'Big Five' UK catalogue companies wise up to retail changes
The 'Big Five' home shopping catalogue operators have acted like rabbits in the headlights, according to a report by retail analysts Verdict Research. But they have to accept that the retail world is changing - discounters are attacking their patch and freely available credit is attracting their traditional audience. This report, taken from Verdict's Home Shopping, takes a close look at the world of catalogue shopping.
GUS, Grattan, Freemans, Empire and Littlewoods have watched their main market gently spiral downwards in decline without making adequate provision to develop and run new business revenue streams in parallel. So they were unprepared when the big hit came in 1999 - wiping £243m off their collective sales. The scale of this loss cannot be understated: it is almost as much as the total 1999 Next Directory business!
designs of La Redoute
Discount stores threaten business
Major discounting to clear stock hit the Big Five's profits hard. GUS was the most bloodied: profits crashed 80 per cent so that it made a mere £21m on a turnover of £1,684m. The sales/profit comparison with Empire (now known as Redcats UK - the company also owns La Redoute, Ellos, and Cyrillus) is significant - Empire made £20m from a turnover of £389m.
'Agency' mail order refers to catalogues from the Big Five companies that offer clothing and home products on 'interest free' weekly credit payment terms over periods of one to three years. They also offer free delivery and free returns. They can do this because the cost is built into the product prices, which are traditionally 15-20 per cent higher than high street equivalents. The main customers are people who find it difficult to get credit elsewhere - low-income C2DE families.
Historically it is usually women who become 'agents', selling merchandise from catalogues to a wide circle of family, friends and acquaintances, earning commission in the process. Changes in society structures have seen this behaviour decline almost out of existence, and now people usually buy just for their immediate family.
This is an important reason for the long term decline in agency mail order business, together with the easier availability of credit elsewhere. However, while the Big Five have realised this, and some have taken steps to launch alternative 'Direct' catalogues, this activity has been quite minimal. Thus, agency accounts for 83 per cent of the Big Five's business. This ranges from 67 per cent at Empire to 97 per cent at Freemans.
Verdict believes that clothing discounters have been the greatest beneficiary of the £243m migration of agency spend
The biggest problem over the last few years is that the price differentials between agency and high street have widened significantly - sometimes to as much as 30 per cent. This is due to the massive strengthening of the clothing discounters (whose prices can undercut even middle market high street retailers by 50 per cent), and intense high street competition generally, leading to major discounting.
Verdict believes that clothing discounters have been the greatest beneficiary of the £243m migration of agency spend. The report says that over one-third went to the high street, especially discounters, while some will have gone to the 'Direct' catalogues and some to new entrants - such as those from Tesco and Woolworths. However, it also says that a large chunk was lost to retail entirely, and spent on leisure and services or channelled into savings.
High street prices
In contrast with agency, 'Direct' home shopping has been successful and has grown. Direct catalogues' merchandise has to be paid for at point of order, or with a credit card that charges APR interest. Customers also have to pay for delivery (usually between £2.50 and £3.50 per order) though returns are free. Therefore prices are equivalent to the high street.
one of the largest direct businesses
This is particularly the case for companies that have both retail stores and mail order catalogues (Next, and the Arcadia brands Evans, Burton, Principles, Dorothy Perkins, Hawkshead and Racing Green). The two largest direct businesses are N Brown (which includes the contemporary classic offer in JD Williams and the niched larger sizes in Simply Be) and Next Directory: both have increased sales and profits.
Online and TV shopping is the fastest growing sector (albeit from a tiny base) with sales increasing by 71 per cent in 1999 to £801m (£581m of which was online sales), increasing its market share by three points to eight per cent. For the future - 2003 onwards, depending on how fast technology moves - Verdict believes that interactive TV (i-TV) will be the saviour of home shopping as it is the ideal medium for the core target market. It will be the major driver in growing the home shopping market from its current total value of £10.1bn to a market worth £25bn by 2005. Verdict says that by 2005 i-TV will account for between 10 per cent and 15 per cent of all home shopping sales - just over £3bn.
Having had this major shock to the system of losing such a big chunk of business, most of the Big Five agency catalogue operators are now putting in place plans to reinvent and re-energise this part of their business, and to grow their 'Direct' catalogues. They are also looking at new revenue streams through offering financial services and their own credit cards.
Three companies have had major management changes and restructures. GUS has been reorganised into the Argos Retail Group, which now includes the Argos Additions catalogue that was launched last year and has been a great success available through Argos stores. Empire has a new chief executive and has been renamed Redcats UK - its parent company Redcats is based in France and is itself a subsidiary of the major Pinault-Printemps-Redoute group. Grattan and Freemans are both owned by the international German-based Otto Versand. These two have shown the weakest performance in 1999: both made losses, both are over 90 per cent exposed to agency. Verdict believes that if their parent was not so powerful, their future would be gravely in doubt.
Flexibility, and more individual marketing - rather than the blanket approach - will win back business.
Key strategies for re-energising these companies' home shopping businesses are linked to making them more flexible, more competitive in the market as a whole, and growing new areas of interest to a wider audience. More flexibility means less reliance on the two huge catalogue publications a year, and putting out smaller catalogues more often which are not only more seasonally relevant but also able to respond more quickly to changes in the market - such as price fluctuations. They will thus become more competitive and relevant to customer needs.
Verdict also believes that, for some companies, the decision will come to 'unbundle' the agency package. That is, not to cost all the free services into the price of the product, but - for example - to start charging for postage and packing. Thus, companies will be able to move product prices more in line with the high street. Offering credit will still be an absolutely essential part of their business, says Verdict, but this will take many different forms to take into account different customer needs. Flexibility, and more individual marketing - rather than the blanket approach - will win back business.
Find out more about Home Shopping from Verdict at http://just-style.com/store/products_detail.asp?art=11481
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