Retail trading economics have always worked off narrow margins. And scale economies have always been critical. In many respects, this hasn’t changed and never will. Nevertheless, I have no doubt that the benefits of scale in retail are declining. Why, how, and what are the implications?
Retail added value is about what happens to your inventory between buying it from your supplier and selling it to your customer. The value you add in between is what generates your profit, and this is the bit of the equation that faces growing pressure. A relentless expansion in capacity, physical and digital, means too many mouths to feed, and pressure of margins. Scale helps to mitigate some of this pressure by spreading the cost base over a wider revenue stream, up to a point.
Pursuing growth has very often gone hand in hand with diluted engagement with core customers – more stores, larger footprints, proliferated ranges chasing widening customer groups. All of which makes adding value more difficult.
Until not so long ago, increased scale trumped narrow focus when it came to trading economics. But with so much more for consumers to spend on, fragmenting and more individualised demand needs a matching supply side, and large retailers have found it increasingly difficult to adjust. In many ways fragmenting demand is the antithesis of scale
Smaller, more niche and focused players have found their closer proximity to customers a fundamental advantage. Large retail business built for a bygone market tend to be strangled by legacy systems and operating models that are inflexible and slow to respond to change. Making decisions faster becomes a very material competitive advantage.
All of this helps to explain why the middle market is under so much pressure. Big businesses whose scale is increasingly failing to compensate for their competitively vulnerable added value. Can these giants learn from smaller players? Of course they can.
Getting bigger has very often meant big retail has become far too corporate. And in doing so, become increasingly less commercial. Ultimately, this is at the heart of everything. The superior commercial skills of smaller players are going to take increasing market share from the bigger, often fatally wounded big beasts whose scale is becoming increasingly difficult to defend competitively .
Over the coming few years the structure of retail will change materially. Shopping more locally is likely to stay, in line with more working from home, and big City Centres will struggle to recapture their formerly dominant positions. Much of this will focus on the middle market, and the monolithic retail giants that have long dominated it. We have already seen the departure of Debenhams and Arcadia. There will be more.