High price for the high street

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08/08/2018
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Jeff Bezos, the Amazon founder is now the richest man in the world, with an estimated fortune of $141 billion. However, is this man responsible for the death of UK high-streets up and down the country? There is no doubt Amazon has changed the way we shop, however, I don’t think it is fair to solely blame Amazon for the demise of the UK high-street.

Senior management across the retail sector are always keen to point the finger of blame at Amazon, but the truth lies closer to home. A failure to adapt to trends within the retail landscape is perhaps one of the biggest reasons for failure. However, it can be argued that the government should have done more to even the playing field between retailers and internet giants. High street shops are seemingly penalised while their online competitors face lower charges; one such example of this is on the business rates they pay. Business rates are based on the rental value for the store, so high streets and city centres which have large footfalls can expect to pay the most in business rates, whereas internet giants can setup their distribution centres in derelict and deprived areas, thus attracting the lowest business rates whilst also keeping wages low. In addition, many internet giants are able to domicile themselves in jurisdictions which will allow them to pay the lowest rates of tax. For the Amazon EU Group this is Luxembourg, whereby they are able to funnel profits from Europe whilst paying only 7.25% tax. Many UK retailers do not have this option, so are placed at an unfair disadvantage. Higher costs, coupled with higher taxation means you have to charge more for a product than your online competitor. This, coupled with the changing retail habits of UK consumers has led to the demise of the UK high-street. A week doesn’t seem to go by without hearing of another retailer going into administration, whilst those still in business face having to restructure and close stores, however, this isn’t the case for every retailer on the high-street. In fact, some have been very successful, and their share prices reflect this:
 

 

Next and WH Smith are two such success stories, and as illustrated, over a ten year period their share prices have increased by almost 800% and 700% respectively. So why have they succeeded while others such as Mothercare, Debenhams and Marks & Spencer are struggling?

WH Smith reads like a bestseller in adapting to the high-street decline. If anything their business is more under threat from Amazon than many others. Books are the main bread and butter of their business, and selling books was the primary reason why Jeff Bezos founded Amazon. Of course, WH Smith has had to close many of their less profitable stores on the high-street. Their remaining stores are concentrated in areas with the highest footfall, but their strategic masterstroke has been to focus on airports. I can’t remember the last time I went into a WH Smith that wasn’t in an airport. Almost always, I go in to buy a book, but inevitably I buy two as the second book is half-price. Once you add the newspaper, magazine and a meal deal then you have departed with the best part of £30. In fact, airport and railway sales now account for 60% of group profits.

Next has also adapted. Their ground-breaking mail operation Next Directory launched in 1988, yet they were one of the first retailers to offer online shopping back in 1999. The Next directory is also now offered online in more than 70 countries. They have continued to improve by introducing new initiatives such as next day delivery and click & collect. They also offer excellent customer service, which in turn is an investment in customer loyalty.

Other retailers are recognising that they need to adapt, but it may be too little too late. They are guilty of burying their heads in the sand, and if they are not careful they too could end up getting into further difficulty. Senior management are focusing on price, and whilst price is important they have to understand that it is not the only way to keep customers coming back. A large part of the reason consumers like to go shopping is often the experience of going shopping, and this is what the retailers need to sell. Competing on price against online retailers is a battle that can’t be won. Retailers need to focus on how to sell their products, both online and on the high-street, with the latter focused on the wider shopping experience. An increased focus on the product and customer service that can be provided can also differentiate from competitors and online retailers. Another focus is how the product is being promoted and whether you are reaching your designated target market, however, it seems retailers are signing their own death warrants by continually focusing on price.

In the UK we have recently jumped on the bandwagon of Black Friday, a US-coined term intended to inject hysteria into shoppers and to increase footfall on the high-street. Nevertheless, I would be inclined to argue seeing grown adults beat each other up in order to buy as many televisions as possible, only so they can sell them themselves for an inflated price, is neither beneficial to the positive experience of going shopping or to the bottom line of the retailer. Yet all retailers are in a relentless race to the bottom on price. Come to think of it has anyone been to DFS when there hasn’t been a sale on?

If anything, prices in some instances need to go up. It was recently announced that Poundworld entered administration. In a statement issued by the retailer it said it had suffered from high product cost inflation. However, we would argue that if you are aiming to sell everything in your shops at £1 without putting your prices up or taking account inflation, then administration should be a forgone conclusion. While it is easy to blame online giants, poor management and failure to adapt is equally to blame. The government should also act or we will see many more derelict shops, leaving our highstreets as simply a place to buy a coffee or visit charity shops. Apparently one Costa Coffee shop on every high-street isn’t enough, we need four.

 

 

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