Trad retail suffering but online has pain, too

Translating the high-street headlines at the start of a new year is like navigating a maze. One day, we read of the worst holiday season in living memory, and the next, of record turnover at the sales.
All this against a background of doom, with famous names such as Blacks Leisure, La Senza and shoe retailer Barratts heading to, or in the hands of, the administrators.

With household incomes going through the most uncomfortable squeeze since the 1920s (Mervyn King's comparison not mine) and the jobless rate rising, it should come as no surprise that times are hard for retailers. But the real challenge is not so much from economic conditions but from changing shopping habits.

The transfer of custom from the traditional high-street and shopping-centre platform to online has been faster and more dramatic than most forecasters could ever have predicted.

Indeed, the tactics adopted by some online platforms, notably Amazon, look predatory. In the US, Amazon has been trailing a smartphone application which allows shoppers to scan products while in store and do an immediate price comparison. It then offers the customer a rebate/discount if they shop at Amazon. In other words, it is using the rest of the high street - which carries all the costs from staff to stock and rents - as its shop window.

Another of the significant threats to traditional retail are the supermarkets. The major grocers: Tesco, J Sainsbury, Asda and Wm Morrison are engaged in a never-ending price war which keeps downward pressure on prices and profit margins. To keep growing, the grocers have had to move into non-foods, selling everything from clothing to electronics.

The massive scale of their distribution, together with some big, cheaper-to-operate, out-of-town sites, means that they are extraordinarily competitive when compared with specialists such as Comet (the UK stores were recently sold for £1), Best Buy (it is pulling out of the UK market having barely begun) and Dixons, which fights on price but has struggled to compete on customer service.

Online challengers have taken Britain's most famous record retailer, HMV, to the brink. Competition from internet downloads destroyed the profitability of physical CD sales and HMV was slow to respond, partly because it was cushioned by the collapse of rivals, Woolworths and Zavvi.

It has sought to adapt by closing expensive stores and tossing superfluous businesses, such as the Waterstones book chain, overboard.

Most recently, it announced that a venture in the world of live music, through venues such as the Hammersmith Apollo and music festivals, was up for sale. Meanwhile, it is seeking to make its stores the top place for headphones, iPads and other tablet-style computers and accessories.

The big question is, can it make the transformation before the banks lose their patience? The virtually non-existent share price of HMV implies it is unlikely.

The paradox is that HMV may have been undone by online challengers but the pure online model, as operated by Ocado, is struggling, too.

Founded more than a decade ago by former Goldman Sachs traders, Ocado had proved disappointing as a public company with its shares sinking like a stone since flotation in July 2010 at 180 pence a share.

On Christmas Eve, traditionally the busiest time of the year for retailers, it issued a warning that profits would come in substantially lower than expected. Ocado's problem, as outlined by founder and chief executive Tim Steiner, has been capacity constraints at its Hatfield customer service centre.

The Ocado model is based on using the most mechanised and computerised distribution. But the strength of demand has meant that capacity has been inadequate and much of the sorting is being done manually, raising the costs of serving customers. As Ocado has struggled, its competitors, including Tesco, have improved.

There is no doubt that the need temporarily to use more manual retrieval while it waits for new capacity to be installed has undermined Ocado's ability to deliver on time. It also faces other challenges. Main supplier Waitrose has launched a rival online distribution network inside the M25 undermining the exclusivity of the Ocado offering.

The need for heavier investment in new retrieval equipment, as well as its second distribution centre, due to open near Coventry in 2013, is placing strain on the balance sheet. Broker Shore Capital says that, despite lower capital expenditure than expected, "we are becoming increasingly concerned on the group's debt profile going forward."

There is a view that the get-out-of-jail card for Ocado would be a bid for its operations by retailers lacking a sophisticated online network - Waitrose/John Lewis being the most obvious candidate and Wm Morrison another.

Shopkeeping, whether an online retailer like Ocado or a company threatened by online like HMV, has become hugely challenging.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 11:43am, January 5 2012