Retail: The Coming Change Is Clearer

Slowly, the shape of retailing is changing as more of the world's biggest groups abandon the 'big is best' approach in favour of smaller stores, more savvy internet offerings and a slower rate of new store openings.

Saving money is the mantra (although not directly stated), improving weakened profit lines is another under-stated intention, and trying to keep and attract customers who have started using stores as showrooms for buying products on line is perhaps the overriding ambition.

Helping drive this change are government spending cuts and austerity measures (in the UK and France and other parts of Europe), political indecision and unease (the US) and consumers who have grown cautious as the world recovers from the GFC and have decided to save rather than spend (Australia, the US, Europe and elsewhere).

In the US in particular, credit rationing is still keeping consumer spending back, but saving is taking precedence, although spending on cars is rising much faster than in the rest of the retailing sector.

But gone are the days of headlong expansion for retailers riding on the back of easy credit for themselves and their customers.

Major economies such as the US, UK, Western Europe and Australia and New Zealand are seeing sluggish to weak retail sales growth as consumers either cut spending, or save or redirect it into personal services, cars and overseas travel, with a dash of property thrown in (in the UK).

Overshadowing this is the all-pervasive internet.

For Walmart, Carrefour and now Tesco, plus Best Buy, America's biggest consumer electricals retailer, the rising influence of the internet is at the heart of the new or changing strategies.

They may talk about cutting prices, improving the retail offer, making stores smaller, more comfortable, 'fun' and so forth, but the bottom line is an attempt to stop customers using retailers as showrooms for online shopping.

And, Walmart and Tesco in particular are making themselves part of the internet fulfillment channel in an effort to either attract more customers, or hold their existing ones.

Just as banks around the world face a clouded near and medium term outlook, so also do big retailing stocks.

Offshore expansion, long favoured as a way of driving sales and earnings growth faster than in home markets, has a mixed record and some are reducing their reach.

The key development in the past year is the rationalisation of some of these offshore moves by the likes of Tesco, Carrefour and Walmart (respectively the world's third, second and biggest retailers) and a slowing of expansion in their home markets as they face the unpalatable truth that they are probably close to, if not at their maximum size.

In Australia Coles yesterday upped the ante on rival Woolworths by revealing a relaunch of its Fly Buys loyalty card that will be more widely marketed.

That's in keeping with the offshore trend of investing more in the quality of the offer to customers rather than more floor space: the aim is to try and offset the appeal of the internet.

Woolies is expanding into hardware to take on Bunnings, owned by Coles' owner, Wesfarmers.

But analysts question the size of the returns Woolies will make from sinking more than $1.5 billion into this new business.

And our biggest consumer electricals and furniture group Harvey Norman is under pressure as sales growth drains away, leaving the company exposed with more than $2 billion of property (in stand alone centres) not making an adequate return.

Even the smartest shopping centre owners in the world, the Lowy family-dominated Westfield Group, has seen the trend and unloaded shopping centres in the US and retail sites in the UK, to pay down debt and finance new openings in Brazil and other emerging economies.

Tesco, the world's third biggest retailer and the UK's largest, is the latest of the global big three to curtail an aggressive expansion campaign in its home market that has weakened earnings, undermined the share price, forced change in senior management ranks and upset customers.

It is slashing expansion plans for Britain to boost profits, redirecting spending to improving its internet performance, investing in price cuts for shoppers and trying to convince Britons to spend more in its 2,700 or so outlets.

Specifically Tesco is cutting spending on new stores in the UK by 38% this year and all but abandoning the construction of so-called big box or hypermarket stores.

The decision comes after the retailer issued its first profit warning for decades earlier this year for UK profits, an announcement that later saw the head of the British retailing depart and the new strategy developed.

It follows a decision by the French-owned Carrefour, the world's second biggest retailer, to abandon revamping its big box stores in France.

Carrefour is the retailer that originally developed the hypermarket style of retailing several decades ago.

As well Best Buy, America's biggest consumer electricals retailer, late last month announced plans to close 50 big box format stores and sack 400 mostly head office employees.

Then late last week it revealed plans to close a further 42 smaller stores, with most shutting by early next month.

And Walmart, the world's biggest retailer, has abandoned its headlong expansion in the US, directing the savings into revamping existing stores, developing smaller formats, investing more in price cuts and expanding its internet offering and performance.

In fact Tesco seems to be following Walmart's model.

The shift in strategy in the UK - Tesco's biggest market - involves slowing its hectic expansion of physical stores while focusing more on the internet.

The company said on Wednesday that net new space growth in the UK would be 38% lower in this financial year than in the previous year.

Those cuts will trim the company's capex in new store and revamping existing outlets by 500 million pounds to 3.3 billion in the next year.

The number of UK stores offering "click & collect" pickups of items ordered from its website would double to 1,600 by Christmas.

At the last count just 500 of its 2,715 outlets across the UK were able to offer the service.

Another change is that Tesco is also imitating Amazon in allowing third parties to sell through its internet business which it wants to become an online shopping mall.

Horticulture, hardware, homewares and other specialist chains or outlets are to be recruited to the website based around Tesco.com.

Customers visiting Tesco's website will be able to buy goods from rival retailers for the first time.

It's all part of the plan to expand the click-and-collect service, which allows shoppers to buy online but pick up parcels from their local shop, rather than wait for home delivery.

Walmart has a similar idea, but extends that to people who don't have a credit card.

They can order online and pay for and pick up their orders at their nearest store the next day.

As well, people too far away from a Walmart outlet and paying online, can order and have their purchase delivered to their nearest Federal Express site where it can be picked up.

Tesco is also recruiting more than 8,000 extra staff across the UK to make the shopping experience more pleasant in its stores.

The company said pilot schemes had shown that this could improve its sales growth rate by just over one percentage point.

The company plans to boost employment by a total of 20,000 people over the next two years.

That might be enough to stop the decline in sales seen in the latest year in the UK, which caused the company's first profit fall in its heartland operations in 20 years.

In the fourth quarter, Tesco's UK sales suffered a 1.6% drop in same store sales, worse than the 0.9% fall in the third quarter, but better than the horrid 2.3% plunge in the important Christmas month, which sparked the revamp of strategy and other changes.

For the group as a whole, sales rose 7% in the year to February 25 to 64.54 billion pounds, up 7% and thanks to new store openings in its international arm, which spans Asia, continental Europe and the US.

But the US business, the Fresh & Easy format, is still struggling and will take at least another year or more to be profitable past the 2013 deadline. It is cutting new store spending in the US to try and improve sales and margins from the existing operation.

China is also a concern and sales growth there is falling on both a topline and same store basis.

Full-year net profit rose to 2.8 billion pounds ($US4.46 billion) from $US2.66 billion in 2010-11.

Tesco is not the only global giant feeling the pinch. French-based giant Carrefour is hurting in its main market, France, as sales and profits slide.

It has lost another CEO and the third in four years takes charge next month.

Sales in Europe excluding France fell 2.7% excluding fuel and 3.8% on a comparable or same store basis in the 4th quarter, with sales in Spain down 6.1% on a comparable basis.

In France, sales fell 0.5% excluding fuel and 0.3% on a comparable basis.

Sales rose 8.6% in Latin America on a comparable basis, helped by Brazil hypermarkets and outperformance at Atacadao, a leading operator of discount hypermarkets in that country.

In Asia, sales fell 4.3% on a comparable basis, reflecting weak trading conditions in China for the company.

As a result of the poor sales and profits, Carrefour has stopped the 1.5 billion euro (around $A2 billion) revamping of its hypermarkets because it has failed to produce a rise in sales from the 81 outlets that have been given a makeover (at a cost of 400 million euros or more than half billion dollars).

Carrefour, which had issued several profit warnings over the past year, said net profit fell 14% in 2011, to 371 million euros (A$470 million) from 433 million in 2010.

The retailer has suffered from the management instability and the presence of aggressive, return-hungry shareholders who have insisted on strategy changes that have failed.

In recent years, the retailer has flip-flopped on many policies, costing it sales, earnings and market share.

It boosted price cutting promotions in France before switching tack last year to focus on everyday low prices.

Then it began the store revamp only to end it.

Last year, it embarked on a merger with a Brazilian retailer that failed.

The retailer also is faltering in its home market of France, by far its biggest.

France accounts for 43% of the group's sales, and last year operating profit in France fell 32% as sales in its biggest stores fell and costs rose.

And it has yet to adjust to the internet, although in France it is not the threat it is in the UK, US and Australia, yet.

Walmart meanwhile managed to stop the slide in same store sales in the 4th quarter to the end of January this year.

Sales rose in the US (and much faster from offshore) and earnings rose as well as the company's revamped website and price-cutting promotions kept customers rolling through the doors.

But it gave up some of its profit margin in the US and earnings in its domestic business fell $US100 million for the year.

Walmart's same store sales in the US rose in the fourth quarter for the first time in more than two years, after the company abandoned a previous strategy of reduced offerings and less advertising and added more products to its shelves.

Topline sales rose 2.4% and same store sales 1.5% in the three months to January.

Walmart added around 8,500 items (11% or an average stores stock keeping units or SKUs) to its stores and moved to tailor offerings to different regions and different racial groups, such as Hispanics.

Walmart raised the height of its US store shelves and brought back what it calls "action alley" - or products in the centre of busy aisles - which the company said has boosted comparable sales.

Previously, the retailer had embarked on a remodeling campaign to lower shelf heights and de-clutter its aisles to make its stores more appealing to higher-income shoppers.

That failed!

The company is now advertising itself as a one-stop shop at a time when its low-income shoppers are facing rising prices for petrol, food and homewares and clothing.

Like every other retailer in trouble or under pressure, Walmart changed its price-cutting advertising back to 'every day low prices'.

It's now heard at the likes of Tesco, no doubt Carrefour, Coles and Woolies in Australia.

They all do it. It's the strategy they all turn to, no matter the PR blub.