With Apple Pay about to launch in the UK, it is clear the challenges facing established retailers are only just beginning
Here is a little secret about the retail sector. There is a famous quote from Sam Walton, the founder of Walmart, the world’s biggest retailer, that has taken half a century to come true.
“There is only one boss. The customer,” said Walton, who founded the US store in 1962. “And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
Now, obviously attracting customers is important to a shop, and it was vital for Walton that this sentiment ran through his company and that shoppers believed Walmart, which now also owns Asda, was on their side.
However, in the era of bricks-and-mortar retailing — which is when Walton built Walmart into the behemoth it is today — the customer was never truly the boss. How could they be when the only store in their town was a Walmart? In the UK, how much power did a shopper really have when their only local supermarket was a Tesco? Tesco became the biggest retailer in the UK because it built more stores than anyone else, not because it was simply the nation’s favourite place to buy food
Only now, in the era of online shopping and the globalisation of retail, do we truly know what the retail industry looks like when the customer is boss.
This idea was at the centre of a lecture by Sir Ian Cheshire, the former chief executive of Kingfisher, at an industry event this week. His thesis was that technological developments — specifically mobile digital and big data — have taken power from retailers and handed it to shoppers.
The digital revolution and expansion of international brands has increased the choice on offer for customers. Instead of having to buy their groceries at the local supermarket, consumers can go to Aldi or Lidl, convenience stores, or shop with any retailer in the world through the internet. In his presentation, Sir Ian showed that it had taken Walmart 32 years to expand outside the US, but took Amazon just three years.
As well as allowing traditional retailers the opportunity to reach every corner of the country, online shopping has provided a platform for new brands and concepts to reach shoppers quickly. This means that speciality retailers such as Graze, which sells snack boxes, and Hello Fresh, which sells recipes and ingredients for evening meals, have emerged alongside online grocer Ocado.
This concept has become known in the business community as “unbundling”, the breaking-up of the packages which established companies offer as new rivals use technology to offer niche services at a price and scale that was previously impossible.
In addition, the internet and the rise of smartphones have blown open the retail industry and made it more transparent than ever. Consumers now have access to information about prices at their fingertips. While in a shop, the customer can use their smartphone to check prices at other retailers — an incredibly powerful tool.
Sir Ian expressed concern that many retailers have simply not grasped how quickly the world is changing. Sales of smartphones and tablets increased by an extraordinary 83pc between 2012 and 2014, he said. There are now 1.76bn smartphone users in the world, up 75pc over the past two years.
At present, 17.4pc of non-food sales in the UK are made online, according to the British Retail Consortium, with the figure considerably lower in food. However, the importance of online shopping is evolving rapidly. Eight out of 10 of the leading online retailers now generate more than 50pc of their traffic through smartphones. Not all of these shoppers are buying products, some are researching and comparing prices.
Sir Ian, who left as boss of Kingfisher, the owner of B&Q and Screwfix, at the end of 2014, pointed to the dramatic change in the hotel industry as an example of what could happen in retail.
Sir Ian knows all about this change because he is a non-executive director at Whitbread, the owner of Premier Inn, which now receives 90pc of its revenues from digital bookings.
From a world where hotels simply competed against their rivals next door and bookings were made over the telephone or in person, the internet has allowed nationwide brands to develop and meant new competitors such as Airbnb can turn people’s apartments and homes into rivals.
Websites such as Expedia and TripAdvisor also allow holiday makers to compare the prices at hotels and brutally rate the quality of the product. If knowledge is power, then the customer is well and truly in control.
Another consequence of the rise of sites such as Expedia and TripAdvisor — or Google or Amazon in retail — is that companies are losing control of how their brand is presented.
B&Q has 350 stores in the UK and Sir Ian was used to battling with major landlords such as Land Securities over rental payments and terms. However, this is nothing, Sir Ian said, compared with the battle that retailers now face with the landlords of the future, such as Google. The even worse scenario for brands is that their products simply end up as a ranking or slot on Amazon and Google as consumers search for “watches” or “skirt” online.
The announcement this week that Apple Pay will launch in the UK potentially represents another example of power being passed outside the retail industry. Mobile payment makes buying products more convenient for shoppers, but it hands data on their shopping habits to a third party. This is information that the retailer would have enjoyed purely for themselves in the past.
When all these factors are combined, it is clear that the challenges facing established retailers are only beginning.
Supermarkets, in particular, are in the firing line. This is because their entire business model is built on the premise of selling a wide range of products and being convenient for shoppers.
Both of these selling points are fundamentally challenged by the rapid changes in shopping habits still taking place. Not only that, but the ability of supermarkets to adapt to the new world is compromised by their fixed investments in property and leases that still have years to run.
This is why the likes of Tesco, Asda, Sainsbury’s and Morrisons are having to cut prices and improve the quality of their products to attract shoppers. It is also why the “Big Four” are going to have to adapt to lower profit margins, and why the challenges they face are not going to ease any time soon.
This article was written by Graham Ruddick from The Daily Telegraph and was legally licensed through the NewsCred publisher network.