September 2018, John Lewis announces a near total collapse in its first half profitability.
John Lewis posted 99% less profits in the first half of this year than the first half of last year. Earlier in 2018, House of Fraser went bust. M&S reported a 62% decline in profits and began closing over 100 stores. Homebase has entered CVA territory. Debenhams was sold to Mike Ashley and not so long back BHS collapsed.
Why are large-format department stores failing?
All of these issues could be fixed through store investment, more exclusive ranges and price discipline. However, the one issue that cannot be fixed is the internet.
The internet is not about price
It’s easy to think of the internet as a price deflator, pushing prices down and down. The larger threat it poses to retailers is convenience and disintermediation, cutting out retailers altogether.
The Convenience Trend
Convenience is the by-word of modern marketing. Consumers have too many choices and not enough time to make them, so convenience wins.
There was a time when department stores, shopping centres and even out of town retail parks were considered the pinnacle of convenient shopping: Single locations where everything was available in one place with easy parking.
The number of product choices in any given category has grown steadily over time. Single locations cannot house so much choice in one place. The internet has shrunk distances and delivery has become faster and cheaper. Physically going to a store is now less and less attractive.
Online consumers can get to grips with the shape and size of a retailer’s range in a fraction of the time it would take them to walk around a shop, where usually only a proportion of the range is on display.
Digital convenience makes the average shop feel inefficient, claustrophobic and limiting, it makes department stores feel like walking round a museum.
Disintermediation and rise of the new middle men
It is however true that many department stores do have very good websites, John Lewis is an example. 39% of John Lewis’ sales are online. Like many brands' websites, one can browse easily, move laterally, earmark choices and transact smoothly.
Nevertheless, the way we shop online is different to how we shop in store. Client research by Morar HPI shows that when consumers shop online they tend to start with a search engine, key in product features first with retailers and brands as a secondary thought.
Google > Black, jumper, cashmere, turtleneck, men, medium.
Dis-intermediators, or aggregators, like Google disrupt the on line experience the retailer is trying to create by taking consumers past their front door straight to a virtual shelf: the first page of search results.
Think across to Google News searches, which transport the reader past the “newspaper brand” straight to the story.
Disintermediation (cutting out the middle man) means retailers must develop another form of convenience; mental convenience.
Retailer brands have to develop strong associations amongst consumers for each aspect of their range, so their consumers searches include the brand name. E.g. “Clarks, school shoes”.
This is easiest for retailers with a few products lines. It is hardest of all for departments stores, many of which sell over 100+ distinct categories. For example, John Lewis’s website has over 300 categories on it.
Google > John Lewis, Black, jumper, cashmere, turtleneck, men, medium.
This is a huge communications challenge and also very expensive requiring the creation and maintenance of complex memory structures in the general public.
Even Ikea’s top of mind product associations are surely a fraction of the size of its actual range. Perhaps we’ll do a survey on that to prove the point...
Of course, the alternative is to pay Google SEO-money to be artificially linked to common search terms like “bookcase” or “sofa”. This is far easier, but no less expensive in the long run as every investment in SEO actually feeds the formula. Google is now worth over $800bn.
Google and Amazon – the perfect storm
Amazon is the 1000 lb gorilla when it comes to perceived convenience. Assumed by consumers "to sell everything” and, with features like 1-click and Prime, considered very convenient.
Both Google and Amazon have become in a small period, two of the world’s most valuable companies by corning the two sides of the shopping equation; search, or rather how products get found and convenience, be it mental or physical.
In so many client studies teams are routinely surprised by just how much of their customers’ wallets go to Amazon, not only in total, but in their own categories. Amazon is the mental and physical convenience benchmark against which retailers need to measure themselves.
What can be done?
John Lewis is rebranding. The company says it makes most of its annual returns in the second half, so let’s see how that goes. A new logo won’t change the world.
Department stores have to respond to the need for greater physical and mental convenience by shrinking both their store footprints, to be nearer to buyers and their ranges, to be more memorable and cheaper to continually promote online.
Interestingly both Harrords and Selfridges have posted sales growth this year. Both stores and offer little in the way of mental or physical convenience for shoppers. However both Harrords and Selfridges have enough theatre and entertainment for consumers to experience inconvenience as pleasure, not pain. They’re both destinations.
So in addition large retailers need to offer experience. This is how Ikea remains strong, posting 6% sales growth in 2017; part furniture store, part day out, where people always leave having selected something they hadn’t intended to buy.
Get in touch
Cracking the omni-channel code is the great odyssey of modern retailing. Morar HPI has a range of consumer and retail experts to help teams improve their convenience and experience. We also carry data for you to benchmark yourself against brands like Amazon and Google.
If you would like to learn more about how consumer insight can help your brand grow, please get in touch.