As store closures and redundancies rock the high street, Drapers explores how retailers are cutting costs in the battle against shrinking margins.
There are tough decisions hanging over retailers. This is an industry battling a legion of challenges in what accountancy firm BDO predicts could be “the worst year on record” for the high street. As the squeeze on margins and shaky consumer confidence takes its toll, fashion bosses are focusing on costs. In boardrooms and offices across the country, conversations are turning to how and where best to save in order to transform operations. The race to become leaner, nimbler and better placed to survive is on.
Cutting costs, however, is never easy. Much of the fat has already been trimmed, leaving retailers with difficult strategic choices. Redundancies and store closures have dominated the industry of late as retailers seek to strip out excess. High street giant Marks & Spencer is just one of the high street heavyweights to embark on a “tough but necessary” transformation of its store management structure last month. A total of 115 store, commercial and operations managers will be made redundant, along with 182 section managers and 54 visual merchandising managers.
Making savings might be necessary, but cutting too deeply, or in the wrong places, is just as likely to bring a business to its knees as market headwinds. Today’s demanding customers will be quick to notice any reduction in quality, whether in product or their overall shopping experience. The question of where to invest is just as important as where to cut.
“Retailers are really looking at costs and efficiency, and it’s important to remember those are two different things,” argues Paul Martin, UK head of retail at professional services firm KPMG. “Businesses are having to transform, but in many cases making a business more productive and driving efficiency does involve spending – it is investing to save.
”Typically, retailers will look at headcount as a saving mechanism, they’ll look at supplier contracts, how much stock they’re holding and, increasingly, at their property portfolios. When it comes down to it, effective cost cutting is about making every process just a little bit better. Just doing that can deliver millions in savings.”
As the difficulties facing fashion show no signs of abating, Drapers investigates how and where retailers are driving efficiency to ensure their businesses are fighting fit.
Stores: burden and opportunity
Bricks-and-mortar stores have been on the frontline of retailers’ efforts to cut costs. High-profile casualties include House of Fraser, New Look and Mothercare, all of which are closing swathes of their once-mighty store estates using company voluntary arrangements.
“Closing stores isn’t something we want to do, because it will undoubtedly affect our relationship with customers, but it is becoming increasingly hard to avoid as rents and rates add up,” explains the chief executive of one high street womenswear retailer.
As retailers seek to stem spiralling property costs, they are focusing their efficiency drives in two key areas, argues Jonathan De Mello, head of retail consultancy at Harper Dennis Hobbs: “Property is a huge cost for retailers – the wave of CVAs we’ve seen recently is just a mechanism for cutting costs quickly.
A store portfolio allows us to place the brands in front of new consumers
Brand chief executive
“Property portfolios are somewhere retailers can trim. It tends to be poor-performing high street stores, rather than retail parks, in secondary towns and locations, followed by expensive stores that don’t deliver. Look at House of Fraser, which is set to close its beast of a store on Oxford Street.”
Taking a more measured approach to store expansion is no bad thing, says Stephen Springham, head of retail research at property consultancy Knight Frank.
“Location planning has become a lot more rigorous and retailers are really doing their homework on new sites. They are asking lots of questions, rather than just taking what looks like a good deal on paper.”
And, although the headlines might be dominated by CVAs, many fashion retailers are still betting on bricks-and-mortar to connect with customers.
“Recent store openings have been attractive financially because of greater flexibility – proposals from landlords that include rent, rates and service charges all included within a single percentage of the sales fees, for example, as well as the greater availability of prime sites in market towns,” the chief executive of one brand group tells Drapers. “A store portfolio allows us to place the brands in front of new consumers, remind existing shoppers of our proposition and start a conversation that will ultimately support our online channels.”
Other retailers are looking for partners to help parcel out the burden of large, expensive stores. Working with other operators through concessions allows retailers to share space costs, as well as giving customers an incentive to shop in store rather than online. Next chief executive Lord Wolfson has outlined his ambition to push for lower rent bills and shorter lease lengths, but also plans to work with leisure concessions. The retailer’s Manchester Arndale store, one of the largest in its portfolio, is home to a pizza and prosecco bar, as well as a spa and car showroom.
Human resources: doing more with less
Dramatically reduced headcounts are another symptom of retailers’ efforts to rein in spending. A wave of redundancies has rippled through the UK high street over the past 12 months – Ralph Lauren, Monsoon and Shop Direct have all announced senior head office departures, citing the importance of keeping up with an ever-shifting retail landscape.
Away from head office, retailers have also been consolidating store management roles. Alongside Mark & Spencer, Topman/Topshop is mulling whether to axe one of two brand manager jobs where the two retailers are in the same store.
“There has definitely been a reduction in the layers [of management] out there,” argues one department store source. “It needed to happen. Streamlining and having fewer layers to go through means things can get done much faster. Some businesses had gone along the route of adding too many directors and too many ‘heads of’.”
Debenhams slashed a raft of senior and director level roles earlier this year across its men’s, women’s and children’s wear departments. The retailer said it was “working on reducing complexity” as part of wider plans to structure its business around key three units: beauty and beauty services; fashion and home; and food and events.
When times are tight, retailers look at where they absolutely have to maintain people
Fran Minogue, managing partner at executive search firm Clarity Partners
Fran Minogue, managing partner at executive search firm Clarity Partners, adds: “When times are good, you see the creep of additional layers and titles, whereas when times are tight, retailers look at where they absolutely have to maintain people.”
However, she stresses that retailers must continue to invest time, as well as money, into store staff if they are to stay ahead of the curve.
“Retailers have to make sure staff know at least as much, and preferably more than, the customer, and that requires product training. They also need to know how to engage with people, how to talk to them and draw them into the new collections. It is as much about time as it is about money. Everybody is so focused on investing in automation that I think they are forgetting the importance of good, old-fashioned clienteling.”
Retailers must look across the entire business when it comes to streamlining costs, instead of taking departments on a case-by-case basis, concludes KPMG’s Martin.
“One of the places many retailers go wrong is that they look at cost brackets in a very siloed way,” he explains. “They might say, ‘Right. How can I make marketing more efficient?’ when really they need to take a more horizontal view.
“We worked with one fashion retailer that, in an effort to cut costs, had disbanded its internal quality-control team. The target was to reduce headcount, but as a result, the amount of time spent sending back, recutting or resizing samples meant costs in other areas rocketed. It didn’t look at the ramifications in the wider business and there are hundreds of examples of this happening throughout the retail industry.”
Product: the supplier squeeze
Squeezing suppliers to recoup the cost of lost sales in tough times is nothing new in the retail industry. Last year, concerned suppliers told Drapers their relationship with retailers had hit “rock bottom” following a drop in the value of the pound that left both sides battling rising prices. Twelve months on and the industry is still reluctant to swallow any additional production costs, despite wider market forces.
“Retailers still want to pay what they’ve paid before or get a better price, regardless of the fact my costs have also gone up,” one high street supplier tells Drapers. “Some of them will swallow some of the cost – say it’s a 10% increase, they may take 5%, but if you don’t accept it, they’ll just go elsewhere or decide that the product isn’t viable.”
An industry expert adds: “The picture I’m seeing is very mixed and it depends on the culture of the retailer. Forecasting and production planning is really key. If you’re running production lines efficiently, there can be margin improvements for both parties. Problems occur when retailers aren’t on top of critical paths. Buyers are making very late decisions because of the volatility in the market, which puts suppliers under huge pressure.”
If you’re running production lines efficiently, there can be margin improvements for both parties
But there are retailers that recognise the importance of investing in product to ensure a competitive edge in today’s crowded high street.
“We’ve been at the bottom of the curve when it comes to costs for a long time and I think that is improving when it comes to product,” reasons another high street supplier.
“Perhaps before, retailers would have cut design details and fabrications, but now they want products to have an individual stamp. There is also a definite emphasis on sustainability, which is floating to the top of retailers’ agenda and can’t be achieved if your only focus is cutting costs.”
However, he adds that a reduced headcount in some buying departments is starting to have an impact: “Without a shadow of a doubt the biggest problem has been trying to get decisions out of people – that’s the worst it has been for a while. There’s just not the [number] of people [in buying departments] that there once was, and it becomes a bit of a vicious circle.”
Technology and ecommerce: an unavoidable investment
Almost everyone Drapers spoke to for this feature argued that the growing demands of multichannel retail mean retailers must invest in technology, or risk losing out.
“Any technology that can grow the business will be an area of investment for us, particularly when it comes to making the customer experience quicker and easier,” argues the managing director of one high street footwear chain.
“As a retailer, your costs tend to be quite fixed, particularly when buying from brands. Occupancy rates are fixed, because we have to pay what landlords charge. Utilities and staffing overheads are fixed, so if you can invest in technology that helps you serve customers efficiently, that’s very valuable.”
Mark Leach, former head of ecommerce at Missguided and managing director of conversion-optimisation agency User Conversion, points to data and search as two areas worthy of retailers’ attention: “Retailers have underinvested in the analytics side of data – ecommerce provides so much data and so much information. The technology to gather that data is used well and understood, but retailers need the tools and people to understand all that information and make it actionable.
“There’s also more that could be done to help customers find what they’re looking for. When you look at the level of investment Amazon has put into those kinds of solutions, there’s still a huge amount to do [in fashion]. That’s where emerging technologies, like visual and voice search, will be really important.”
Times may be tight, but retailers can’t afford not to invest in technology, particularly when it comes to logistics, argues Sue Rissbrook, head of retail at PwC: “There are some key areas that should be particularly hot on the agenda, such as integrated product forecasting and personalised communications.
Logistics has been an area of investment, not least because customers’ service and delivery commitment expectations continue to shorten
Retail chief executive
“Another interesting area is last-mile delivery, and how that service can be optimised to really give the best experience. Then there’s the next wave of artificial intelligence and blockchain, which is going to be fascinating.”
Etail giant Asos has shifted its focus to investing in infrastructure. Chief executive Nick Beighton has prioritised new warehouses in Berlin and Atlanta and both projects are expected to have a price tag of between £230m and £250m this year.
One retail chief executive adds: “Logistics has been an area of investment, not least because customers’ service and delivery commitment expectations continue to shorten, driven by expectations created by Amazon Prime Now and others.”
Investing in technology and ecommerce doesn’t necessarily have to come with a high price tag. Many large retailers are choosing to partner with nimble start-ups, pooling resources to stay one step ahead.
“You don’t have to embark on a massive, expensive tech project. It can be a partnership with a start-up, which is often leading the way,” adds Rissbrook. “That’s something we’re seeing more and more of – look at Marks & Spencer [which is partnering with investment firm Founders Factory to discover start-ups, giving the retailer access to cutting-edge technology].”
The Drapers Verdict
There are few quick wins left for retailers when it comes to cutting costs. Trading on the high street is unlikely to get any easier, at least for the foreseeable future. Closing stores and simplifying internal structures are not easy decisions, but are the few options left for those in distress. Retailers must ensure that their operations are as efficient and nimble as possible, allowing them to make quick decisions and react to customers’ changing demands.
But there is also no question that prioritising investment in the right areas is crucial. Exactly where to save and where to spend will vary from business to business, but all retailers need to ensure their customer comes first.
“The framework for thinking about how to cut costs and how you invest is to think about your customer’s journey end to end,” says Sue Rissbrook, head of retail at PwC. “Think about the moments that matter to them and where it doesn’t matter, take it out.”
As one retailer concludes: “There is no silver bullet. Ultimately, it is about every little piece of the jigsaw.”
BOOST YOUR PRODUCTIVITY
As retailers continue to adapt to the changing market and evolving consumer behaviour, it has become more and more apparentthat increasing productivity in retail has commercial advantages. Retailers are now looking for new ways to further improve efficiency and enhance the customer experience.
Drapers Fashion Forum will look to the future and investigate what the fashion retail landscape will look like in a year, five years or even 10 years:
- what retailers will be focusing on and investing in
- adapting organisational structures
- streamlining supply chain and back-end operations
- how the store will function alongside digital platforms
- how consumers will be shopping and on what platforms
- and, ultimately, how retailers can future-proof their business to survive and thrive