October 09 2006

[Editorial] Cyclical credit-crunch approaching?

SPSL's latest research for the BRC-KPMG Retail Traffic Index has led them to interpret the 3.6% year on year decline in shoppers numbers (along with data on insolvencies and bank restrictions on lending) as credit-stretched customers curbing their shopping. The impact for etailers is greater than for the High Street...

The SPSL press release is reproduced at below, but it makes sobering reading: 3.6% decline in shopper numbers year on year, and 6.9% down on last month. Behind the volume metrics, however, "a new pattern is clearly emerging; that the cash-strapped, on-their-credit-limit-poor have curbed their shopping while those still feeling affluent are strongly tempted by ongoing price deflation to shop while prices remain low".

There are of course the seasonal excuses (sunny weather depressing sales of the new Autumn/Winter collections, the wrong kind of leaves on the rails etc), but those working in retail feel that this research has named the beast: the credit-fuelled sales boom is faltering slightly.

This should give pause for thought to etailers - especially after a few years of inexorably rising sales. Most of this growth online has been a result of increased broadband at home, general familiarity and the fuller ranges of goods online. Rather than retailing genius, in the bulk of cases, the sales growth has been accidental. As a former boss used to remind me regularly - "a rising tide floats all boats" (before demanding above-index growth!).

On the web, price-led competition is an unquestioned norm. This is a combination of marginal costing calculations as well as the notion that online sales are "free" (or additional sales that would not have been gained offline, via the catalogue or store). It is as if there's a grazing, opportunistic hoard of people - like dust in space or flies in a room: you know they're there, that there are lots of them, but they're difficult to catch without the sticky-paper of low prices.

Unquestionably, there are some etailers who have a lower cost base, or others where their overall buying volume means that they are able to offer lower prices, but the majority of integrated retailers inhabit a 'grey area' where the marginal attractiveness of 'free' internet sales is flattered by a channel-based approach to cost allocation. Since eCommerce is seen as 'separate' the only costs of sale tend to be the direct acquisition costs and recharges for returns, customer service and such like. Insofar as eCommerce sales don't carry their full share of brand overhead then there will be a pressure to make the etail channel a low-price, "mop-up" one, rather than the most direct, customer-focused, high-service opportunity. It's no co-incidence that "lack of customer loyalty" is such a regular concern in the eCommerce marketing teams throughout the country.

It's ironic then that so many acquisition campaigns are based upon the notion that a deep discount today to "acquire" the customer will be recouped on 'future sales'. The prevalence of deep discounting, first-time offers and suchlike simply encourages the 'grazing' habits of customers. No one company can (or should) just 'stop' acquiring customers (that'd be irrational, and a version of "the tragedy of the commons", where common assets are over-exploited since there's no cost to over-use).

While shops have used deep discounting as an acquisition tool since time immemorial, and financial services and mobile phone companies still do (to the annoyance of existing customers who are denied the newer rates - a sort of perverse 'punishment for loyalty'), online there's no inertia to moving to a new 'shop'. Even the 15 minute walk down a High Street, or a drive to a different retail park, can be enough of an aid to customer inertia (or is that 'retention'?). Online, however, there's no such inertia.

Furthermore, online price comparison sites allow a customer to find the best deal before leaving their keyboard (if indeed they decide to leave the keyboard to make the purchase!), and independent credit, not tied to a store, has allowed customers a freedom of choice that was not as widely available a generation ago - when savings clubs, store credit and lay-away schemes were the norm.

The freeing of credit and rising house prices have filled consumers with the confidence to borrow and consume. All balloons have a maximum size, however, and this data indicates that we are approaching a maximal level of credit.

As consumers reach the maximum levels of borrowing, and free income is diverted to repayment, the spending reduction is made more acute.

As etailers we are still seeing our sales increase, but profit increases are more elusive. Multichannel retailers are also seeing that their overall sales are challenged while ecommerce takes a higher percentage of their sales mix.

The big question therefore is how we're fitting our businesses to cope with slower growth, increased customer selectivity and continued price competition.

The food retailers are in an interesting competitive position: spending on food is non-discretionary and (comparatively) high-commitment - who in their right minds would relish 90 minutes a week wandering through a supermarket? We already know that the moves by the food retailers to increase their retail offerings into other areas are logical - buy these electrical/clothing/furniture items "while you're here" (or even sell your house, as we reported of Asda in July). So much we know. But this research indicates that we're no longer competing for a share of an ever-larger pie: the competition is about to bite...

Dr. Tim Denison, Director of Knowledge Management at SPSL comments; "The fact is that significantly fewer shopping trips are being made to non-food stores. In part the decline may reflect share gains in non-food areas being made by the grocery multiples as more people are happy to shop for some of their non-food goods during their regular supermarket trips".

The grocery multiples have increased their ranges in-store, increased their online offerings with category-killing, focused businesses (eg Tesco has an electricals, wine and soon-to-be-launched clothing operations online), and finally now offer paper catalogues too. When you factor in their 'cost of acquisition' is tending towards zero (since a) we're "there" anyway to get our food and b) we're disinclined to be elsewhere since we're not spending-as-leisure quite as much) and that their buying power keeps their prices competitive - then it's clear that large-scale businesses like these are the biggest challenge to traditional retailers.

These businesses are showing a ruthless determination to integrate their business channels and focus on the customer. The "ruthlessness" isn't so much in terms of competitors, but rather with their own business infrastructures and operations.

I have been speaking this week with people in eCommerce at two of the food giants and the common factor is the dedication of senior management to resource investment in digital businesses, the coherence of a customer-focused approach and finally a no-nonsense approach to making all of the business' capabilities work together to support the channel. This is very different from the 'add-on website' approach adopted (with some success, admittedly) by retailers to date.

As customer credit is constrained and customer become more selective with their purchases, retailers need to address not only their cost structures and buying-in margins, but also how they can make their business work in a seamless, coherent fashion to deliver the best price, relevance and service to customers.

Otherwise, we won't have "customers" - we'll have one-off "purchasers".

Ian Jindal The press release is reproduced in full below:

Credit-Stretched Consumers Curb Their Shopping For immediate release Retail research group SPSL's Retail Traffic Index ™ (RTI™) for September reports a decline in shopper numbers of 3.6% against September 2005 and month-on-month by 6.9%. Footfall for Q3 was down by 3.1% against the same quarter last year, slightly better than the year-on-year fall of 4.3% recorded for Q2. Nevertheless a new pattern is clearly emerging; that the cash-strapped, on-their-credit-limit-poor have curbed their shopping while those still feeling affluent are strongly tempted by ongoing price deflation to shop while prices remain low. Dr. Tim Denison, Director of Knowledge Management at SPSL comments; "The figures for September are much as we had forecast with a slight worsening of the position that stood in August 2006 versus 2005. It is never the strongest of months for footfall given the end of the summer Sales and the school holidays. Like many months this year September's retail scene was affected by the foibles of the British weather. The warm month did not play into the hands of the fashion stores merchandising their autumn/winter collections." The RTI continues to track the BRC-KPMG Retail Sales Monitor closely but interestingly for the last 12 months has registered year-on-year deficits against the gains in sales. Denison continues; "The fact is that significantly fewer shopping trips are being made to non-food stores. In part the decline may reflect share gains in non-food areas being made by the grocery multiples as more people are happy to shop for some of their non-food goods during their regular supermarket trips. "In part too though, I believe we are seeing the consequences of a growing portion of society that is highly geared financially and becoming increasingly squeezed by credit constraints. Though the numbers are still relatively low, we cannot ignore the fact that individual insolvencies have risen by 66% year-on-year in Q2; to 26,000. Personal insolvencies this year alone are expected to account of over £1.5bn of bad debt in the UK. "Nor can we dismiss the warnings from high street banks that they may be compelled to stop lending to some of their customers. Their level of bad debt stood 27% up in the first 6 months of the year, and there is belief that worse is yet to come. "Over the last decade we have gradually migrated over to a credit-centric society, in fact Europe's most credit-leveraged ever. This has helped fund the retail boom that we have witnessed and which has sustained retailers. "However, there is only so far that the loan envelope can be stretched. Although for most of us that point is still a way off, especially as house prices continue to inflate, for a small and growing minority that point is rapidly being reached, particularly on unsecured debt. August saw a 12 year low in credit card lending. Home repossessions are running at their highest levels since 2001. Whereas a trip to the shops might have featured prominently in their routine, it is now more a question of avoiding the temptation to spend by steering clear of the shops except for essentials such as food. "No-one should doubt that trading conditions have toughened for retailers over the course of 2006 with both rising costs and price deflation. To date the main players are choosing to absorb extra cost and/or renegotiate with suppliers rather than increase prices, mindful of the poor state of consumer confidence. Sales are being driven by heavy discounting and multi-level promotional activity. "The successful are being rewarded with higher conversion rates from those members of the public still shopping recreationally. The pattern of Britain's shopping habits is changing; it is no longer a matter that sales are being driven by people making more shopping trips. Those times have gone for now and the rebalancing of the economy is well underway."