Is retail a dead end?

Retailers have had a tough time recently. Scratch that...retailers have a tough time any time the economy weakens. JJB Sports are the latest company to create the troubled headlines.
Yet we, the British, are said to be a nation of shopkeepers, and the retail industry is central to our economy.
So is retail a dead-end? Or a panacea? Or is it a little bit of both?

The fact is that most retailers work on incredibly tight margins. I used to work for Tesco, and their published net profit margins hover at around 7% of Revenue. Compare this to the Capital spend required just to maintain the stores and there is not a lot of spare cash to go around.
Some start-ups can carve out a niche with higher gross margins, but if fully and properly costed, net margins can also be very hard to find.
Move to some other countries and things are even more finely balanced. In Germany retail margins are generally lower than in the UK - staff are much more rare in a German retail store because of that. The experience of queuing at one of only two populated tills when shopping in a supermarket there makes you appreciate the banks of tills in a UK equivalent with only 1 or 2 people waiting at each.

Bricks and mortar-based retailers have significant fixed costs in rent and rates, and semi-fixed costs in staff to uphold. Online retailers benefit without these, but have higher systems, fulfillment and marketing costs to offset instead. Good role model retailers (like Tesco) that combine bricks and clicks and run both effectively and efficiently, still end up with a 7% net margin...and probably a return of more like 2% after essential maintenance capital.

So is it all worth it?
Retail is central to the economic well-being of the UK and many other countries. Jobs, wealth creation, much of it flows through the UK's shops. It is a tight balancing game, but even the apparently small margins, when applied to a massive revenue, can generate profits of over GBP2 billion for Tesco.
In the good times, cash flows into the tills and provides the profit to pay for all those jobs, support a massive infrastructure engine behind it all and powers the economy forwards. If the government is looking for industries to help bring the economy back on track, then retail must be at the forefront of their minds.

Yet individual companies will remain incredibly sensitive to changes in consumer spending...much more sensitive than their landlords, local authorities etc who are the recipients of the retail industry's fixed costs. And so some retailers will always struggle in a downturn. 

All the more incentive to be the best in class, to be better, more nimble, more reactive to the circumstances, than the competitors in order to retain or even grow market share during the tough times, as well as being able to enjoy the sunshine and make hay during the good.

Look for the confounder

I have blogged before about correlation and causation, and the importance of looking for possible "confounders" when there is a correlation but no causative relationship.
Today I want to apply this to education.
I have long been skeptical about the annual improvements in A level results, supposedly demonstrating the improving quality of school leavers but possibly indicating continuously falling standards. I have also thought that this may just be sour grapes on my part, and a desperate attempt to try to justify that A levels were simply much harder "in my day"...but that's just the grumpy old man coming out in me.
This year, 2012, the proportion of students obtaining an A* grade has fallen for the first time after 20 years of that continuous "improvement". A shame for the students themselves.
Also this year is the first year where the A level students of this summer become the University freshers of September/October. This first year when Unis can charge fees up to GBP9,000 per year.
What's the connection? There are, of course, a number of possibilities:

• There is no connection
• One is causing the other...and since the fee increases were announced before any student sat their exams, it has to be the fee increases causing the poorer results
• There is something else going on, with this "something else" potentially causing both, 
• or this "something else" is sitting in between the 2 ie high fees causes X which causes poorer results 

The point of this blog is not to answer the question - I simply don't have the data to be able to prove any of the above. 

I have my opinion, of course...but I can't prove I'm right with my assertion that government policy is driving both of these effects - with the proportion of people going to Uni just getting too high, the disparity between the number of graduates and the number of graduate jobs becoming unsustainable. The government have decided to reduce the numbers...financial disincentives combined with managing qualifying standards (don't try to tell me that the previous 20 years wasn't a "managed" result).

My point is that such options are always possible when there is a correlation. In business it is critically important to look for the real reasons...not to assume, not to guess, not to stick with an industry standard belief...in order to drive your business forward.

Does a ban on something work?

New York City mayor Michael Bloomberg has today enacted a ban on super-sized sodas.
From a nutritional point of view, I have a number of disputes with the ban:
. Why only on super-sized portions?
. Why not ban diet sodas too, which have been shown to induce more sugar consumption later and are equally bad, if not worse, than regular sodas?
. Why a ban? Surely a tax on these diabetes and obesity inducers would be more prudent, more easily enforced, more effective...
From a political and business point of view, the more relevant question is what this will achieve.

First, it will achieve some positive PR to show that the mayor is doing something about obesity. Like many ill-fated policies in the past, the efficacy of a policy perhaps matters less than its mere existence.
Second, it may raise the debate about just why sugar water is so bad for people. It may also help to challenge portion sizes, reining in the proliferation of recent years.

But what of the bans likely impact?
I suspect there will be a movement towards diet sodas, which I cannot support and feel may end up being counter-productive in the fight against obesity and diabetes.
I suspect people will simply buy 2 smaller portions rather than the super-sized one.
Sugar is addictive. That's why the sodas are so dangerous for health. And as we all know, an addict will not let a ban get in the way of them getting a fix. whether that's an alternative supply (like the supermarket that can still sell large bottles of soda), an alternative product (diet), or another way around the ban (in this case buying more of the smaller sizes).
From a business point of view, expect to see heavy marketing to support one of these 3 strategies...2 for 1 deals on the smaller sizes, maybe? Supermarkets literally going "large" on their huge soda bottles. Expect too some, "we support the ban" type of advertising to improve drink suppliers credibility and reputation. Also note that the products these suppliers will tout will not necessarily be healthier options, simply ones that conform to the ban...not the same thing at all.

On a positive note, it is a start. Any more draconian measures would likely have been resisted even more. Time will tell whether this initiative has any positive impact at all. For the mayor there is unlikely to be an real scientific corroboration of the single impact of this ban - fortunately for him, life is more complicated than that.

History tells us that a ban rarely works. Pushing an addictive substance underground merely raises its price, and in some cases, its street cred. In this case, soda is not even being pushed undergroun. And diet soda is no methodone to regular soda's heroin (not that much evidence shows that to work either...)