- Where are we seeing opportunities in the retail sector?
- Why fashion retailers need to re-think business models
- Finding growth in a beleaguered sector
All business has to respond to change. For the retail sector it has to cope with annual changes in fashion and in northern Europe, the weather. Structural changes in shopping habits has moved some consumer activity from the high street, to out-of-town shopping centres but now digital disruption is creating a further challenge for the sector. Traditional store portfolios with large fixed costs associated with long leases on property, are no longer as attractive. The landscape is changing with competition from companies such as Amazon that have huge buying power, putting deflationary pressure on prices. Many traditional retailers are suffering and struggling to refine their business model to cope with these challenges in an overall weak environment and where fashion retail is barely growing.
As is often the case, challenges also present opportunities. The location of sales outlets remains an important selling point but now the location includes websites and social media. This has profound implications across businesses in areas ranging from stock control and supply chain logistics to branding and advertising. Many of the key elements of success – a clear identity with customers and a value proposition remain important but these now have to be fused with a digital offering and logistics to support distribution. For many, this means a radical change in the store portfolio, with fewer flagship stores and less small stores. The impulse purchase once made in store on the way home, can now be made as easily by flicking through the internet on a smartphone on the train home.
Several European businesses have taken advantage of these changes to boost their position and find new areas of growth. Inditex, a successful traditional retail company headquartered in Spain that offers affordable fashion, has adapted, while keeping several distinctive aspects. Unlike many that focus extensively on cost in the supply chain, Inditex has sacrificed some costs for proximity of supply and with that faster turnaround times to respond to fashion changes. This model results in fewer discounts, faster moving lines, as well as local store manager autonomy. It has extended this model to the internet and created synergies with the physical store portfolio in so far as it has incentivised staff and created collection options for customers. Having taken its time to plan and launch a digital offering, it can now reduce investment in physical stores and capital intensity while still driving top line growth.
Zalando is also a new challenger, based in Germany and created for the digital age. It grasped the importance of logistics and a scalable platform to create the network effect that is common with digital offerings. Zalando solely operates online and hosts others companies' products as it can deliver both products and the ‘shop window’ better than many established brands. According to Zalando, it can deliver goods to over 80% of Europe within two days. For a sector with little overall growth it is also growing sales in excess of 20% pa.
In a world of increasing digital disruption, we are seeing many companies adopt new technology and techniques to run their business and meet evolving customer demands. Companies will have to adapt to survive but this remains part of the life blood of a growing dynamic economy and presents multiple opportunities for bottom-up investors.