I’ve read a lot recently about how independent retailers are struggling. Its an ongoing battle trying to increase or at the very least maintain turnover in the face of high market rents, rates and the increasing pressure, (for some unknown reason), to increase wages. Lets face it, the high street is a difficult place to do business these days which is why many small and medium sized retail companies are trying to develop an online presence as well. I read an article by Eric Musgrave, editor of industry magazine, The Drapers Record, which encouraged all retail businesses big or small to expand online. If they weren’t multi-channel then they were missing a huge line of extra sales and would very likely go out of business as a result.
Which is why I am amazed that many brands who supply these businesses have an active and aggressive online policy themselves. Take Timberland for example. In an article in Computer Weekly in October last year, senior head of e-commerce, Dan Mahoney had this to say, “It’s difficult to use the term competitor,” he says. “Because they’re a business partner, not a competitor.” when referring to other online stores that sell the Timberland product online. However it is quite clear that Timberland is pushing ahead aggressively as it can trying to understand its customers, developing a responsive and now mobile experience to gain as many online sales as possible.
Where does this leave the humble retailer? It may be OK for big players like Schuh, Office and Amazon to stand up to the competition but smaller, independent stores?, how will they cope online. Everyone is telling them that the only way to survive is to have a multi-channel presence, but their biggest competitor is the brand themselves.
Go to Google and search for ‘Timberland’ and you will see that they occupy the very top advert but also the top organic spot, the next three retail spots and the next position for the US shop after that. Half of the search results page is taken up by the brand itself, so how can anyone else get a look in? Well frankly they can’t.
There is a huge incentive for a brand to sell online directly to the public. Normal wholesale margins hover at around 40% so, for example, a pair of shoes may cost £20 from a supplier, the brand will then sell the same pair to a retailer for £33.33 which allows for a £13.33 or 40% profit from them.
A retailer will typically sell the same shoes for 2.25-2.5 times mark-up including VAT, in this case using x 2.25 = £74.99 – so that pair of shoes that has cost £20 from the factory will end up on the shop floor, (or on a website), for £74.99. Now if that website happens to be the brand themselves then the whole margin, a whopping £42.49 profit after VAT or 212% is available to them. That’s a pretty big incentive to sell directly don’t you think?
You can do an awful lot with that 212%! The retailer will be running his/her shop on the margin they make from that pair of shoes – in this case £29.16 or 46.6%. They need to pay rent, rates, staff costs NI, in store marketing, fitting and local advertising as well as hoping there is enough left over to live on. They are then being encouraged to go ‘multi-channel’, so maybe they will have a website with running costs, be operating on Amazon and Ebay who typically take 15%, paying Google for Adwords, advertising on Bing and Facebook, via email and the many other ways there are to reach people via the internet. Before long it all gets swallowed up, before long they are out of business.
Of course its very easy to get up to your neck in all of this, by constantly being told that going multi-channel is the only way forward they are being stymied by the very organisation who is there to support them, the organisation that provides the product, the marketing and the very desire, the brand itself. But if that brand is completely dominating search, is dominating advertising because it can, (212% goes a long way!) then the retailer has not got a hope in hell of competing with them online.
Timberland is not the only brand selling directly to the public, Hush Puppies do as well and at the end of the season they launch a 40% off sale – Heaven help you, you poor retailer if have any left to sell! If the brand themselves have that level of discount then you either have to wait until they sell out or join them. Ecco issue a 10% voucher just for signing up to their newsletter. Any shop selling Ecco just lost 10% of the retail price in a stroke – so that 46.6% just became 36.7% of the original turnover!
So why am I complaining?, why am I bothering to write about this? well firstly I am concerned for independents because they represent the heartland of Britain but it affects pure play online businesses as well. We used to take a lot of top spots in Google but with the brands having their own websites they will always come above us. The only way around this is to pay more to Google, but the brand’s pockets are infinitely deeper, (remember that 212%)
So where will it end? Some brands like Tamaris, Azor and Lelli Kelly have seen sense and only have a website to showcase their products in the UK. This allows the companies they supply to make a fair profit. For those brands that don’t play the game in this way, they risk hoovering up all the online business to be had but also destroying the very retailers that made them a ‘brand’ in the first place. A successful brand will alway boast about the number of ‘doors’ it’s in but if those doors start closing one by one because they can no longer compete with the brand itself then is it still brand at all?
If a brand was only available from it own online store is that a desirable brand? with nowhere else left to buy it, maybe not. Its volumes per line will fall and last and sole amortisation costs will rise, the ranges get smaller and the brand disappears.
It’s happening more and more and brands need to wake up to the fact that they just might be biting the hand that feeds. Those embattled independents need a leg up, not another shovel of manure thrown at them.
Nigel Carr© 2015