Perennial hits hard times

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What makes a successful retailer? It seems that Marks and Spencer may have forgotten the capabilities that put them on top.

English retailing is like an English garden. There are hardy perennials in the background – Marks and Spencer, John Lewis, J. Sainsbury, Harrods. Through decades they remain, sturdy and reliable. In front there are the annuals, which flourish briefly and then fade. Coffee shops are today springing up everywhere. Sock Shop or Laura Ashley. But do you remember hot bread shops, or Next Interiors? Sometimes, like Next, old plants flower again on different stems.

Last week, one of the most reliable of the perennials, Marks and Spencer, revealed some signs of ill-health. And it seems that Sears is about to be pruned, thinned and even dug up by the roots. It is a good moment to review what we know about retail horticulture. What makes retailers flourish? What distinguishes annuals from perennials? Are some of our perennials in need of renewal?

Transitory competitive advantages in retailing are generally based on clever positioning. George Davies, who developed Next, saw that there was a market for stylish clothing for a slightly older age group of women than those whose needs had hitherto been met by fashion retailers. Body Shop, Direct Line and pubs with real ales and no loud music were all the results of similar insights.

But two things went wrong with Davies’s Next. The niche identified was rapidly invaded by competitors, many of them with stronger retailing skills. At the same time, the company persuaded itself that its success was the result, not of transitory dominance of a neglected market segment, but of a universal management genius applicable to a wide range of retail activities. It went on a spree of acquisition and diversification, and came close to nemesis as a result.

With hindsight, these errors are easy to identify. But not easy enough for Ratners, who made almost exactly the same mistakes nearly a decade later. Gerald Ratner recognised a market for low cost, low quality jewellery. But, once identified, others would provide this, and they did. And all Ratners had to bring to the firms they bought was the no longer original concept of selling crap. Ratner’s accurate denigration of his own products only set the seal on a fate which the weaknesses of the underlying business strategy had made inevitable.

Positioning is not a source of sustainable competitive advantage for any business, because if competitive advantage rests on positioning alone it is readily replicable. For a time, one British retailer – Kwik Save – seemed to be an exception to this rule. For several years they earned one of the highest returns on capital employed of any large British company. And yet their formula – branded goods sold at low prices in unattractive surroundings in secondary locations – was based on positioning, and a readily reproducible positioning at that.

But, in the consumer boom of the 1980’s, it was not reproduced. It was then a business cliché that customers would always pay a premium for quality, and Kwik Save’s natural competitors, Gateway (now Somerfield) and Asda, moved up market in what proved unsuccessful emulation of Sainsbury and Tesco. Recession, and entry by continental retailers such as Aldi and Netto, eventually proved that Kwik Save was indeed no exception to this basic rule of business strategy: positioning is not enough. Kwik Save’s profits, reputation and rating suffered accordingly, and it is no longer an independent company.

Enduring competitive advantages in retailing are based on brands and systems, and it is strengths in these areas that have differentiated the hardy perennials from the gaudy annuals. Nothing illustrates the weakness of positioning advantages and the importance of brands and system more clearly than the history of Tesco. That company’s success in the early years of UK supermarket retailing derived from its positioning – Jack Cohen’s slogan was famously pile ‘em high, sell ‘em cheap. But as Tesco created the systems to match Sainsbury, they gambled on a dramatic change in positioning. Slowly they created a Tesco brand. After twenty years, the results show astonishing success. Real competitive advantages take longer to build, and last longer too. Market positioning is a competitive advantage only when it is matched to competitive advantage based on brands and systems.

It is in these areas that Marks and Spencer has had such an enviable record for so long. They have the best brand on the High Street. Not just for their customers, who associate the company with total dependability and value for money: but also for their staff, for whom the firm has always been a preferred employer. The external architecture of Marks and Spencer’s organisation was built around an almost Japanese relationship with suppliers – detailed influence on product specification and design as part of relationships sustained over many years. The internal architecture of the company was centred round permanent employment relationships, strong organisational routines, and a shared sense that there was a Marks and Spencer way of doing things.

With competitive advantages such as these, there is always a balance to be struck between exploiting them in the short run and developing them for the long term. You can always increase profits faster than underlying sales, for a bit. By taking full advantage of your strong customer franchise in your prices: by putting pressure on your suppliers and diversifying your supply relationships: by reducing staff numbers and employment security. By eroding the things that make you different from your competitors, the things which were the source of your higher profits in the first place.

Perhaps that is what Marks and Spencer did as they became leaner, meaner, and more aggressive in the 1990’s and perhaps today they are starting to pay the price. And perhaps that defines the dilemma that faces them – and perhaps other companies – today. Do they meet City expectations for earnings today and tomorrow by pushing these processes further, and becoming more like their competitors? And accept that in the long run, that will also lead to the same returns as their competitors earn.

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