UK Retail Market and Financial Comparison of GAP and NEXT - Case Study Example

Overview of the UK retail market: In 2004 the UK clothing market reached £37 billion, including sales tax, representing a 4.2% growth on 2003. Consumer spending has also continued to grow at a figure of 18.8% since 2000. However, it would seem that deflation is also set to continue, partly due to the weak dollar and the abolition of quotas from china, but also due to the downward pressures on price which consumers have come to expect. The top five clothing retailers, M&S, Next, Arcadia Group, Matalan and BHS, claimed 44% of sector sales in 2004 making the UK one of the most concentrated clothing sectors in Europe. In spite of this, value-led retailers, such as TK Maxx, ASDA (George range) and Tesco outperformed the rest of the market, continuing to be the fastest growing channel and generating £2 billion in clothing sales. Next retail also continued to grow, overtaking the Arcadia Group and moving into second place behind M&S. The value clothing market has become increasingly competitive. Not only have many of the retailers in this sector really got their act together in terms of upgrading store environments and enhancing their product offers - becoming, in effect, the new lower middle market, but the middle market has been fighting back. The last 18 months have seen a strong recovery at M&S, and BHS - that describes itself as premium value- is also a much stronger player (Raphael Moreau, 2004). Therefore, there is more and better choice for consumers. However, while 2001 and 2002 were buoyant years for retail and for clothing, 2003 is seeing a significant slowdown. It is much quantifiably harder to persuade consumers to spend. A key factor is that value clothing retailers now know that they cannot succeed with low prices alone. Consumers expect a pleasant environment and mainstream-quality merchandise even if they are paying very little. So they have had to make very significant investments into their store estates - at a time when many are expanding rapidly too. Also, this space and product expansion has been very challenging. Many have found that their infrastructure, systems, IT and logistics have just not been up to it and this has affected their sales performance. In 2004, the competitive environment in the UK retail market has experienced a dramatic re-shape. This re-shape has been led by the acquisition of the Safeway supermarket chain by Morrisons, which has created the country’s fourth biggest retailer and has given Morrisons the chance to pose a real threat to Sainsbury’s, in the fight for third place behind the UK’s biggest retailers, Tesco and Asda (Raphael Moreau, 2004). According to new research analysing the Retailing industry in the UK by Euromonitor International, the move towards greater consolidation continue to impact the UK retail industry over the next five years. Euromonitor suggests that future mergers and acquisitions in UK food retailing are likely both to be on a smaller scale and to involve the take-over of convenience retailers by hypermarket chains wishing to strengthen their presence in the UK’s high streets. According to Raphael Moreau, Retailing Analyst "Diversifying into convenience stores is on the agenda for the UK’s top hypermarket chains because this retail format offers good growth prospects (Anonymous, 200). Convenience stores have increased their share of the UK food retailing market from 20% to 21.9% between 1999 and 2003. Clearly these stores are appealing to UK consumers, thanks to their convenient locations and extended opening hours. Hypermarket retailers want to make sure they don’t miss out on this growing area of the UK market." High Street convenience stores are also particularly attractive to hypermarket retailers, due to strict planning rules restricting the opening of new out-of town hypermarkets. Euromonitor International believes that this trend is likely to intensify in the next five years. The Competition Commission, which considers convenience retailing to be a separate sector from supermarket retailing, has also encouraged this trend, since supermarket chains can diversify into convenience retailing without facing enquiries from the Commission about the market’s level of concentration (Raphael Moreau, 2004). More moderate growth of retail sales Looking to the future, Euromonitor International’s latest research forecasts that UK retail sales will increase by just over 11% in real terms between 2004 and 2008, a moderate increase resulting from strong downward pressure on prices, especially within food retailing, combined with rising interest rates leading to higher debt levels. This would represent a slowdown compared to the strong performance recorded in 2003 and 2004, of 3.8% and 3% respectively, even though growth could be maintained by the dynamism of convenience stores/small grocers (Raphael Moreau, 2004). About Gap: Gap (originally The Gap) is a San Fransisco-based apparel and accessories retailer founded in 1969 by Donald Fisher and Doris Fisher. The Fishers opened their first shop because they had been frustrated with the lack of decent customer service and fashionable styles at other retailers. The name was derived from the growing differences between children and adults—namely “the generation gap”—which reached its peak with the hippie movement (www.wikipedia.com). Gap Products: Gap Gap Outlet GapKids babyGap GapBody GapMaternity Love (Gap Accessories) Old Navy Old Navy Outlet Banana Republic Banana Republic Factory Store Forth & Towne Piperlime About Next: Next PLC is a British clothes retailer, with its headquarters in Enderby, Leicestershire, England. It is one of the United Kingdom's largest clothing retailers, number three behind Marks & Spencer and Philip Green's Retail Empire of Bhs and Arcadia Group. The group has over 400 stores throughout the UK and Ireland, and 50 franchise branches in Europe, Asia and the Middle East. These are located at a mixture of high streets, shopping centres and retail parks (www.wikipedia.com). In the year to January 2005 Next's turnover was £2,858.5 million. Profits were £422.9 million before tax and £301.0 million after tax There are a number of stores owned by Next known as Next Clearance which sell previous seasons stock at lower price then at the core Next stores. In late September 2006 Next opened 3 new stores called Lime these stores sell refurbished previous season’s stock under the label of Lime. The first three branches opened in former Next locations which have moved to other premises in Derby, Nottingham and Newbury with other stores opening in the near future. It was setup primarily as competition for low cost competitors such as Primark, TK Maxx and the clothing operations of supermarkets such as Tesco, ASDA and Sainsbury's. Next own the call centre operator of Ventura. Next discount sales are very popular events usually occurring four times a year, two at the end of seasons and two mid-seasons. In-store preparation for the sales start the night before, and it has been known for staff to work until 3-4 am in the morning getting the shop ready. Likewise queuing for the sales starts early with people arriving at times as early as 3.30 am to wait for the store to open at 5 am. Sales involve most of the store staff and extra temporary staff is usually hired as well to cope with demand. Financial Comparison: In the year to January 2005 Next's turnover was £3,106.2 million. Profits were £449.1 million before tax and £301.0 million after tax. The number of employees working in Next in 2005 were 57,454, NEXT enjoyed a healthy Profit Margin of 14.46% during the year 2005. In contrast Gap on the other hand had a turnover of £189.548 million, with profits before taxes equalling 8.7million and profit after taxes only 2.09 million. The total number of employees at the end of 2005 was 6,255. Gap profits margin was 4.6% in 2005. Contestable Markets - Gap began dominating the apparel market as Gap began dominating the apparel market as a result of it’s ability to fill what it perceived as “gaps” before anyone else could enter. 1 • Economies of Scale Economies of Scale - As an early entrant, Gap was able to take advantage of economies of scale within the industry. 2 • Economies of Scope Economies of Scope - By expanding its market within the apparel industry, Gap was able to reduce its manufacturing costs. 3 • Product Differentiation Product Differentiation - Increased sales have resulted primarily from the Gap’s ability to expand into specialty markets, i.e., Banana Republic, Old Navy, babyGap etc. 4 • Vertical Integration - Although the Gap began by selling Levi’s exclusively, its ultimate growth and dominance began once it started to manufacture products under its own label. Vertical integration on also allowed Gap to lower transaction costs and reduce supply threats created by Levi’s. 5 • Branding - The Gap’s multiple brands have become some of the most recognizable labels within the apparel industry. Positioning: "There are three main factors: style, quality and price" that attract Gap customers, says Gap vice president of finance Warren R. Hashagen. "Having all those three together is value, and that's why Gap has been successful. But there is always a segment of the population for whom price is more significant, and this is the way for us to better serve that market in our lower volume stores." 1 Overall corporate real estate strategy is focused on optimizing store fleet and more aggressively allocating square footage across all brands to better serve customers. Closures reflect underperformance and the company’s determination that it was no longer financially beneficial to keep that store open. Information regarding individual store performance is not available. Stores are evaluated from a market perspective, and a closing is based on various criteria including how many stores are located in that market, where the stores are located and how the store is performing. As of fiscal 2006, Gap Inc. reports only store locations (not concepts), which the Gap feels is a more useful and clearly defined measure. The Gap's success in expanding its market--as well as its net income, which fell 15 percent in the first half ended July 31, to $70.2 million from $83 million in the year-ago period--depends on how well it can offer discount merchandise without hurting its premier lines (http://www.gapinc.com/public/documents/GPS_AR_05.pdf). Next on the other hand focuses on providing quality products for its customers. A major part of this commitment to quality involves ensuring that their products are safe for their customers to wear and use. A team of around 100 specialist technologists works closely with suppliers to ensure that the high standards that they have developed are maintained. Products are tested to ensure that they meet the requirements of the relevant European or British Standard for safety and where no such recognised standard exists, internal guidelines are used and risk assessments are carried out to ensure that NEXT’s products are safe and suitable for the purpose designed, whether the product is clothing, footwear, an accessory, or an item for the home (http://order.next.co.uk/aboutnext/index.asp). Promotion: Effective promotion depends on finding out what appeals to your customers and then applying imagination to trigger their interest. NEXT promotional mix mainly encompasses on advertising, direct mail and exhibitions. In order to maintain its market share NEXT has to advertise year round introducing new designs for different seasons. Promotion of the new line is subdued. In a Gap outlet in Huntington, N.Y., store passersby are greeted by a black-and-white Gap Warehouse logo pasted on a front display window. Inside, toward the rear of the store near a dressing room, a simple lettered sign says: "Welcome to a whole new way of shopping for your family. Great quality clothing. Great-looking colors. All in fabrics and styles that cost you less. Gap Warehouse." Product: NEXT is committed to providing quality products for its customers. A major part of this commitment to quality involves ensuring that their products are safe for their customers to wear and use. A team of around 100 specialist technologists works closely with suppliers to ensure that the high standards that they have developed are maintained. Products are tested to ensure that they meet the requirements of the relevant European or British Standard for safety and where no such recognised standard exists, internal guidelines are used and risk assessments are carried out to ensure that NEXT’s products are safe and suitable for the purpose designed, whether the product is clothing, footwear, an accessory, or an item for the home. The Gap, after years of watching discount stores knock off its trendy marketing of basic fashions, is knocking off the discounters' successful pricing strategy with a new Gap Warehouse collection of men's, women's and children's clothing. The merchandise consists of a broad selection of basic jeans and pocket T-shirts as well as more fashion-oriented items. These include denim vests with striped, woven cotton backs merchandised with denim skirts and all-cotton blouses, and coordinated children's sets of embroidered knit sweaters and printed shirts. Price: Gap Warehouse carries four labels: Denim Supply Company, Khaki Corporation, Athletic Department and Kids Clothing Corporation. The pricing strategy is being sold through 48 of the company's poorest performing stores in a dual effort to revive their fortunes and attract price-conscious customers. Distinctive styling and exclusive designs have given NEXT a strong brand image which remains their greatest asset. NEXT women wear has quickly became synonymous with value for money, good quality fashionable clothes designed to meet the demands of busy lifestyles. The prices are relatively high but compared to the brand image and quality, NEXT justifies them very effectively. References: Raphael Moreau, Consolidation re-shapes UK retailing, - 29 Sep 2004 Value Clothing Retailing - UK - September 2003 , Mintel International Group Ltd Anonymous, (October 14th, 2000), `Next forges ahead with expansion plans′, The Guardian Wilson and Gilligan (1998), Strategic Marketing Management, 2nd edition, Butterwoth Heinemann, Oxford http://www.gapinc.com/public/Investors/inv_financials.shtml http://www.gapinc.com/public/documents/GPS_AR_05.pdf http://order.next.co.uk/aboutnext/index.asp finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=GPS - 52k host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=GPS - 13k - 22 Jan 2007 www.stanford.edu/group/SICD/Gap/gap.html Read More