Britain: The Battle For High Street Has Begun
No wonder grocer J Sainsbury (JSNSY ) is considered a takeover target these days. In the past year, the iconic British supermarket chain suffered from severe stock shortages, a management shakeup, and the first loss in its 136-year history. Making matters worse, the rise of the discounters has the retailer looking like a pricey -- and inferior -- alternative. Sainsbury, once the king of Britain's grocery market scene, has been virtually cast out of the kingdom. "We've let our customers down," Justin King, the chain's new chief executive, conceded in a press conference last fall.
Sainsbury, whose stock has risen 3% since the beginning of the year on takeover rumors, isn't alone. Other traditional players on the British High Street, including Marks & Spencer Group (MAKSY ) and stationer WHSmith, used to be considered widow and orphan stocks. Now they're all takeover bait. Since the late 1990s, these retailers have struggled to remain on top. A failure to keep up with trends in women's apparel has turned M&S into a second-rate department store. And, with the discounters selling books and DVDs, WHSmith seems irrelevant. Their vulnerability was no more apparent than this Christmas, when they saw sales stagnate, or, in the case of M&S, decline.
High Street's holiday performance makes it ever more likely that 2005 will be a critical year for the grand names of Old Brittania. Discounters such as Tesco PLC (TEOSF ) and ASDA Group, which was purchased by Wal-Mart Stores Inc. (WMT ) in 1999, have been stealing customers for years with lower prices and a wider selection of products. Meanwhile, a wave of "fast-fashion" stores such as Next and Topshop have sucked in trendy hipsters. Now the old-line retailers face an unexpected obstacle: a slowdown in consumer spending. In the last quarter of 2004, overall retail sales in Britain grew a paltry 0.3%, the slowest fourth-quarter growth rate since 1998. That's a recipe for a shakeout in the country's $443 billion retail industry, the second-largest in Europe after France. "In a consumer economy where the rate of growth is tightening, the sheep will be sorted out from the goats," says Edward Whitefield, chairman of Management Horizons Europe, a retail consultancy in London.
The battle for M&S and WHSmith already has begun. Last year self-made billionaire Philip Green made a run for M&S. But Green, a British retail entrepreneur, was rebuffed by the board, which brought in a new CEO. In addition, Permira, a pan-European private equity firm, tried to buy WHSmith but pulled back after the company said the firm would have to make a substantial cash contribution to help close its $350 million pension deficit. Although both bids failed, the vultures are still circling. Investment bankers say private-equity firms are interested in Sainsbury.
It's no wonder Green has his eye on M&S. His privately held Arcadia Group owns stores such as Topshop, Dorothy Perkins, and Miss Selfridge, which offer inexpensive but modern clothes. Arcadia said in October that profit has more than doubled, to $556 million, since Green bought the company in 2002. Acquiring M&S's 370-plus chain in Britain would allow Green to expand his empire with hundreds of stores in prime locations. Green, 52, is known for his ability to cut costs and personally pick hot clothing lines.
M&S isn't ready to raise the white flag. To win back shoppers and fend off Green, M&S last spring brought in Stuart Rose, a 55-year-old industry veteran who started his career at the company. Rose has cleaned up some of M&S's cluttered stores, cut unpopular lines, and sold noncore businesses such as financial services. Sales in the 12 months ended April 3, 2004, grew 3.5%, to $15.6 billion, and profits rose 12%, to $1.6 billion. But revenues during the holiday season fell 5.6% from the same period a year earlier, and the company issued a profit warning in January. While Rose concedes M&S has some "catch-up" to do, he notes 10 million customers shop at the company's stores each week. "I don't in any way subscribe to 'it's all over and it's going elsewhere,"' Rose says.
WHSmith and Sainsbury also have brought in new CEOs. But instead of choosing insiders, they each hired experienced young talent from dreaded competitors Tesco and ASDA. WHSmith hired 40-year-old Kate Swann, a former Tesco marketing executive in November, 2003. King, 43, the CEO of Sainsbury since March, 2004, was retail managing director at ASDA. (He was also director of food sales at M&S.)
The new CEOs are making some progress, but it's an uphill battle. Shoppers like Rosalind Deutsche, a 59-year-old housewife, say there are often shortages of basic goods such as bread. "I used to do 99% of my shopping at Sainsbury, but now I go to Tesco," she says. To revive the supermarket chain, King has pledged to narrow product lines, improve availability, and expand sales by $4.7 billion over the next three years. But in the 28 weeks ended Oct. 9, the company suffered a pretax loss of $73 million, compared with a $607 million profit in the same period a year earlier. Sales fell 10% in the period, to $16.3 billion, as both Tesco and ASDA gained share.
In fact, Sainsbury has been losing market share for many years. Since 1995, its portion of the grocery market has fallen from 18.0% to 15.9%, according to TNS, a market research firm in London. Over the same period, Tesco's market share has jumped from 19.3% to 29.0%, while ASDA's has nearly doubled, from 9.8% to 17.1%.
Like Sainsbury, WHSmith, which has $5.3 billion in sales, is coming under pressure from the price-cutters. The bookseller and stationer reported a pretax loss of $253 million in 2004. Swann managed to boost profit margins at the group during the holidays by improving product availability, though sales fell 1% in the six weeks ended Jan. 15. To give the retailer more of a niche, she has doubled the number of greeting cards on display, to 3,500, and introduced 947 high-margin stationery products.
The retailers' new guard may well make some headway with consumers if they manage to get their margins in shape before investors lose their patience. If the new chiefs don't deliver, more British retailers are likely to fall prey to raiders or private-equity firms. Despite the pressure, top management is keeping the faith, saying there is a place for traditional retailers and the discount chains. "I think both will continue to co-exist because they offer consumers different things," says Swann. For her and the other new execs, it certainly won't be easy. But they have to try: The soul of the High Street depends on it.
By Laura Cohn in London