Online Retail in 2020: Traditional Retail’s Obsession With Growth Over Profit Will Be Its Doom

A gloomy outlook

The past 18 months in retail have been tough. Not that it wasn’t tough before, but to some, there doesn’t seem to be any light at the end of the tunnel. And, as more established High Street brands go to the wall, it feels like no-one has a viable plan to stop the rot.

Slow car crashes like the inevitable demise of Mothercare feel like they have been a decade in the making. Indeed, I have spoken myself in interviews and articles about the opportunity within that niche retail sector which would be the saviour or death of the brand. Somehow, Mothercare never seemed to quite get the balance of stores and online right to offer a truly omnichannel experience to their customers. Given the possibilities the brand could provide of following a new family through the formative years of their life, supporting them digitally at every milestone, it’s frustrating and sad in equal measure. Although Mothercare shouldn’t feel solely responsible, Toys R Us similarly failed to embrace the same opportunity.

Grow, grow, grow!

A simple search of news feeds today brings up a long list of recognisable High Street retailers who are issuing profit warnings, despite “strong growth” or continued store openings. It seems counter to every lesson we are taught in business – “turnover is vanity, profit is sanity” – is a well-worn but still relevant mantra. Margin should be King, and in uncertain times, walking a fine line on profitability can be a highly dangerous game to play…

Shock for Chris Dawson as The Range’s profits fall by £4m

Strong growth rate affects Lidl’s profits

TK Maxx profits drop as it ramps up store estate

Sainsbury’s to close 70 Argos stores as profits fall

Aldi Sales Grow In 2018 But Profit Falls; To Open 100 New UK Stores

Asos profits dive 68% despite sales smashing £2.7bn

Zara’s UK profits plunge 56.9% despite sales increase

As ASOS are demonstrating, an established and successful online operation doesn’t necessarily protect you from the decline. It’s as easy to get sucked into the obsession with discounting and promotions on the web as it is in opening new stores on the High Street when property prices are low. It’s a trend which is seen in its most extreme forms in the WeWork saga or the equally mind-boggling numbers Uber have recently released. People seem to have seen what Amazon can achieve when ignoring profit over growth, and think this is the new norm as opposed to a freak which contradicts every other piece of conventional thinking about business and economics.

The light at the end of the tunnel?

The decimation of the traditional High Street has revealed some opportunities. While the “big boys” fight over dregs of the old retail landscape, there are a new generation of agile, profitable businesses who are gaining traction in the market.

This is happening in almost all sectors but is most prevalent in fashion where it seems you can’t move for another ‘Pretty Little Thing’ or ‘Missguided’ type website smashing all expectations on what seems to be tight margins while up against huge levels of competition. So, how do they manage it? It all comes down to costs.

These new businesses are able to create rapidly scalable pureplay models. managed it in the early days of the first dotcom boom: treat every order the same, target every sale on its margin and always understand how much it really cost to fulfil it. As soon as something doesn’t fit the model, understand why and correct it.

Back in the days when they only sold CDs, DVDs and games, wouldn’t sell anything they couldn’t make a clear £2 margin on. This covered postage, packaging (everything went in one of two different-sized envelopes – CD or non-CD) and everything else. It was simple, it was brilliant, and it made them lots of money. It was only when gadgets and all sorts of other product types came in that trouble started and things became far, far more complicated.

While clothes are slightly harder to uniformly package than CDs and DVDs, the principal is the same – consistency is key. Retailers who are seeing most successful (and profitable) growth often specialise in a limited product line. Not only does this minimise operational costs from a fulfilment perspective, but it has the added benefits of allowing companies to punch above their weight in the SEO stakes. For example, see how “The Door Handle Company” can appear alongside the likes of Screwfix and Wickes in Google search listings for “Door Handles” and other generic, valuable search terms.

This focussed approach also instils a sense of “expertise” in your field – who would know more about door handles than a company that sells nothing but door handles? What are the chances of the customer service individual on Amazon’s live chat knowing whether the selected door handle will fit my specific requirement? Where do I download installation documentation? All these factors are contributing to the proliferation of hundreds of online companies that sell a very narrow spectrum of products.

Growing a specialised retail business online

The specialised site approach does, of course, have its drawbacks. You tend to have a very limited target market when you don’t sell a wide range of goods. The temptation will always be there to “branch out” into related areas to try and grab more opportunities, but you don’t want to dilute your core offering.

Maybe creating a second brand is the answer? Another specialised site targeted at another small set of specific customers. Ironically, with modern eCommerce platforms, this is often a more cost-effective and stress-free way of addressing the problem rather than managing a larger catalogue. Treating each product set as its own sub-brand with its own profit and loss targets, but with consolidated resource where appropriate, can create a start-up style culture within a retailer, even a huge, well-established one.

The “fail fast” tactic allows for proof of concept stores to grow unhindered by the burdens of the larger company. It gives far more granularity around understanding which areas of the business are succeeding, profitable or (conversely), costing money and need to be restructured.

It’s an approach that Tesco and Asda tried several years ago, albeit too soon as the technology wasn’t really up to the task. They launched separate online platforms for clothing, flowers, toys, cards and a range of product lines which weren’t in their core specialisation. Both retailers have gone through exercises in identifying which of these services weren’t returning acceptable levels of profit and have closed them down accordingly.

Back to the High Street!

So, where does all this online-centric growth leave the High Street? Well, the general prognosis from the experts is pretty grim, but there are still some huge opportunities for innovation and transformation. In the US, b8ta have established an exciting new bricks & mortar retail model. This involves effectively being landlords for the smallest of product owners and online retailers, allowing them to lease store space for consumers to interact with their products physically. Is it a re-hash of the old department store model? Maybe, but they’re doing it, they’re doing it well, and they’re not the only ones.

Companies who are taking an experienced-based approach to bricks and mortar retail are seeing interest, and they are seeing progress, but it’s going to take a huge team effort to transform a failing town centre into an innovative digital retail hub. Are the UK’s cities and towns up to it? Probably not, but they need to do something, and they need to do it fast.

We are seeing the green shoots of recovery in some places. Business property rates have fallen low enough, or are incentivised enough by local councils, to attract small retailers back into boutique-style pockets of many towns. Run by a generation who are more comfortable with online, many of these stores already have websites, eBay stores, social media presences and a digital mindset which means they are as comfortable selling over the counter to a local as they are shipping an order to China.

To support this, the biggest change for the physical stores channel needs to start in how property is managed. Retailers have been massacred by the trend for 25-year leases on huge properties in town centres, bought with the expectation in the 80’s and 90’s that the investment was (literally) as safe as houses in a growing retail market. New rental models which better suit smaller businesses and provide more agility, for both parties, will likely become the norm, but there will be huge resistance from retail landlords who are already seeing their estates devalue by 5 percent a year. However, the bottom line is that left unchecked, the decline will be terminal, and the property will be worth a fraction of its peak value, so landlords really do need to bite the bullet on this one.

The Year Ahead

Despite ushering in an exciting new decade, it looks like 2020 is likely to be a turbulent year, especially for retailers already struggling. There doesn’t seem to be much prospect for a sudden change in behaviour or in retail trends, which would ease the pain of those businesses not already investing in digital transformation. It’s becoming obvious that retailers aren’t going to be able to weather this one out, and that the adjustments are fundamentally industry-changing.

Companies trapped on legacy IT platforms, or on complex solutions which are slow and costly to change, need to find an agile alternative. Tactical substitutes to developing on existing architecture to take opportunities must be preferable to waiting for months for features to be developed on current software.

I am still stunned when I hear about struggling retailers proudly announcing multi-million-pound digital re-platforming initiatives during this period of change and turmoil. It’s the modern equivalent of the 25-year store leases: removes agility & responsiveness within a business and locks you into something which dictates your strategic direction for years to come.

A clear and well-defined strategy is always a good thing but tying yourself to it come what may in an environment which is subject to change rapidly and drastically, is a dangerous position to put yourself in as a retailer with limited cashflow or dwindling margins. Getting the simple stuff right and optimising the process for the core of your business (i.e. stripping back the complexity) is probably going to make a bigger difference to your profit margins than the cumulative costs of feature developments.

If you want to speak to anyone at Pinpoint about your current eCommerce solution, your digital strategy or just fancy a coffee and a chat about the industry in general, contact us today!