Retailers enter the age of hyper-diversification

Facing an increasingly uncertain future, British retailers are branching out, providing services ranging from rental homes and renewable energy to weddings and workouts. Are these extreme brand extensions a stretch too far?

Even before the pandemic accelerated the ecommerce revolution, many UK retailers were transforming their high-street stores into venues offering services and enhanced customer experiences as well as goods, seeking a level of engagement that could never be achieved over a smartphone.

This trend has strengthened since the Covid trading restrictions were eased, as the sector faces new challenges that have driven some players to rethink their business models entirely and, in some cases, venture boldly into uncharted territory. 

For instance, the John Lewis Partnership surprised many observers by announcing a move into residential property development. In June, it revealed plans to build on top of two of its Waitrose supermarkets in Greater London and convert a vacant warehouse in Reading into homes. These developments will form part of the UK’s burgeoning build-to-rent market. The partnership’s stated aim is to “raise standards in rental property, through our role as developer and our commitment to manage the buildings”.

In August last year, Ikea announced that it would be selling renewable energy to domestic consumers, starting in Sweden. Ingka Group, which controls most Ikea stores globally, will buy solar- and wind-generated electricity on the Nord Pool power exchange and sell it on to customers without a surcharge.

Selfridges, which opened a cinema at its Oxford Street branch in 2019, has recently obtained a wedding licence, so that customers can go there to do more than simply buy an outfit for the big day. Packages range from the modest “Just the two of us” option through to the “All-out extraordinary wedding”, which includes a make-up appointment with the store’s beauty concierge and hair styling at its Daniel Galvin salon. The couple can make their vows at its wedding lounge before heading to a private room at the Brasserie of Light for a three-course meal with 20 guests. 

“Retailers occupy the envious position of having direct contact and engagement with the consumer. In many cases, they can become a trusted partner,” says Rhiannon Thomas, partner and MD at the Kearney consultancy. “What’s interesting about the latest shifts is that retailers are looking to meet an end-to-end consumer need, rather than merely offering services adjacent to their retail lines.” 

In John Lewis’s case, it’s about providing “all the services to create the best home for you, including the building. This is similar to Nike offering you all the services to motivate you to run,” she says.

Given that such developments represent a radical form of brand extension, they need to sit well with the retailer’s existing offerings. Ikea uses solar panels to generate much of the energy required by its stores, for instance, and it sells these products widely in Continental Europe and Australia. The firm’s move into supplying renewable electricity therefore seems a logical and appropriate next step. 

In the late 1980s, Next came close to collapse after it diversified too quickly into non-core activities

Similarly, it’s not too much of a stretch to understand why chocolate retailer Hotel Chocolat might have chosen to build a hotel on its cacao plantation on the Caribbean island of St Lucia. 

Other brand extensions might appear more tangential at first sight, but they still make sense. For instance, menswear retailer Flannels has opened a fitness studio on the fifth floor of its flagship store in Liverpool for customers whose interest in their appearance extends beyond their wardrobe.

John Lewis certainly sees no incongruity in its move into the build-to-let market. 

“Delivering new rental homes is a natural extension of our heritage. It’s what drives us as a business,” says Chris Harris, the partnership’s director of property, who points to John Lewis’s expertise in providing products such as white goods and furniture along with services such as home styling, contents insurance and tax-efficient individual savings accounts, which many people use to build a deposit for a home. 

“Most crucially, it allows us to play to our strengths of being a purpose-led, reputable brand with high quality standards. We believe that these core values apply as much to letting homes as they do to retail.”

A retailer offering financial services is nothing new, of course. Sainsbury’s Bank started life in 1997 as a joint venture between the supermarket chain and Bank of Scotland, for instance, before the former took full ownership in 2014. But there has been a fresh influx into this sector in recent years with the growth of embedded finance – integrated services that enable customers to pay for their goods seamlessly. UK brands expect to generate £230bn from these services over the next five years, according to estimates by embedded finance provider OpenPayd.

The idea of a retailer that offers everything is a concept that dates back to the heyday of the department store in the late 1800s and early 1900s. Today, Amazon is following in this tradition. Having transformed from a bookseller to a general retailer, the etail behemoth is using its considerable heft to enter sectors ranging from commercial insurance to medical care.

Such diversification is not without its risks, notes Professor Adrian Palmer, head of marketing and reputation at Henley Business School. 

“Management time may become focused on a large number of peripheral problem businesses, diverting attention away from the core enterprise,” he says. “If the company is struggling in its main market when other players are succeeding, the question must be asked whether it has the management talent to cope in sectors that are less familiar to it.”

Palmer points out that a rapid and poorly focused expansion would put a strain on any company, however well resourced. “In the late 1980s, for example, Next came close to collapse after it diversified too quickly into non-core activities, including travel services and wallpaper manufacturing.” 

Buffeted by problems such as high inflation, staff shortages and disrupted supply chains, retailers are taking a risk and doing some impressively innovative thinking to refresh and, in some cases, reinvent themselves. But, as ever, it’s largely down to the consumer to decide whether their bold gambits will prove successful or not.