We analysed a group of specialty retailers with sufficient public data over the last 20 years – nearly 70 retailers – and found that the majority of retailers who substantially underperformed the market ended up turning their like-for-like sales positive in a relatively short timeframe.
First, sustained poor performance is more common than many would think. Eighty-eight per cent of the retailers we studied had at least one year of double-digit negative like-for-like sales. And 47% of our set followed that bad year with another negative one.
But all hope is not lost for this set. In fact, we found that 51% of those retailers averaged positive like-for-like sales in the two years after their slump. And 60% of the set had turned positive within five years.
We found that overcoming such a significant slump is made more challenging by four factors:
1. Tarnished brand. Once-desired brands can lose advocacy or prestige as a result of failure to adapt to changing trends or a loss of quality control. Examples include TGI Friday’s and Aquascutum.
2. Rapidly increasing market competitiveness. The popularity of a given category encourages a sea change in the number of brands and retailers playing in it, as well as e-commerce influences like Amazon keeping prices relatively low. Retailers like Argos and Jessop’s have faced this challenge.
3. Secular shifts or a changing industry. Companies run into this problem when consumers no longer want their products. Some, like WH Smith and Barnes & Noble, have been able to branch out into adjacent categories to stay afloat. Others, like Silverscreen and Allied Carpets, have fared less well.
4. Operational missteps. Risky management decisions with lasting consequences can do as much damage as any macro trend. HMV and Focus are examples of retailers who failed to adapt their core concept quickly enough and suffered the consequences.
None of these challenges alone means that a brand is beyond hope. They simply mean that reinvigorating the brand will require major strategic changes.
The following case studies help illustrate some of these strategic changes.
Case Studies: Great Turnarounds
2006–2011: BLUE INC
ISSUE: Blue Inc experienced double digit decline in sales in 2002, had further declines in 2005 and 2006 and was loss making for the first four years of the new millennia. These results reflected challenging trading conditions and were compounded by increased activity in the value sector by major retailers.
SOLUTION: Foundations to the turnaround were laid in 2004 when several unprofitable stores were closed and the rebranding of remaining stores from Mr Byrite to Blue Inc was completed – aimed at younger and more fashionable clients. A management-buy-in during 2006 by Steven Cohan, who took the helm as CEO, saw an accelerated store opening programme including a flagship Oxford Street store.
RESULTS: Blue Inc turned in 22.7% total sales growth in 2007 followed by 40.2% in 2008, with operating margin increasing simultaneously. Double digit sales growth continued throughout 2009 and 2010. The acquisition of the Officers Club stores in 2011 and D2 stores at the beginning of 2012 – combined with the Chairmanship of Sir Stuart Rose – have put the business in a good position for stock market floatation at some point in the future.
2005–2009: ICELAND FOODS
ISSUE: Iceland faced double digit decline in sales in 2001, followed by further mid-single digit declines in 2002 and 2004. This culminated in a £75m pre-tax loss in 2004. The poor performance was a result of internal strife and turnover of management, including 3 CEOs in a year. Poor merchandising decisions also contributed, including selling only organic vegetables and going onto develop a range of products too large and out of line with market prices.
SOLUTION: Iceland re-appointed founder and ex-CEO Malcolm Walker in February 2005 with a new team of directors – who remain at the business today with the exception of the managing director who retired in 2012. The business reverted to its original core business, a traditional freezer centre – making the business simpler and refocusing on its strengths. Iceland underwent store and distribution centre rationalisation, cut head office costs and closed the loss making home shopping operation.
RESULTS: Combined like-for like sales in the three years from March 2006 to 2009 increased by 39.9%. The acquisition of 51 former Woolworth’s stores in 2009 aided expansion – and c.20 additional openings in 2010 and 2011 has maintained this expansion. Total sales have increased from £1.44bn in 2004 to £2.61bn in 2012 and net margin has increased. Malcolm Walker and three other directors were involved in a management-buy-out in 2012 and hold 43% of the business.
2006–2010: AMERICAN GOLF DISCOUNT CENTRE
ISSUE: American Golf Discount Centre faced declining total sales of 3.1% in 2006 and 10.5% in 2007. The poor performance resulted in the business making a loss in 2007. These results were symptomatic of a high turnover of management since an LDC backed management-buy-out in 2004. Additionally 2006 had seen a significant downturn in golf hardware retailing.
SOLUTION: Significant investment was made in expanding the internet business in 2006, while a price match philosophy re-established American Golf’s value credentials. It also underlined its market leading status as a specialist through the launch of exclusive ranges. The buying back program of franchises was completed in the 2006/07 financial year, giving the business total control over strategic decisions. In 2009 the transactional website was made available across Europe, with prices in local currencies. The internet business was further strengthened in 2010 with the purchase of onlinegolf.co.uk – and to underline the businesses commitment to e-commerce Lee Brown, the founder, was appointed to the American Golf board as E-commerce Director.
RESULTS: In 2007/08 strong like-for like growth was reported from stores and the developing internet operation – combined with the addition of 3 new stores – total sales increased by 10.8%. Mid single digit total sales growth was achieved between 2008 and 2010. Since the acquisition of onlinegolf.co.uk in March 2010 sales have grown at 20% a year, reaching £133m in March 2013. The business has just opened its 100th store.
2003–2007: J. CREW
ISSUE: J. Crew experienced -16% comps in 2001 and -11% in 2002. These results were symptomatic of significant internal strife and turnover, including three CEOs in five years, and poor merchandising and real estate decisions. At the same time, its competitive landscape only intensified.
SOLUTION: Starting with significant management changes, including hiring Mickey Drexler as CEO, J. Crew sought to instil a design-driven focus throughout the organization. It also revamped its products to include more colour and added new higher-end pieces, categories and a bridal collection. J. Crew also upped its product flow and improved the store experience.
RESULTS: J. Crew turned in 16% same-store sales growth (SSSG) in 2004 and 13% in 2005, plus a 17% increase in total revenues to $804 million and a gross margin increase of 36.3%. It was taken public in 2006 with a market capitalization of $1.1 billion and has since spawned several successful new businesses, including Madewell and Crewcuts.
In conclusion, four pre-requisites are necessary to turn around a substantially under-performing retail business:
- A new team has to be put in place – sometimes this can entail bringing back on board a previously successful leader
- Clarity and investment in the core value proposition
- Rapid divestment of non-core activities and systemically unprofitable parts of the business
- Rebranding/ reinvention of the customer experience.
24 April 2013