Tesco Direct - Death of E-commerce and Online Retailing?
Official retail sales figures for April from the ONS, full-year trading updates from Marks & Spencer, Halfords and Pets at Home, interims from Kingfisher. M&S’ store closures and winding down of Tesco Direct in perspective.
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- Official retail sales figures for April from the ONS make a mockery of the media’s interpretation of the BRC’s earlier figures as “the worst month since records began”. The ONS figures show that retail sales values grew by 3.4% year-on-year, with volumes (i.e. net of inflation) ahead 1.5%. Easter timing distortions would have been a drag rather a positive driver, year-on-year and month-on-month comps were very challenging, yet there were no negative figures in the release - which curiously appears to have received next-to-no press coverage.
- Much more coverage of the trials and tribulations of Marks & Spencer. Annual pre-tax profits fell 62.1% to £66.8m, after hefty one-off charges of £321m relating to store rationalisation (for more on this, see below). Underling profits (i.e. excluding adjusting items) were down by a more modest 5.4% to £580.9m. Overall group revenue increased marginally by 0.7% to £10.7bn, although like-for-likes fell by 0.9% in the UK, driven by a fall in food (-0.3%) and clothing & home (-1.9%).
- Mixed results from a number of retail warehousing operators. Q1 sales at Kingfisher were down 1.2% to £2.83bn, as group like-for-likes fell 4%. B&Q’s like-for-likes slumped 9% over the period, with ‘the Beast from the East’ accounting for an estimated 6% of this decline Screwfix fared much better (+9% overall, +3.6% like-for-like). Halfords reported a 3.7% rise in group revenue to £1.1bbn for the year ended 30 Mar, but underlying profit before tax fell by 5.0%. Turnover was boosted by a 4.1% rise in retail revenue and a 0.8% increase in autocentre sales. Like-for-likes rose by an impressive 2.0%. Similarly, Pets at Home reported a 7.8% increase in revenue to £898.9m for the year ended 29 Mar, but this did not prevent a 16.6% drop in statutory profit before tax. Group like-for-likes rose 5.5%, boosted by merchandise (+5.0%) and services (+8.5%).
Stephen Springham, Head of Retail Research:
Store closures from M&S = Death of the High Street? Closure of Tesco Direct = Death of Online Retailing? Discuss.
Fair to say that many in the press reached the first (and lazier) of these two conclusions, but absolutely none came close to making the same association with what is arguably as significant a development in the online market – the UK’s largest retailer / second largest online operator calling time on its standalone non-food website.
The fact that M&S is to close 100 stores by 2022 was not so much news as quantification of what we already knew. The business announced that it was fully reviewing its store portfolio in November 2016. A total of 21 stores closed under the first wave, a further 14 were made public as part of this second wave. Such a high profile retailer closing sites is always going to set alarm bells ringing, but this still needs putting into perspective.
As I’ve argued before, M&S’ store portfolio review is essentially long-overdue housekeeping that should have been undertaken progressively and proactively over the years, rather than retrospectively and reactively now. Many M&S stores have been trading for 50 years+ and the retail scene has changed dramatically since then. Essentially, I would imagine that the review of each and every store hinges on two fundamental questions 1. Is this an M&S town / location? 2. Is the existing site fit for future purpose in its current guise? If either box is unticked, there is a case for exit.
But in many instances, the business may decide that it is indeed an M&S town, but the existing site is not suitable for its aspirations in that location. Take Putney (one of the 1st wave of closures) by way of example. Is Putney an M&S location? Unequivocally yes for Simply Food and you could probably make a decent case for a full-line (60k sq ft+) department store as well. But the site they occupied fell between both stools – two aged high street units knocked together, with a small upstairs, effectively too large for a Simply Food, but too small to give General Merchandise any sense of purpose or authority.
Equally, the 2nd wave of 14 closures is a real hotpotch of sites, spanning the high street, shopping centres (e.g. Newmarket), retail parks (e.g. New Mersey in Speke) and FOCs (Freeport Outlet Village). Each will have its own narrative as to why it is not ticking the two boxes. Two sites (Clacton and Holloway Road) are straight re-locations, existing stores giving way to a dedicated new Simply Food outlet in a nearby location. In the case of Northampton, I would venture that the new all-singing, all-dancing store at Rushden Lakes is regarded as an adequate replacement. In very simple terms, M&S is not randomly closing 100 sites in a state of blind panic without due consideration for its coverage in that area.
Moving to Tesco, its standalone online clothing and GM business will cease trading in July 2018. Launched in 2006, Tesco Direct was conceived as a non-food affront to Amazon, especially with the integration of marketplace sellers from 2012. The decision to discontinue it is significant and speaks volumes as to the mechanics of online retailing generally. The accompanying narrative was particularly revealing. Tesco conceded that not only was it “loss-making”, but a higher cost base, particularly around fulfilment and online marketing, meant that there was “no route to profitability” for the business and it was unsustainable in the longer term. A pretty damning indictment.
Of course, this is rationalisation rather than an outright exist from online GM retailing for Tesco. The majority of products available from Tesco Direct will be moved onto Tesco’s main website (Tesco.com). Tesco already trades media, home, small electricals and toys through its grocery site, albeit to a lesser degree than through Direct. Categories that may lose some exposure in the transfer are likely to be slower moving, lower margin goods requiring separate warehousing space, such as larger electricals, home and furniture goods.
There is more commonality between these moves by M&S and Tesco than meets the eye. One major UK retailer streamlining its store portfolio, another streamlining its online business. The common denominator is that both are looking to future-proof their multi-channel operations. By extension, the closure of Tesco Direct doesn’t signify the death of online any more than M&S store closures signify the death of the high street.