The pain of commodity prices

Commodity prices are at historically sustained high levels & their effect is being felt on the whole global economy, but particularly sharply by a number of specific retailers.  With Oil prices above $120 all costs are increasing, but it is the price of cotton that is currently the undoing of clothing firms with American Apparel the large US based chain issuing a new bankruptcy warning.  Due largely to crop and soil fertility failure cotton prices are sustained at 200cent per pound, more than double their historic level.  Consumers currently are simply not willing to accept these price rises being passed on leaving such retailers the very unhappy ‘piggies in the middle’.  Maybe falling commodity prices will be just round the corner to ‘save their bacon’ – sorry ;)

Notworths

Much talk was made of how the British public no longer liked to shop at variety stores when Woolworths went out of business.  At the time I was adamant that this was not the case and the media commentators had got it wrong.  There are many current success's within UK variety retail, just look at Wilkinson & The Range.  The real issue as I commented at the time is that Woolworths senior management was not strong enough.  So it comes as no surprise that Alworths the company led by ex Woolworths director has also failed at the end of last week.  With strong management variety store retail is flourishing in the UK.  Woolworths had a strong brand and strong product mix both factors that have been rescued, but lets not try to rescue the management 'talent' that led to Woolworths original demise.

Retail Internationalisation to Ireland...

Many writers have commented on the attraction of internationalising to similar markets first.  Ireland must be a perfect target for UK retailers then.  Culturally, Linguistically, Geographically proximate, and in the past 20 years slightly less economically developed meaning opportunities were present in the market for the ingressing retailer to capitalise on...

BUT - while Ireland was once the 'Celtic tiger' it is no more, it's huge financial difficulties commented on here previously have manifested themselves into 34 consecutive months of retail sales decline.  So rapid are the sales declines that Carpetright is reporting drops in sales of some 50%, and announcing the closure of many stores.  Birthdays have done the same, and I'm sure many others will follow.  Just demonstrates once again the risks of any form of retail internationalisation even if you are taking the seemingly most cautious strategy.

Have Best Buy got the Best Way?

When a retailer becomes very strong in their home market they can become emboldened to believe that their format has great international appeal & move overseas.  Best Buy is one such retailer, initially very slow to internationalise, then in recent years a lot of talk of their ambition including opening 80 large out of town stores in the UK.  Quite why the UK market was chosen remains a mystery to me – it is a highly competitive market with large established players in the form of Dixons & Comet, and a market in which increasingly sales are moving to inevitably cheaper on-line retailers spearheaded by Amazon.  So in the UK they have entered a competitive and shrinking market!

Just last week came the news that Best Buy will withdraw from 9 stores in China & their entire estate of 2 stores in Turkey.  Does this represent a ‘failure’ in these markets, or the emergence of better investment opportunities?  Given the scale of Best Buys resources I don’t think that these withdrawals will provide significant new sources of investment capital & so we have to put it down to returns in these stores not matching expectations – expectations presumably then that weren’t realistic or well enough researched?  I do hope the UK market follows the same course, whatever happens given their slow start in the UK, the ambition for 80 stores now does not seem likely to be realised.

Marks and Spencer returning to mainland Europe again...

Marks and Spencer had built up a significant business in mainland Europe, but in the 1990s when the brand was struggling to maintain is strong position in the UK is divested these operations.  Now this withdrawal is widely considered to have been a mistake, and under Stuart Roses’ leadership M&S pursued international expansion again focusing on developing retail markets such as India & China, but now new head Marc Bolland has stated that he wishes to build ‘leadership positions’ in priority markets.  This comes as it is widely tipped that M&S have secured the lease on the Esprit store the Champs-Elysees in Paris – I do hope that internationalisation is done carefully and in a fully researched manner rather than rather arrogantly assuming that their offer will be accepted largely without adaptation from the domestic offer.  While a store in Paris could prove successful it does not appear to sit comfortably with Bollands vision – M&S will never be a fashion leader in the French market...

Online first international expansion

Zara have announced the launch of transactional web-sites in Denmark, Norway, Sweden, Monaco & Switzerland on March 3^rd.  This is an underused internationalisation strategy, to establish the brand in a country on-line and ‘test’ the markets acceptance of and interest in its products and approach.  Most large retailers jump straight in with both feet with very significant capital investments setting up stores & very often making fundamental mistakes which either prove costly or fatal leading to market withdrawal.  This cautious approach has a great deal of benefits – comparatively very low cost, potentially less damaging to the brand, provides a platform to learn the market and make necessary adjustments to the offer, and of course on-line customer feedback is embedded allowing the brand to really use their consumer and viewing non-consumers to help inform their practice.

JJB & CVA

CVA's (Company Voluntary Arrangements) are a nice idea in principle:  If a company has run out of cash and is staring bankrupcy in the face then rather than call in the administrators and shut up shop (in which event everyone looses generally), the company can negotiate a deal with it's creditors and subject to certain conditions continue to trade.  JJB finds itself in this position for the second time in two years and is seeking a CVA agreement with it's creditors - most notably it's landlords.  The proposed CVA is likely to release JJB from some long leases signed on retail premisis, and allow for some rent reductions on others - the assumption is that the landlord should be happy with some rent rather than the alternative of none at all.

But, the fragile state of JJB has been the subject of comment on here previously.  It's competitors are performing well, but yet JJB has repeatedly sought further support from the banks and it's shareholders.  When will the support stop and people realise that this is simply a fundementally poorly run business and pull the plug.  With two CVA's in two years there are some real issues around fairness of competition.  JJB is able to downwardly negotiate rents and get out of contracts that it willingly entered into while it's competitors who have managed their businesses with greater competance have no such advantage...  Fair competition??