Retailers up their ante to combat weakening consumer sentiments

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Global retailers are once again fighting their biggest battle – reluctant consumers. With the holiday season closing in, retailers are resorting to newer strategies to beat the consumer blues. To add to the pressure is the heavily discounting trend among many retailers to protect the bottom line. So there is British retailer Marks & Spencer working extra hard to get its general merchandise division provide better performance than the last season. Also, in order to fight competition in its home turf from rival Zara, Spanish retailer H&M is all set to launch a Spanish online store.

Back in the US too, weakening consumer sentiment has affected the sales of upmarket retailers. Most of these retailers like Walmart and Macy’s have lowered their forecast but are ready to fight the demon. Price cuts have now become imperative for many retailers to be able to compete with the aggressive department store promotions and get customers to purchase in an otherwise stagnant fashion environment. Industry experts are, however, hoping that this too shall pass very soon leading to a merrier holiday season for retailers.

Newer strategies to tap consumers in Europe

British retailer Marks & Spencer is geared up to have both its food and general merchandise divisions work double shift and expects a better Christmas after poor clothing sales hit last holiday season, according to its food business head. While the 130-year-old firm’s general merchandise division – clothing, footwear and home ware – has posted 12 consecutive quarters of declining sales at stores open over a year, its food business has delivered 19 straight quarters of like-for-like sales growth.

“This business has not had foods and general merchandise firing on all cylinders together for a long time. I think we are very close to having a position where both the food and general merchandise businesses are working positively,” Steve Rowe, Executive Director – Food, M&S said in a media interview. While the food business was continuing to win market share with a strategy to specialise more and focus on quality and innovation, he said there were also “really good positive signs” coming out of womenswear, its biggest clothing segment.

“I do not think we will have a poor Christmas (in general merchandise),” he said in the interview. “We all believe it is time to deliver.” Under Marc Bolland, CEO since 2010, M&S has posted three straight years of profit decline despite spending US$ 4 billion to address decades of underinvestment. Analysts do, however, expect profit to rise significantly over the next three years. M&S’s food business is outperforming the wider British grocery market, which is growing at its slowest rate for over a decade – and contributed over half of total group sales of £ 10.3 billion in 2013–14. The firm does not split out food’s profit contribution, but analysts estimate it generates about 35 per cent of UK profit, reflecting lower margins and higher operating costs than in general merchandise.

M&S, which trades from 809 UK stores, 763 of which sell food, has a strategy that sets it apart from Britain’s so-called big four grocers – Tesco, Walmart’s Asda, Sainsbury’s and Morrisons – which are being hurt by the rise of discounters Aldi and Lidl. Tesco and Morrisons have both issued profit warnings, while upmarket Waitrose has also cautioned that its period of unprecedented investment will affect profits. “The biggest single lump (of trade) is coming from the middle and moving to the discounters, but we are gaining from the middle, and so are Waitrose,” said Rowe in the interview.

M&S, which has 4 per cent of the UK food and drink market, has not felt the same pressure from discounters because it sells mainly own-label produce, so only 10 per cent of its food catalogue is directly comparable with the core product of the big four. Consumer trends of shopping around, buying little and often, and wasting less are also playing to M&S’s strengths, given its estate of 459 Simply Food convenience stores, a large proportion of which carry a much bigger range of products than the smaller convenience stores of the big four. Some 41 per cent of M&S’s customers ‘shop for today’, buying produce to consume on the same day of purchase. This compares with about 25 per cent at the big four.

M&S is also differentiating itself from the competition with its product innovation – about 20 per cent of its product range changes every year. On items that M&S cannot differentiate, such as bananas and cucumbers, it will match the market on price. But in areas where it can differentiate, it competes on quality, and not price.

Unlike its rivals, M&S has not brought down the price of a 2 pint carton of milk to below £ 1.

Swedish fashion retailer H&M, on the other hand, is launching a Spanish online store, adding to the competition faced in its home market by Spain’s Zara chain, owned by Inditex. The site will feature their home decor section H&M Home, just as Zara offers Zara Home. H&M, which has been slower to go online versus its rivals, has now invested heavily in its web business and plans sites in eight to 10 markets in 2015, after Spain, Italy and China later this year. The company has been gaining market share despite tough competition from discount retailers, especially in Spain where high unemployment has constrained consumer spending.

Hong Kong’s Li & Fung Ltd. also provides an interesting turn to this story. The retailer, which grew to prominence making clothing and toys in Asia for Western retailers, said its first half profit climbed 16 per cent as a one-off accounting gain more than offset weak sales in overseas markets. Li & Fung, which supplies to companies like Kohl’s Corp and Wal-Mart Stores Inc., said January–June net profit grew to US$ 111 million from US$ 96 million a year earlier. But it sounded a cautious note saying customers are delaying order decisions until they get a better idea about the outlook for consumer confidence in the third quarter. The firm said its first-half earnings were boosted by a one-time US$ 98 million gain related to the way it accounted for acquisitions. Li & Fung has traditionally relied on acquisitions to fuel growth, but the company has slowed the pace of mergers and acquisitions and spun off Global Brands Group Holding Ltd., a business that makes branded goods under license. Core operating profit fell 9 per cent in the half to US$ 227 million, slightly below an average forecast of US$ 232 million from three analysts polled by Reuters. “The recent Russia and Ukraine crisis has reduced foreign travel by Russian nationals, which is starting to impact the European retail markets favoured by Russian tourists,” Chairman William Fung said in a statement.

“In China, which remains Asia’s most important economy, the government’s focus on fighting corruption and its pull-back on being an export-driven economy is affecting consumption in the short term,” Fung said, adding that the firm still sees opportunities over the long term. The global exporter had said in May that factory facilities of some suppliers in Vietnam, which accounted for 7 per cent of sourcing last year, had been damaged during anti-China protests earlier this year and that the disruption caused would mainly affect clients in the United States. Li & Fung, with a market value of over US$ 11 billion, listed Global Brands on the Hong Kong bourse in July without raising capital, as part of a three-year growth strategy. Global Brands, which carries names like Cole Haan, Tommy Hilfiger, Disney, Calvin Klein and Juicy Couture, separately reported its first-half net loss widened to US$ 98 million from US$ 49 million last year as costs rose on investment in developing new licenses.

Shares of Li & Fung have risen more than 26 per cent so far this year, outperforming a 7.8 per cent rise in the benchmark Hang Seng Index.

Upmarket US retailers hit by slower consumption

Weak results from the likes of Wal-Mart Stores Inc. and Macy’s Inc. are the latest sign suggesting that less affluent US consumers are still pinching their pennies and the trend appears to be hurting upmarket retailers as well. A number of large US retailers who cater to low and middle income consumers reported disappointing quarterly comparable sales this week, pointing to a cutback in spending and a shift in preferences to stores nearer to home. “Consumers are still concerned about the cost of living and employment. Overall, we are seeing no changes in the consumer than what we have seen in the last few quarters,” Wal-Mart Chief Financial Officer Charles Holley said on Thursday.

Wal-Mart cut its profit forecast for the year, citing higher healthcare and online investment costs, but also cautioned that heavy discounting would continue into the holiday season to draw in its shoppers, many of whom depend on government assistance.

Even department store operator Macy’s, which caters to a more affluent clientele, lowered its same-store sales forecast for the year. Analysts feel that the weak sales and margin data illustrate the effects of a slowly improving job market, volatile fuel prices and government food stamp cuts. Amid the general gloom, one surprising glimmer of hope came from struggling department store chain J.C. Penney Co Inc., which reported a 5 per cent rise in quarterly sales and a narrower loss.

Even McDonald’s Corp, which sells burgers and fries for as little as a dollar, has struggled to grow sales at established restaurants in the United States since November 2013. Same-restaurant sales at home fell 3.2 per cent in July. Consumer sentiment is the highest since 2007, but consumer optimism is not translating into spending, say industry experts. The restraint is hurting retailers in the ‘affordable luxury’ space such as Michael Kors Holdings Ltd. and Kate Spade & Co’s, which have had to fall back on discounts to push their handbags and other accessories. Kate Spade shares lost nearly a quarter of their value after the retailer said gross margins were being hit by intense competition, particularly in its low-end Kate Spade Saturday brand. Michael Kors’ quarterly margins were squeezed by increased discounting to clear inventory and watchmaker Fossil Inc. announced lower profits as declining mall traffic, a problem for many retailers, took its toll. The rise of e-commerce has played a significant role in weakening brick and mortar retailers as well, although Inc. is struggling to reap a bottom-line boost from its surging sales. Price cuts have now become a necessity for many retailers as well, to be able to compete with the aggressive department store promotions and get customers to purchase in an otherwise stagnant fashion environment. In addition to McDonald’s, the US consumer’s reluctance to spend has also hit some of the country’s more upscale ‘fast-casual’ eateries, where many chains have been feeling the squeeze even as Chipotle Mexican Grill Inc. has prospered. Noodles & Co., a full-service restaurant chain, slashed full-year sales forecasts, in part for a drop in frugal customers visiting its restaurants. Red Robin Gourmet Burgers Inc., also a fast-casual chain, reported lower-than-expected quarterly sales and profit citing intense and non-sustainable discounting from rivals.

Burger King acquires Tim Hortons

Burger King has struck a deal to buy Tim Hortons Inc. for about US$ 11 billion, a move that could help give the fast-food company a stronger foothold in the coffee and breakfast market. The corporate headquarters of the new company will be situated in Canada, which may also help Burger King lower its taxes. Such tax inversions have been criticised by President Barack Obama and Congress because they mean a loss of tax revenue for the US government. Burger King and Tim Hortons said the chains will continue to be run independently and that Burger King will still operate out of Miami.The tie-up could help each Burger King and Tim Hortons chains pose a greater challenge to market leaders such as McDonald’s and Starbucks. It also reflects a desire by both companies to expand internationally. Burger King, which has about 14,000 locations, has been striking deals to open more locations in developing markets. The company sees plenty of room for growth internationally, given the more than 35,000 locations McDonald’s has around the world. Tim Hortons has more than 4,500 locations, mostly in Canada. Back in the US, breakfast and coffee have been hot growth areas in the fast-food industry. Between 2007 and 2012, breakfast grew faster than any other segment in the restaurant industry at about 5 per cent a year, according to market researcher Technomic. But it has long remained a weak spot for Burger King. McDonald’s led the category with 31 per cent of the market in 2012, while Burger King had just 3–4 per cent. Under the deal, Burger King Worldwide Inc. will pay C$ 65.50 (US$ 59.74) in cash and 0.8025 common shares of the new company for each Tim Hortons share.

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