UK Retail Briefing - July 2016
Analyst Comment
 
THE PROBLEMS OF RUNNING A PUREPLAY ONLINE RETAILER
We have argued in several places recently (eg Online retailing – Europe, July 2016) that online retailers need to concentrate on what they do best:

●	Breadth of range – typically much more than can reasonably be stocked in a store
●	Convenience – in the sense of being able to order and receive delivery at a time that is most convenient for the customer.

One thing they can’t do is to focus on price and in fact, most online retailers now recognise that. But even if they follow this strategy, online is not an easy route to success. It is as challenging as any other form of retailing and the fact that businesses such as Asos or ao are profitable, does not mean that everyone is. 

We show later that the performance of online retailers is “mixed” and in this article we focus on one that has, so far, not been successful, at least in terms of making profits, Worldstores.

What it does
Worldstores is a homewares online pureplayer. It sells both branded and unbranded product. Its USP appears to be breadth of range of good quality products. There is no feeling that it is a price-led business. Its strategy is to focus on breadth of range and convenience, as we argued above it should.

Breadth of range can bring problems with it. For example, Worldstores has 750 lampshades, all displayed on the same page so that it is very hard to browse or compare goods. Nor has there been any attempt to break the range up into different sizes or styles of lampshade.

As far as we can tell, it has never made a profit and certainly not since it was large enough to have to file full accounts. It was founded in 2000.

Acquisitions
Worldstores has bought two companies in the last couple of years.

Kiddicare had been bought by Morrisons, made losses and was sold on to Worldstores in September 2014. It sells baby and child hardware. It is similar to Mothercare in its ranges except that it does not sell any clothing. Like Worldstores, breadth of range is a USP. Total sales at Kiddicare for the year to January 2015 were £21.1 million, and its contribution to Worldstores for that year was £7.0million. Since then all but one of its ten stores have been closed.

Achica was bought in December 2015. It described itself as a “members only, luxury lifestyle store”. Membership is readily available by signing in. And the range on offer is mass market. Like Worldstores, the emphasis is on homewares. Like Worldstores, the business has been making losses. In the year to December 2014, after a major advertising campaign to increase awareness, it reported an operating loss of £14.3 million on sales of £58.6 million – almost a quarter of sales. Worldstores is reported to be looking at ways to cut costs.

Worldstores record
Worldstores has continued to expand. We estimate that underlying sales growth was around 12% in 2014/15. Impressive by most store standards, but not what we are used to seeing from the high-flying online retailers.

FIGURE 1: Worldstores Ltd: Group financial performance, 2011/12-2014/15
 
Year to January 	2012 	2013 	2014 	2015 	
Sales (£m) 					
Worldstores Ltd	35	52	60	76	
Operating Profit (£m) 					
Worldstores Ltd	-5	-4	-7	-13	
Operating Margin (%) 					
Worldstores Ltd	-13.5	-7.6	-12.3	-17.3	
Pre-tax Profit (£m) 					
Worldstores Ltd	-5	-4	-7	-7	

Source: Company Accounts and Annual Report/Mintel

Accounts for the year to January 2016 have not been published yet. But it looks as if pro-forma total group sales (including the recent acquisitions) in 2015 were around £140 million. 

Stocks
Achica and Kiddicare are fundamentally different businesses. Kiddicare operates a standard range through the year. As often with an online operation it aims for a wide range, somewhat larger than could be stocked in-store. Worldstores wrote up the value of the Kiddicare stocks before consolidating them in the accounts so that they amounted to 25% of sales, an exceptionally high level especially as all but one of the stores has since been closed.

Achica works on special purchase deals, which it then clears through its website. Its stock levels at 3% of sales are at the other end of the range.

Worldstores itself operates on a similar level to Achica and, given the breadth of range, that looks an impressive figure.

Deep pockets
None of the businesses have a record to inspire much confidence. Worldstores has made a huge leap over the last couple of years through acquisitions. But it has yet to prove that they will work.

But it has clearly been able to persuade some backers. It raised another £25 million in capital in 2014 and brought in Goldman Sachs as an investor.

Other pureplayers
There was a time when it was easy to find backers for dot.com start-ups. There was a widespread assumption that online would take over retailing and that the high street would die. It hasn’t happened and it won’t. But there are still a few backers who think that way. Most pureplayers realised that they need to make profits and most do. 

The following table gives basic performance data for some of the larger pureplayers. These are not the largest pureplayers (such as Amazon or Asos) they come from the next level down and they are retailers that we have data for on Mintel’s Retail Interactive database.

There is no clear pattern. Some are still in a dramatic growth phase (eg Missguided), some seem to have hit the buffers (eg Ebuyer). Most are profitable, but profitability can vary widely from year to year. Worldstores makes the biggest losses in the list, but it is far from being alone.

FIGURE 2: Second rank internet pureplayers, sales and operating margins, 2012/13-2014/15
 
	Sales (£ m) 			Operating Margin (%) 			
	2012/13 	2013/14 	2014/15 	2012/13 	2013/14 	2014/15 	
The Hut 	157	184	248	1.1	2.7	3.4	
Ebuyer	189	187	191	1.5	0.9	0.9	
Wiggle	141	168	179	9.0	6.6	-0.4	
notonthehighstreet.com	43	83	155	na	2.1	-3.6	
M and M Direct Ltd	113	119	120	5.8	7.0	na	
Buy It Direct	93	101	104	0.6	0.4	1.7	
Missguided	29	51	87	11.0	1.8	5.6	
Worldstores Ltd	52	60	76	-7.6	-12.3	-17.3	
Kitbag	70	67	74	-2.4	-6.2	-1.6	
Victoria Plum`	26	54	72	22.6	22.4	4.5	
Kybotech Limited	25	29	46	6.2	5.9	0.0	
Made.com	16	26	43	-19.2	-19.1	-12.5	
everything5pounds.com	9	18	33	15.4	7.2	0.7	
Shop4Toys	21	23	27	3.1	-0.7	0.8	
Chums	25	26	26	5.2	5.6	5.2	
Woolovers	15	20	24	12.0	17.3	7.8	
Box Ltd	29	32	24	1.8	2.2	1.9	

Source: Company report and accounts/Mintel

Stocks and profitability
One of the biggest problems for an online retailer with broad range as a USP is controlling stocks. Both Achica and Worldstores seem to be able to cope well, though it may be that there are ways of keeping stock off balance sheet or, perhaps, only bringing it into the warehouse to satisfy an order. Kiddicare, on the other hand, needs to improve its controls.

All three companies need to achieve profitability. So far Worldstores has been able to persuade its backers to provide more finance, both to cover losses and to pay for the businesses bought. It looks as if total capital raised and loans taken out amount to £55million.

But Worldstores cannot rely on backers to bail it out for much longer. It needs to make profits. Its sales growth has been slowing, it has taken on loss-making businesses (although Kiddicare managed to report a profit for 2014/15). 

What it means
Worldstores is a large business in internet terms, but as its record shows, online is not a shortcut to retailing success. Worldstores’s record and those of other retailers we have listed here show that online is very challenging, every bit as challenging as store-based retailing.

There is also a message in the data, that pureplayers are still feeling their way. The sheer volatility of the record of some of these companies is remarkable and not at all what one would expect from a store-based retailer. But operating online is fundamentally different, not least because where stores use their physical presence to attract customers, online retailers have to spend on marketing and that is expensive. Perhaps some of the volatility in the record is a function of online retailers having to find out just how much they do have to spend on attracting customers to their sites.

That volatility should not come as too much of a surprise. It is rare to find an online retailer that was established before 2000. They are all very young businesses and they are experiencing a steep and sometimes painful learning curve.