“Turnover is vanity, profit is sanity” – retail’s oldest proverb

Written By:

Stephen Springham, Knight Frank

17 May 2019

5 minutes to read

Categories: Retail UK

• As anticipated due to the timing of Easter and the fact that the weather was glorious, retail sales figures for April were strong. The British Retail Consortium (BRC) reported that total sales were up year-on-year by 4.1% and like-for-likes were ahead by 3.7%. As ever, the BRC downplayed its own numbers by saying that they were somehow “below expectations”. The official retail sales numbers released by the ONS next week are likely to be stronger still.
• In the wake of the CMA blocking its proposed merger with Sainsbury’s, Asda reported mildly disappointing trading figures for Q1. Like-for-like sales fell 1.1% over the period, but adjusting to take into account the timing of Easter, sales grew marginally by 0.5%. The future of the business is still uncertain. Parent company Walmart has revealed that it is considering an IPO, although this may be a number of years in the offing.
• The usual mixed bag from Kingfisher, with the French side of the business negating an improving trend in the UK. Across the UK and Ireland, the business reported like-for-like growth in common currency of 3.4%, with Screwfix up 4.5% and B&Q ahead by 2.8%. With Wickes reporting a 10% increase in its Q1 like-for-like sales, the weather is clearly providing a strong boost to the DIY sector. Both operators are no doubt also benefiting from Homebase’s downsizing.

Stephen Springham, Head of Retail Research:

“Turnover is vanity, profit is sanity”. One of the oldest retailing proverbs still rings true today, albeit with some necessary qualification.

A rare thing this week, a balanced article in the press (the Financial Times) covering an illuminating piece of third-party retail research (from The Share Centre) on retailer profitability. The research shows that listed UK retailer profits have slumped by more than one third over the last 11 years, despite a 50% rise in sales. In terms of the hard numbers, sales rose from £125 billion in 2007 to over £190 billion last year. But pre-tax profits (excluding exceptional items such as asset impairments) fell from £6.5 billion to little more than £4 billion over the same period.

Hardly cheering statistics, but at least they reflect where the key pinchpoints in retail are – the bottom line, more than the top line. Better to address the root causes of retailer malaise than continue to peddle urban myths that consumers are reining in spending or to fall back on lazy generalisations that online is killing the high street. Above all else, The Share Centre research piece reinforces the fact that the UK retail market is undergoing fundamental structural change.

The statistics bear out a number of the ’10 Structural Failings’ we identify in our recent ‘Price of Change’ Retail Newsletter. Most tellingly, many retail costs have grown (and continue to grow) at a much faster rate than retail sales, putting downward pressure on profitability. Rather than undermine physical retail, the rise of online has actually been a growth opportunity for many store-based retailers. But the cost of transforming themselves into multi-channel operators has been a substantial one and one that often outweighs top line gains. Oversupply is also a key factor – if there is too much floorspace and too many operators chasing the consumer wallet, it is inevitable that something will have to give in margins and industry profitability will be undermined.

Of course, during the ‘good times’ in early to mid 2000s, many retailers turned a blind eye to the “turnover is vanity, profit is sanity” truism and embarked on overly-ambitious expansion programmes in the chase for sales and market share, while also acting with wanton neglect to their “ugly tail” of under-performing / loss making stores. A typical conversation with a retail property director back then would be “our store in xxx location does really well for us”. On pressing for quantification of “really well”, the response was a proud “£xxxx per week”. On pressing for quantification on profitability rather than sales, usually little more than a telling blank look.

Of course, times have changed. Retailers are now far more forensic in their store appraisal processes (better late than never) and the focus is now much more on profitability. And this is true of all their operations, not just their property-based ones.

But I said that “turnover is vanity, profit is sanity” required qualification and it certainly does. A bad or failing retailer will not become a good one by merely slashing costs. Cost reductions are worthless without a robust, growing top line. If this isn’t there, the need to cut costs becomes an eternal downwards spiral. A successful retailer needs a solid, mutually-supported top and bottom line – rather than a top line that has been flattered by a vain chase for sales or bottom line that is merely a reflection of over-zealous cost-cutting.

The Share Centre’s research also draws very different distinctions between the grocery and non-food sectors, suggesting that “the high street is around three years behind the food merchants in the process of adjusting to their new reality”. And this is a very valid point. Five years ago, the ‘Big Four’ grocers were in the absolute eye of the storm, watching the world they knew crumbling around them. They embarked on drastic self-help programmes and completely re-engineered themselves from the bottom up. Much of their focus was on the fundamentals of retailing – doing the basics well, reassessing what made them relevant and above all putting customers front and centre. Any complacency went well and truly out of the window.

Five years on, the ‘Big Four’ are in far better place than any of us would have imagined back then. The recovery is not complete and many of the competitive pressures remain just as intense, but they are at least partially on the road to redemption. Three years behind on this road, many high street retailers would do well to observe the remedial action undertaken by their grocery peers if they are to stage a similar revival.