Why Retail Businesses Fail Part 1: La Senza in Administration
Why Did La Senza Go Into Administration?
Lingerie specialist La Senza went into administration in the first week of 2012. It is amongst some 183 UK retailers including: Barratts, Clinton Cards, Habitat, HMV, Focus DIY, JJB Sports, Jane Norman, Mothercare, Oddbins, TJ Hughes and Thorntons that got into trouble in 2011. This is in addition to the thousands of retailers that have already gone bust without making the headlines.
Coincidentally, just a week ago, I visited La Senza in the Trafford Centre, Manchester; to take photos of bad visual merchandising examples for research for my forthcoming book on visual merchandising display.
Why do many retailers get into trouble or go bust?
Let’s read what a La Senza spokesperson had to say about why La Senza went into administration:
“Due to trading conditions in La Senza’s high street locations and the overall macro environment which are having an adverse effect on the company, the board of directors of La Senza has filed a notice of intention to appoint administrators.”
The UK’s retail guru, Mary Portas, recently released her High Street revival report, commissioned by the British Prime Minister David Cameron; in to why the UK High Street is at risk of becoming extinct. According to her report, the main reason for the demise of the High Street was that “High Streets have reached ‘crisis point’ with the rise of super-malls, out-of-town supermarkets and internet shopping”.
This follows another report by Colliers CRE which highlighted the “downward spiral and degenerating or failing” of the High Street.
The willingness of the British Prime Minister to get directly involved in the retail industry crisis outlines the severity of the situation. However, the UK government is not alone in expressing concern for the retail industry. The Australian government has also commissioned a report into the future of the Australian retail industry.
Thousands of jobs depend on retail. Whenever, a retailer goes out of business, especially large retailers, they leave a large hole in the labour market. Therefore it is understandable that the governments are concerned.
Did La Senza and the other big retailers that are in trouble actually suffer because of the ‘challenging economic environment’ or ‘challenging trading conditions’ to adopt the fancy language of retailers themselves?
Is the UK High Street in danger of extinction because of reasons described by Mary Portas and the Colliers CRE report?
I beg to differ.
The core problem with most retail businesses in the UK and in many developed countries is: they are ran like non-profit organisations. The fundamental reason for the existence of any business is to make profit. Any business that does not have profit as its core goal will either fail or languish in mediocrity.
It is true that businesses need to provide good customer service, take care of their employees and support the community. However, businesses do not exist for those reasons, they exist solely to make profit. It is only after they have achieved their core purpose for existence that they will be able to fulfil their other responsibilities.
Let me qualify this statement to avoid becoming ‘lost in translation’. I did not say businesses exist solely to make money, I said profit. There is a big distinction between making money and making profit.
The retail industry is the only industry where increased sales is the key performance indicator. I am writing this White Paper on Boxing Day; which is the day when most retailers make their biggest sales of the year. The irony is that even though they will make their biggest sales today, it does not necessarily mean that they will be making their biggest profit margin today.
When the dust has settled, and customers have returned home, as retailers tally the figures; they will fall into the following categories:
- Profitable retailer.
- Break even retailer.
- Losses retailer.
How can retailers expect to make a profit by discounting their merchandise at 50% or 70%? Retail profit is an average of 3%. Even the most profitable retailers make between 3-5% profit. However, the large majority of retail profit margin is between 1.5-3%. Therefore, if a retailer is making a 3% profit margin and they discount their merchandise by 50%, how much profit will they be making?
The peripheral reasons most retailers go bust are as follows:
- Lack of “level five” leadership.
- Lack of understanding of their target market.
- Lack of trained staff.
- Lack of skilled sales staff.
- Lack of product knowledge.
- Low wages.
- Bad customer service provision.
- Wrong loss prevention strategy.
La Senza went into administration because like most retailers it did not apply fundamental business principles. It did not focus on profit, instead it was focused only on increasing sales. A company that increases sales without increasing profit will not survive.