Over the last couple of months three major UK retailers have gone into administration; Comet an electrical retailer with 240 stores nationwide and 6,895 employees, Jessops a camera supplier with 187 stores and 1370 employees and this week HMV an entertainment retailer with 285 stores and 4350 employees. The three chains have a long history and much in common, in that they were badly managed and their businesses were undermined by the increase in online sales. HMV opened its first shop in 1921, Comet in 1933 and Jessops in 1935, but their heritage failed to save them from closure. A similay situation exist in the USA and much of Europe, where recessionary pressures are hitting the retail sector with some ferocity.
Julie Palmer, a partner at Begbies Traynor has estimated that another 140 retailers are facing ‘critical issues’ and are in ‘financial distress’. A number of factors have hit retailing this year, including the wet weather and wider problems in the economy. Higher taxes, wage freezes and the rising cost of food and essential purchases has kept consumer spending on discretionary purchases low. Figures produced by RSM Tenon accountancy group show that in 2012 about 1,300 retailers became insolvent, meaning they could not pay their debts – a rise of 7% on 2011
The health of the UK high street underpins national economic growth and consumer confidence. With some 3 million people working in the UK retail sector, it is the biggest private sector employer. The slump has left many high streets depressed, with the British Retail Consortium (BRC) estimating that one in nine town centre shops is empty, the highest level since the trade body began compiling data.
Michael Ingram, a market analyst with City broker BGC, said: “disposable income in the UK is being squeezed mercilessly: wage growth is running at less than half the rate of inflation (1.3% versus 2.7% on the consumer price index and 3.0% on the retail price index), while inflation in non-discretionary items, such as fuel and water tariffs, is running at over 6%. As a consequnce, customers are becoming increasinly price and value sensitive.
In addition to the problems affecting all retailers, Comet, Jessops and HMV also faced the issue of changing purchasing behaviours of shoppers and were particularly vulnerable its customer base began to move to online or digital formats. There has also been an explosion in popularity of mail order websites, such as Play.com, Amazon, and Tesco.com. Although nearly 70 million CD albums were sold last year compared with the 30m downloaded, nearly two out of every three music albums were bought online or in supermarkets rather than from traditional music retailers on the high street. Just 567,000 (3%) of the 189m singles sold were physical CDs, while downloads – mostly from Apple’s iTunes store – surpassed 183m (97%). Craig Armer, an analyst at Kantar Worldpanel, said that if HMV disappears he expects the big four UK supermarkets to pick up 32% of HMV’s £932m annual sales. Amazon, he calculates, will claim 29% – meaning it would account for more than one in four of all CDs and DVDs sold in the UK.
It is clear that consumers are increasingly investigating products they want in high street shops, but then making the actual purchase online, where prices are likely to be significantly discounted. Online retailers, such as Amazon, have far lower overheads and gain from significant economies of scale. In addition, over the last decade these companies have exploited loopholes in EU tax rules importing DVDs and CDs at VAT-free prices from the Channel Islands and some have lowered corporation tax liabilities by using transfer-pricing methods to minimise profits in countries, where tax levels are relatively high.
The UK business secretary, Vince Cable, said: “There has been a very rapid growth of e-shopping. Britain is one of the most dynamic countries in the world in that area and this trend has been very much at the expense of some of the more traditional retailers”. Asked if online retailers enjoyed an unfair advantage, because they were able to arrange their tax affairs to pay lower tax than high street rivals, Cable said: “certainly the information I have seen about Amazon is very disturbing and it does indicate that government has got to be tough and, as far as possible ensure that companies do pay tax.”
So the question is whether the traditional retail outlet is in terminal decline. Certainly, there are expert commentators suggesting that this need not be the case. At present, only 10% of current consumption occurs through the internet, and many high streets (in and outside metropolitan areas) are doing well because they are offering consumers – and not just those with reasonable levels of disposable income – something different, personal service and products possibly unattainable online, which may result in more niche specialist businesses. Sharp buying and merchandising, clever promotions and an increased concentration on superior customer service to maintain sales or to show slight sales gains could result in independent retailers being the winners as larger retail chains close. Despite HMV’s inability to make high street music retailing pay, many independent record shops are already reporting higher demand and sales, due partly to a backlash against Amazon’s tax set-up and the difficulty of stumbling across unexpected gems online. Tim Winter of Harold Moores Records in Soho, London, said HMV’s flagship store, a short walk away on Oxford Street, attracts customers to the area, which is also home to a clutch of independent record shops, “in the hope of a tangible musical experience”.
Another possible solution is accepting that customers will buy online, but offering ‘click and collect’ services. Here consumers buy the product online, but collect from a local retail branch, allowing them the opportunity to examine the physical product. At the same time, of course, they may impulse buy other products in the store. Delivery and reliability of distribution is a real problem for large online e-tailers, such as Amazon and imaginative partnerships are being developed with small independent retailers, whereby consumers purchase online, but collect from their local shops. This allows buyers, who are at work during the day to pick up products bought online at their local community outlet which is open in the evenings and at weekends.
It appears that the future is a world with fewer independent retailers, but ones that will be more robust and commercially viable.
postcript: As this goes to press, another high street chain, Blockbuster the DVD and video rental outlet, has announced it is to enter administration. More than 4,000 jobs are at risk at Blockbuster, which has 528 shops in the UK. Lee Manning, joint administrator for Deloitte, said: “In recent years Blockbuster has faced increased competition from internet based providers along with the shift to digital streaming of movies and games.”
IB Style questions
1. Define the following terms:
- Economies of scale
2. Explain the reasons why consumers in the USA and Europe are becoming increasingly price and value sensitive.
3. Analyse the advantages and disadvantages of small independent retailers compared to large retail chains.
4. Discuss the costs and benefits of e-commerce to firms and consumers.