The few weeks since Christmas have seen an unprecedented succession of retail failures and news of retailers in serious trouble. CVAs, loss of credit insurance and even administration have become commonplace.

We have written about these matters in other places, most recently discussing the problems of New Look – “The Challenges that lie ahead for New Look”, 16th March 2018.

But what strikes us about so many of these stories is the way commentary tends to compartmentalise the problems. If one reads the comments in the media one would get the impression that the problem at New Look is that some stores are loss making, without giving any thought to why that should be so.

In fact so much of the comment completely fails to look at the bigger picture.

Symptoms

  • Stores lose money because they are not generating enough in sales. They used to cover their costs, but now they don’t. Why not?

  • Management buy-ins often fail because the company fails to generate enough profit to cover finance costs. Why not?

  • Profits fall if sales are weak.

Treatments

So if a company is struggling the reaction tends to be to address a profits problem by cutting costs. This is the natural reaction of anyone with an accounting training.

The trouble is that cutting costs often just makes matters worse and all too often accelerates a downward spiral.

  • Lack of investment in stores means that the store environment deteriorates and customers drift away.

  • Lower staffing levels mean that store standards deteriorate and customers drift away.

So the next resort of managements is to try to negotiate lower rents (eg House of Fraser ) or better terms from suppliers (Arcadia).

But isn’t it all about online?

It would be easy to look at the growth of retailers from Amazon to Asos and Missguided and say that the high street is suffering because of the growth of online. While it is true that online is growing very rapidly while too many high street fashion retailers are struggling again one needs to ask why.

If there was one clear message from the trading results over Christmas (See Christmas Shopping Habits – UK, February 2018) it was that some high street fashion retailers could perform just as well as online fashion specialists.

So what’s missing?

The elephant in the room is the root cause of all the trouble – the merchandise. Sales are weak because not enough people want to buy the goods. That’s why the Analyst Insight concentrates on the underlying problems of New Look – that it has lost track of its target market. It has become unfocussed and is trying to target too many disparate groups. It is also, like too many UK fashion retailers becoming risk averse.

Online retailers are growing fast because they have a clear understanding of their target market and what it wants.

Back to basics

In essence retailing is simple. In practice it can be very complicated. But the first and most important factor is to understand what the target market is and how to service it. It may seem obvious to argue that a weakness in sales can be addressed by trying to target another group, as New Look has been doing, but in practice the business just loses focus. Core customers find too little to appeal to them and too much that doesn’t appeal. But at the same time the new target customer doesn’t come into the stores because they don’t associate the stores with the new ranges on offer.

So the problems at New Look are not financial – those problems are the symptoms, but not the cause. The root cause is that the merchandise does not appeal enough to the existing customer base.

The problems of these failing companies are retail ones, not financial ones. It would be easy to blame external factors, but in fact all the problems are home grown.

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