I’ve shied away from commenting on the recent spate of
retail administrations for a number of reasons. Most obvious amongst those is
that I’m still less than a year past my own experience with Game. Whilst there
is plenty to be said about all of that, it doesn’t seem appropriate to get into
details on a blog, particularly with friends and colleagues still in the
relaunched version of that business fighting hard to build a sustainable future
for it.
However, I do think that when we take the stories of Game, HMV,
Jessops, Blockbusters and the other retail casualties together, there are some
clear lessons which emerge, and as someone who has spent more time than most
both making and learning from those mistakes, I’d like to share a perspective.
The first lesson is perhaps the most obvious. Industries
change and consumers move on. Sometimes the hardest thing for a business to do
is to change with or ahead of its consumers. The business model you have
operated for years seems safe, well understood and low risk. In almost every
case, our list of retail failures have been “done over” by changes in consumer
buying patterns which they could and should have seen coming. 5 or 10 years
ago, most of the now household names in digital content delivery didn’t even
exist, and there was nothing stopping big retail brands from creating those
businesses themselves. Nothing except the inertia of having an existing model,
and an instinctive desire to avoid cannibalising the revenue streams which paid
the bills.
Consider movie rental. Once upon a time there was only the
drive to your nearest rental shop, the gamble that your choice would be in
stock and the hassles of returning movies once watched. Consumer problems are
almost always solved as technology marches on, and from our perspective now we
can see the emergence of first postal services and then VOD as making the
experience of watching a film easier. No business was better placed to create
those services than Blockbuster – it had the customer database, the movie
studio relationships and the technical infrastructure. And yet it fell to new
start-ups to fulfil that demand, wiping the video shop out in the process.
I have every sympathy with the generations of managers in
that business who missed that opportunity. Sitting there on their balance
sheets were the liabilities for store rents – building a new business which
bypassed those stores would have seemed like madness. And that is a point we
shouldn’t gloss over. Investing in new and emerging business models at the
expense of your traditional one almost always hurts short term profit.
But the lesson is clear – if you don’t solve a consumer
problem, even by cannibalising your own historical revenues, someone else will
do it for you. There is no hiding from change.
Don’t think that that is easy, though. I’ve seen the same
basic point about reinvention made frequently in the last couple of weeks about
all of those businesses which have hit administration. Usually by people who’ve
never been in the position of having to make those challenging calls and
sometimes (most ironically) by people who are in the middle of making the same
mistake themselves. Just because your business is new, shiny and digital
doesn’t mean that you too aren’t going to be faced with the challenge of
smashing it up and starting again when technology or consumers move on. Today’s
innovation is tomorrow’s legacy problem.
So if the first lesson from these retail failures is that
reinvention and change needs to be bold and early, what are the others?
The first is technical, but important. Businesses, and
especially retail ones, need to take much more careful account of the real cost
of investing in physical property. Future store rents are not currently
capitalised on balance sheets, and that can make expanding a store estate when
times are good far too tempting, creating a problem when the tide turns. Again,
all of our administration victims are guilty of expanding their store bases to
a ridiculous extent in the good times, leaving a difficult and expensive shrink
process when times get tough.
It seems to run very deep in the DNA of the retailer that
the thing to do when you make money is to invest it in opening more shops. It
is not just the current problem brands where this is evident – there are, I’m
afraid to say, still far more shops in the UK than consumer spending can
justify, and some big shakeouts to come over the next 5 or 10 years (step
forward, the supermarkets).
So, be careful of the liabilities you take on; don’t expand
your cost base further in good times than you can bear in bad times, and be
bold about changing your business to keep solving consumer issues, even if it
means painfully junking what worked in the past.
It all sounds terribly simple, doesn’t it? To make it
actually happen, though, takes another ingredient too often missing from our
big companies – far sightedness.
If you measure yourself on a quarterly or even an annual
cycle, none of what I’ve written makes sense. Opening new stores looks like a
great idea, because you are only accounting for this year’s rent, not the 5
more you’ve had to commit to. Smashing up your business model in the search for
a new one looks like madness. Only when you look at a business and ask yourself
“where will we be in 5 years time?” does real reinvention become not only
possible, but attractive.
And very few businesses do that. There is much reflection to
be done, for example, about whether the stock market is a place which
encourages real long term planning. The same observers and analysts who will
now tell you that it was obvious some of these businesses were going to die
were also busy 3 or 4 years ago applauding big capex investments into store
refits, foolhardy international expansions and other examples of businesses
choosing to polish their legacy problem rather than solve it. If directors,
shareholders, analysts and journalists routinely applaud short term choices and
avoid the short term profit dilution that investment in the future creates, we
should not be surprised at the outcome.
I’d urge all consumer businesses to use this moment to
examine their own 5 year future. If you aren’t wrestling with a legacy problem
already, you will be at some point. Now is the time to make sure that you have
alignment of your people, your shareholders and your other stakeholders to
ensure that you act before it is too late. Don’t join the depressing list we’ve
seen already of those who sought to protect the short term at the expense of
the future.
