The demise of previously leading retailers in their respective sectors, Comet, Jessops, HMV and Blockbuster, is largely blamed on their failure to adapt to online retailing. Commentators suggest that by not changing their business model to “clicks & bricks” (from “bricks & mortar”), as others like Tesco and Argos have done, these previously market leading, but now collapsed, companies missed a trick.
Ten years ago HMV was worth a billion pounds when it floated on the stock market. Could these retailers have avoided their declines? Arrogance or a feeling of invincibility probably played a part in their downfall but, ultimately, they were overtaken by the pace of technological advancement.
Local Growth Minister Mark Prisk recently issued a warning to high streets across the country that they need to adapt to meet the changing needs of today’s consumers if they are to prosper. He suggested that retailers need to adjust to a new era of online shopping and that the high street cannot live in the past.
Granted, merchants are not on the high street but they still operate out of physical stores following a business model that is consistent with many retailers. Many merchants have locations in or near town centres with high overheads compared with a pure online retailer’s business model such as Amazon’s.
I would recognise that the supply of building products is probably not going to migrate to a pure online model, but a multi-channel “bricks and clicks” approach would make sense to me. So, are we likely to see another transition in the merchanting industry? And, if so, when might we see online sales reach the critical mass that stimulates this?
More than 30 million UK consumers now shop online and the most recent figures show that this market is growing by 12% per year. According to IMRG, the e-commerce trade body and Capgemini, consumers spent an estimated £78 billion at online retail stores in 2012 This means online shoppers each spend, on average, more than £2,000 per annum, equating to about 10% of average UK earnings.
Online purchases of consumer electronics, music and video have grown dramatically, to reach a tipping point when they reached a critical mass that accelerated the decline of the traditional channels. How close to a tipping point is the builder’s merchanting industry?
A headline in the Financial Times last month stated that online clothes sales had reached a critical mass of 10%, a sign that a substantial number of shoppers have overcome an aversion to buying items they cannot touch or try on.
UK online grocery sales are around 4% of all grocery sales and have certainly not yet reached critical mass but, they are growing at 13% per annum and Tesco has a 50% share of the online market. Clearly any businesses in these sectors that is not online risks a loss of market share.
DIY will lead
Online sales of building products lag other sectors with less than 2% of total purchases made on line, but with quite large differences between DIY and Trade channels.
A survey of over 15,000 households in eight European countries by Kingfisher, parent company of B&Q and Screwfix, found that:
- 94% of home improvers use the internet to help with their projects
- 66% of people do some browsing online for ideas and prices
- 35% are buying online
- 28% are simply looking for their local store
The survey also revealed that the UK has the second biggest amount of online buyers of home improvement products and that click and collect is incredibly popular. Why shouldn’t we see this happen with the next generation of tradespeople?
“Clicks & Bricks”: Winners and Losers
New entrants like Screwfix and Toolstation have been very clever at blending online sales with selling in actual shops to the extent that they are opening more and more branches and encroaching on the traditional merchant’s value proposition. But we are not yet seeing too much of the reverse with traditional merchants growing their online presence as Next and M&S have done rather than giving up (too) much market share to players like ASOS which is now the UK’s largest online-only fashion retailer with sales of over £350million.
In some sectors the “bricks & mortars” have successful transitioned into the “bricks & clicks” but in others it has been Amazon, I-Tunes, Lovefilm and Netflix that have put Comet, Jessops, HMV and Blockbusters out of business. Who will be the winners in building product sales?
Empty shops & branches
As shops are vacated by failed business models, what is the future for shops? Well one trend that we are beginning to see is manufacturer concept stores, which are basically showrooms where purchasers can examine products before they buy online whether in-store, at home or even on their smart phones on the way home. Concept stores become more important when there aren’t any Comet’s or Jessops that you can visit to touch and feel a camera before you go and buy it online at Amazon or elsewhere. Panasonic and Sony shops are examples of this in consumer electronics.
Granted, it is possible to make a purchase from these stores and some people do, but the manufacturer’s objective is not to compete with its distribution channels. For this reason they normally price at a premium which encourages the purchasers to buy from traditional channels.
I did something similar to this when I was at Yale Locks in the Far East, before the rise of the internet, mainly as a way to introduce new products into the market. In some markets our wholesale and retail distribution channels were reluctant to stock expensive new products that they were worried would not sell. So, we opened small concept stores in the building materials street (in the Philippines and Vietnam all the merchants tended to be in the same road) with a limited stock of every single product line in our offer. Customers could view product and, if they were happy to pay a premium price, buy them too, but the majority went down the road to one of our wholesalers or retailers. Over time our distribution channels sent prospective customers to the showrooms to “look before you buy”.
A shift to online building product sales could create a need for manufacturer showrooms, which could be set up in space vacated by old businesses. Both trade and consumers alike could be sold to in these showrooms. You might also see complimentary product manufacturers coming together. I wouldn’t envisage every town having a Celcon Blocks showroom, but a fabric solution showroom collaboration between brick, block, insulation and accessory suppliers might be more likely. Alternatively the showrooms could be merchant led with the solutions on display integrating their preferred suppliers.
So, should Builders Merchants put all their efforts into online channels and rush to downsize their branches? Not necessarily. Plenty of businesses get in to trouble by not understanding their customers and changing too quickly for them. Think of Boo.com which ended in May 2000 after working its way through over £100 million or Webvan, the US equivalent of Ocado, which expanded into eight US cities and built a huge infrastructure burning through $375 milllion before closing. And there are still questions over Ocado’s business model, which still hasn’t made any money after twelve years of trading. I don’t know any merchants who would be happy to finance a loss making business for that long….
This article originally appeared in the March 2013 issue of BMj magazine