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Comment: by Terry Murden

Eroding profits and the curse of Black Friday

TerryAndy Street will have ended the year knowing that the John Lewis department stores had a good Christmas. It always has a good Christmas because it is a destination shopping venue.

However, the times are changing and while the figures overall may be up, it is ever more evident that the ‘venue’ is a virtual one. Income from those passing money over the counter is fast being replaced by those clicking a mouse.

While sales in the five-week period rose 4.8% on a like-for-like basis to £777 million pounds, this was driven by a 19% jump in online sales, much of it on Black Friday when many products were heavily discounted. Shop sales showed no growth at all on last year.

So, where does Britain’s favourite chain of department stores go from here?

Street, John Lewis’s chief executive, has begun a debate in the retail industry about the merits of Black Friday and whether it was a help or a hindrance.

His preference is for it to be restricted to electrical goods. This is not surprising as sales of electrical goods were up 6.8% in the five weeks leading up to Christmas, but fell 14.7% in the final fortnight. This was largely because so many people bought their televisions and tablet computers on Black Friday. That week saw a 41% increase in electrical sales at John Lewis.

It is not difficult to work out that if most purchases were made at a discount that it would hit income and profit margins.

The problem for Street is persuading other retailers that the Black Friday phenomenon, imported from America, is not helping retailers trying to cope with other pressures, such as online competition. They are selling goods at a discount that would be bought anyway at full price.

He will have a tough task persuading others to join him, particularly as the purely online retailers such as Amazon would take an even greater share of the market.

John Lewis is at least supported by one of the better online services which has underpinned its multi-platform strategy for years. Others are expected to have done less well, not least Marks & Spencer which had a number of problems in the final weeks of the year.

A report published today by the Scottish Retail Consortium makes some interesting remarks about changing consumer behaviour.

It says that most retail and consumer goods companies have reacted swiftly to address the changes brought about by the emergence of the internet and new consumer spending habits, as online retailing competes headlong with the high street.

But it warns that what it calls “the unstoppable move to multichannel retailing” presents a “steep learning curve, with real costs as well as enormous benefits”.

It adds: “What works in a purely online environment does not necessarily transfer seamlessly to established store-based retail. More channels do not always mean more demand.”

The report notes that although consumer spending has improved, retailers’ net profit margins have been on a downward trajectory, and since 2010 over two-fifths of retailers have seen their net profit margins fall, on average, by 5.2%.

This will be at the back of the minds of many retailers, John Lewis included, and would explain Mr Street’s concerns over exercises such as Black Friday – Britain’s biggest ever retail bonanza with £810m of sales on one day. It may create a bumper spending day for consumers but does little to benefit the bottom line of retailers.

The SRC says that profit margins have been squeezed and are now only slightly higher than where they were at the height of the recession.

It concludes: “We’re expecting net profit margins to fall further as structural changes in the industry continue to provide significant challenges for retailers – especially for food retailers.”

 

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