Long-established retailers WH Smith, Boots and Woolworths are cherished national brands, yet the City is losing faith in all three. Aggressive moves into non-food by the supermarkets, wider choice from specialists such as Waterstones, Paperchase and HMV, price pressure from hard discounters and growing interest in online shopping have all contributed to ‘legacy brands’ losing market share. Sales growth has slowed, and share prices have taken a dive.
Recent takeover bids for WH Smith, by Permira, and Woolworths, by Apax, were aborted at due diligence stage, undermining the companies’ corporate standing further.
So can the likes of Woolies, WH Smith and Boots realistically survive as growing, or even going, concerns in the long term?
Maybe not, says retail analyst Dave Stoddart at Teather & Greenwood. “Slowing consumer spending and overcapacity in the sector is likely to exacerbate their problems.”
Penny Jarvis, director at consultancy The Egremont Group, argues that while Tesco - itself an ailing legacy brand until it reinvented itself in the 1990s - has managed to carve a strong brand image of quality, community and value for money, the others have let their core consumer promises slip, again undermining their future stability.
Attempts to generate new growth - WHSmith investing in overseas operations, Boots launching Wellbeing concepts and Woolworths opening out-of-town Big W stores - have often been costly failures, causing a loss of focus on core business.
Yet all three groups insist that recovery programmes will deliver the desired results. They’re certainly trying hard to stop the rot. Woolworths, under CEO Trevor Bish-Jones, is selling off its loss-making MVC retail business and closing Big W stores in order to focus on installing the new 10/10 main-chain format. This boasts a clearer Kids and Celebrations merchandise theme, which Woolworths hopes will generate higher gross margins once space allocation problems have been ironed out.
WH Smith, led by chief executive Kate Swann, has restructured head office, sold off extraneous publishing and overseas divisions, and is concentrating on the high-margin product areas of stationery, cards and books in stores, with a view to re-establishing its specialist reputation.
At Boots, chief executive Richard Baker is offloading its manufacturing arm, Boots Healthcare International, and has stripped non-profitable Wellbeing ventures. Cost-cutting exercises and extended opening hours are also on the agenda.
Analysts are eagerly awaiting results. Paul Smiddy, retail analyst at RW Baird, says streamlined management structures will speed up crucial decision-making processes, but he still sees little opportunity for new growth. “Boots, in particular, will have ongoing problems coping with the might of the supermarkets,” he says.
He believes Woolworths’ plan to keep its two entertainment (music wholesaling and video publishing) divisions running alongside the stores will support growth.
Nick Bubb at Evolution Securities feels that Apax pulled out of a proposed bid for Woolworths in April because it wanted only the entertainment division, but saw insufficient upside to make a purchase of the whole group viable. “Management is right to say the business is much better run than three years ago,” says Bubb. “But every year supermarket competition chips away at sales, and the performance of the 10/10 store revamps has been disappointing.”
Stoddart at Teather & Greenwood says legacy brands can hope only to get operations in shape to “reach a higher plateau of profitability that is defensible in the medium to long term”.
Rejuvenating brand perception could make a difference, says Jarvis at Egremont, but dramatic change such as selling off or re-purposing chunks might be required first. Certainly, they will either disappear, or look very different in five years’ time.