Retail’s mojo is back - and online

After a torrid few years marked by bankruptcies, administrations and sliding sales, the retail sector has got its mojo back, writes Chris Johnston

The economic recovery has helped UK consumer confidence rise once again, sending retail sales volumes up by a dazzling 6.9 per cent in April, the highest year-on-year jump for almost a decade, according to the Office for National Statistics.

However, the more telling figure was the 13.3 per cent rise in the amount spent with online retailers compared with April last year. E-commerce is far from a new phenomenon, but with online now accounting for about £1 in every £5 spent on non-food items in the UK, every retailer, no matter what their size, needs a strategy for dealing with this structural change.

For general retailers with a large number of bricks-and-mortar stores, the rise of online is making it more difficult to maintain their profitability. That has resulted in unviable outlets being closed or relocated and fewer new stores opening as “showrooming” – consumers looking at merchandise in store and then ordering online – becomes common practice.

Yet the move to online continues to have unexpected consequences. As Clive Black, an analyst at Shore Capital, explains retailers, such as N Brown, the 140-year-old catalogue clothing company, is starting to open physical stores for the first time.

“The showrooms act as a halo and a draw for their web proposition,” says Mr Black. However, he adds: “The dominant process is retailers reducing the number of stores they open, and closing and downsizing existing outlets.”

Being able to research online, see and touch the product in-store, while also receiving expert advice, is hugely valuable

Neither are shoppers necessarily making a choice between physical and online retailers. Sebastian James, chief executive of Dixons Retail, owner of Currys and PC World, says more than 80 per cent of customers are using both online and stores to make their decisions.

“Being able to research online, see and touch the product in-store, while also receiving expert advice, is hugely valuable,” he says.

Technology may also help to blur the lines between physical and online as augmented-reality apps help shoppers to see if a shirt flatters their body or whether a new sofa complements their living room’s colour scheme.

Retailers either need to use their floor space to showcase their offer and present new products and ideas to consumers or focus on convenience, argues Patrick O’Brien, lead analyst at Verdict Research: “If you try to be somewhere in between, there will be a real difficulty,” he says.

Food retailers are facing the biggest challenges as the recession has fundamentally changed consumer behaviour, prompting them to reduce waste by making more frequent trips to supermarkets, shopping in a more disciplined way and embracing the keen prices offered by discounters, such as Aldi, Lidl and Poundland.

Mr Black says that last autumn each of the big four supermarket chains – Tesco, Sainsbury’s, Asda and Morrisons – all lost market share for the first time, which he calls “totally, utterly unchartered territory”.

At the same time, the big supermarkets are having to offer online shopping to customers at the same prices offered in stores, despite delivery costing far more than they are able to charge for it, while the drive to open more local and express outlets continues apace, even though they are less profitable than superstores.

As Mr Black puts it: “There really is a very broad squeeze on supermarkets at the moment – they aren’t yet benefitting from improved economic conditions.”

Where we go shopping has changed in recent years and will continue to do so as more shopping centres open with anything up to a quarter of their floor space given over to leisure activities, such as restaurants and cinemas.

While some high streets continue to suffer vacancy rates of close to 40 per cent, Mr Black believes that a new kind of individual butchers, bakers, delis and the like is emerging.

“As a nation of shopkeepers there’s already evidence that a new breed of entrepreneurs and innovators are starting to come through on the high street and make them more interesting – it’s the essential ingredient for their recovery,” he says. The government could help stimulate this trend by offering new small retail ventures relief on business rates and even rent support.

The most successful retailers appear to be those that have fought and won customer loyalty, be they John Lewis or a local fishmonger. Shoppers either want it as cheaply as possible or are willing to pay more for better quality and more attentive service.

Retailers that have survived the shakeout appear to have learnt the lessons of the recession, and tweaked their business models and store portfolios.

Mr O’Brien does not believe there will be another wave of business failures, if the economy continues to improve, but concludes on a note of caution. “The retailers left standing in many markets are healthy and have developed their multichannel offer,” he says. “Those who will find it difficult are the smaller retailers that don’t have the resources to put this kind of infrastructure in place.”