the past week - American Eagle’s decision to quit the UK and Asda’s shocking FY results. The two are in no way linked, but both bear telling testament to the UK retail market as a whole – brutally competitive and less forgiving than perhaps any other in the world.
Re. American Eagle, I can hardly put it better than one of my former retail mentors, Richard Hyman, in an interview with Retail Week. On asked where it had it gone wrong for many international retailers opening in the UK, his refreshingly blunt response was “by coming here in the first place”. American Eagle is just the latest example of a US retailer under-estimating the challenges of the UK retail market. The number of overseas operators that have come to the UK with a gung-ho attitude, only to depart with a whimper a few years later is both long and likely to grow.
To be fair, the track record of UK operators Stateside is equally poor. Tesco, Sainsbury’s, Marks & Spencer and Dixons are just four leading UK names that have tried and failed to build a sustainable business in the US.
The fact remains that internationalisation in retail is notoriously difficult. It is seldom the golden ticket it promises to be and very few retailers can succeed overseas without drastically realigning their domestic model to meet the demands of each and every international market they operate in. At the same time, from a property perspective, new blood is always welcome and we have a vested interest in welcoming new entrants from overseas and helping them succeed. But this may require considerable homework and education and expectations need to be managed accordingly.
Moving onto Asda, the Leeds-based supermarket is, of course, owned by Walmart, the world’s largest retailer, with operations across 28 markets internationally. Asda is by no means a small fish in Walmart’s huge pond – the UK is actually Walmart’s second largest market after the US and one of its most profitable. But recent performance at Asda has obviously been desperately disappointing.
It is nevertheless slightly bemusing to hear many commentators refer to Asda as Walmart’s “problem child”. Having devoted nearly three years of a past life almost exclusively to analysing and consulting on Walmart’s US and International operations, I would venture with some authority that Asda is in fact Walmart’s best business, certainly within the International portfolio. Asda is light years ahead of most of Walmart’s other International businesses in virtually every retailing discipline, be that own-brand development, General Merchandise proposition (eg George) or e-commerce.
The paradox of a “best in class” business being regarded as a “problem child” again harks back to the underlying strength (and, indeed, strength in depth) of the UK retail market. Asda may be trailing its UK peers in terms of performance, but it would potentially sweep the floor if it transported to a less-competitive country.
The UK is arguably the most competitive retail market globally. There is no room for complacency and “just being good is no longer good enough” (Richard Hyman again). But this puts most media narrative on the UK retail market into perspective – perhaps what they always label as “beleaguered” is actually a “best in class global powerhouse”? Just a thought.