Suppliers are springing up as the new saviours of struggling retailers. But can they translate their manufacturing skills and take their product direct to the UK high street?
Select, Atlantic Fashions and QS. All have underperformed to the brink of bankruptcy, only to be rescued in the past 12 months by white knights in the shape of overseas manufacturers.
Cafer Mahiroglu, owner of a Turkish-based supply business, splashed out £13 million in a rescue deal for Select last month. This week the chain went into administration but Mahiroglu rescued half of its 250 sites almost immediately. A week before it went under, Select co-founder Nigel Fisher stepped down from the chain 25 years after he founded it.
Mahiroglu’s initial takeover of Select in January was swiftly followed by the apparent supplier-led rescue of another young fashion business, Atlantic Fashions. In February the 30-store chain was rescued from administration by a mystery bidder, thought to be one of its suppliers. And last year Indian textile firm Alok took control of value chain QS by acquiring more than 50% of the business.
These are gutsy moves into UK retail and more supplier-driven deals are expected to follow. The upsides are obvious, from margin gains through to protecting existing business should a retailer collapse, but taking on a 200-store chain in an unfamiliar market is a huge challenge for overseas suppliers.
Verdict Research analyst Maureen Hinton says overseas suppliers are being tempted to enter the retail market because of the success of vertical models operated by the likes of Inditex. “Suppliers are interested in expanding into UK retail because they can cut out another layer and gain direct access to retail margins. When it works, it works well. Look at fashion chain Zara – by owning most of its factories it can protect its margins, but its operation is seamless. Customer feedback in store filters down the supply chain and it can drive through high volumes.”
Paul Herman, director of retail at Cavendish Corporate Finance, which specialises in selling retail businesses, agrees that in general it makes “commercially good sense” for suppliers to try their hand at retail. In fact, he predicts that the UK will see more interest from foreign suppliers during the next three to four years as suppliers look to exploit this potential. “These suppliers understand the economies of bringing the supply base in-house and it can work very well for them,” he says. “As well as benefiting from significantly higher margins, suppliers also have better visibility in their businesses.”
To date however, these new supplier/ owners, including Mahiroglu, have revealed little about their long-term strategies, but sources told Drapers Mahiroglu planned to take the slimmed-down rescued chain more upmarket, with larger stores and a bigger presence in London.
However, QS, bought by Alok over a year ago, has been sketchy with information on strategy, resulting in mixed messages from the value business. In January, QS – which is rebranding its shops as Store 21 – put 34 of its stores on the market, only a week after it claimed to have plans to expand its 200-plus portfolio by more than a fifth.
Fisher’s exit from Select and its subsequent collapse has thrown the spotlight on whether suppliers can cope with running high street businesses without retaining the existing management’s retail expertise. But this week Mahiroglu seemed to show his commitment by appointing buying director Debra Bloom to the board and drafting in former New Look managing director John Hannah. However, Hinton warns that supply and retail are two different disciplines. She says: “Selling direct to the consumer demands different skills and it’s highly risky to get rid of the existing management.”
Hinton says buying a value retail chain can be particularly tough for overseas suppliers. She says: “A foreign supplier taking on a UK retail venture will find it challenging if the business is value-driven because it needs to push through high volumes. For it to work you need a solid partnership, with the supplier trusting its management team to run the business. A UK retailer or supplier would never venture overseas without a partner because they wouldn’t necessarily understand the dynamics there.”
One high street supplier agrees and says it is “suicidal” for a new supplier to get rid of the management of a retail chain because of their unrivalled understanding of the retailer’s customer base. He says: “Nigel at Select, for instance, knew the business inside out.”
The chief executive of one multiple highlights the perils of suppliers ignoring customer service and marketing. He says: “It’s not as simple as going vertical and getting margin gains. Suppliers fail to understand the customer-facing aspect of retail. Wholesale and retail are very different. Suppliers get their orders, manufacture them and deliver, then the product is out of their hands. When you are a retailer, you have to follow that product through and take the risk.
“The danger is that suppliers will look at a business and think they can get 20% to 30% more margin than the retailer and strip out costs. They may not understand the importance of store staff and service and may opt to cut that back, which is devastating. They also may not understand the importance of marketing. In a supply business, everything is on your doorstep and easier to manage, with very few industry-facing staff.”
Designs for life
However, Herman says retail management skills are less important than design talent at a chain. While suppliers have the economic knowledge to make a business work, designing for the UK market is vital. Herman says: “Problems come when supply dictates the retail end. Leave the design to the UK team. Overseas investors will not know the customer demographic of Jane Norman, for example, in the way that Jane Norman will.”
Overseas suppliers entering the UK retail market could see their core supply business damaged too. In such a competitive market, retailers will be wary of suppliers owning and operating rival retail chains and may pull their orders for fear of conflict of interest. The high street supplier says:
“It can damage your supply business because your wholesale customers won’t want you knowing about their future products and designs and best sellers in case you exploit that for your own retail chain. If you then opt to just design and supply all of your own product for the chain, with no outside input at all from other suppliers, it is a road to disaster because your product will be so insular and out of touch.”
In Select’s case, it is understood that Mahiroglu is also a director at manufacturing firm Armondi, which supplies Topshop, River Island and Miss Selfridge.
A supplier to Select says: “I’m pretty sure these retailers will be cautious about sharing their designs with Mahiroglu now he owns Select. It’s a conflict of interest.”
She agrees with Hinton that suppliers are hungry for the benefits, but worries they do not understand the complexities of the UK high street. “Suppliers could be looking at vastly inflated profit margins, but I don’t think they understand how competitive the UK high street is,” she says. “They may think it’s a good way to enter the UK market, but you have to be really good to succeed here.”
However the chief executive of the value chain suggests that overseas suppliers’ interest is being fuelled by huge retail growth in their home markets, such as China and India, and that they view the UK as a learning ground. He says: “There’s vanity involved, but overseas suppliers also see it as an opportunity to learn about retail in the UK before transferring the knowledge and opening a retail chain in their home market. A lot of supplier territories such as India and China are opening up as big potential retail markets and these suppliers want to get in on that.”
While overseas suppliers are to be admired for their guts given the difficult UK economy, it’s fair to say there could be some expensive lessons learned this year.