EasyJet founder Sir Stelios Haji-loannou’s recent foray into retail demonstrated the difficulties in trying to innovate in a sector hit hard by pricing wars and changing consumer behaviour.
Part social enterprise, his recently opened ‘easyFoodstore’ in North London, selling staple foods for 25p. Swamped by crowds as word spread, the store was forced to shut its doors for a few days before reopening with bouncers.
The episode underlined consumers’ eye for a bargain, which has driven down the margins of many of the high street players and left the big four supermarket chains playing catch up with the discount chains.
‘For one thing, the internet has increased price transparency so it is now much easier for people to shop around before they make a purchase. This means retailers are having to invest a lot more in becoming multi-channel. It’s a big cost to bear.’
But despite the doom and gloom around the sector, consumer spending has held up reasonably well, rising 2.7% last month, the fastest annual growth rate since May 2015. The key is to identify the emerging trends, particularly online, and those retailers that are best able to adapt.
Leigh Himsworth, AA-rated manager of the Fidelity UK Opportunities fund, recently bought into the supermarket on the back of the news. He expects the acquisition to be used to build a ‘click and collect’ model (where people can order goods online, but pick up in a local store) to revitalise sales.
‘Over Christmas a lot of people used Amazon, but they also used John Lewis, which did well off its click and collect partnership with Waitrose,’ he said.
‘That is probably what Sainsbury’s is trying to do with the Argos buy. It is off the beaten track, but Argos has spent a lot of time and money improving the customer service experience. Therefore it will sit well with Sainsbury’s in a click and collect pattern. So as a strategy it makes sense as a lot of people have a Sainsbury’s near them.’
Alan Custis, AA-rated head of UK equities at Lazard Asset Management, said the deal highlights how traditional retailers need to adapt to changing consumer trends or risk losing relevance.
‘The Sainsbury’s/Home Retail transaction is fascinating,’ he said.
‘Sainsbury’s buying Argos is an acknowledgement of our standards of instant gratification being met, which is now the most important thing. I think it is a smart deal because Sainsbury’s has excess space and it is a good way of combining audiences.’
Focus on value
Aside from the focus on value, which has been successful in times of austerity, Custis said the speed of e-commerce – with Amazon continually entering new markets – is raising standards and forcing companies to innovate.
‘It strikes me that there are new business models coming into the market and it is all about trying to keep an eye on them and see what is successful and what isn’t,’ Custis said.
‘You used to order something and it would come in the next couple of days. Now everyone expects next day delivery. So companies are really having to sharpen their pencils.’
This is also leading Himsworth to steer clear of the large established names that may need to spend a lot more time and money adapting their businesses, in preference for smaller and younger peers.
‘For some companies it is about being in the right place at the right time,’ he said. ‘If you had tried to market value retailing in the 1990s, you would have been shunned, but nowadays taking a Lidl bag to a dinner party is almost a badge of honour.
‘But companies now have to be a lot more nimble and can’t pay up front for this. I own Boohoo, which was nimble enough to grow into this niche, but even this is starting to become fair value.’
Moore has chosen to avoid direct exposure to retailers, in favour of owning names such as pub company Greene King. ‘You can’t have a pint online,’ he points out.
He also likes NewRiver Retail, which owns several shopping centres, as he looks to benefit from an increase in consumer spending.