Taking a snapshot of the news I heard last week was definitely glum.
First it was Capita’s profit warning, then came the announcement that M&S are to close 14 stores and having seen a number of telltale signs heralding trouble in the restaurant industry, it appears one of my favourite dining places in Cardiff, Jamie’s restaurant, is now set to close.
Three different industries. Three different businesses. Three different sets of problems.
What do they have in common?
Are they providing reasonable value at a lower price? Are they delivering better benefits than anyone else? Do they understand and service their target market better than anyone else?
These are questions they will be challenging themselves on now.
As an outsourcing company Capita has set alarm bells ringing with many asking is this the next Carillion or can it turn its fortunes around? With Bloomberg reporting the company had had its worst day ever in a quarter of a century there is increasing uncertainty, fuelled by the demise of Carillion, as to whether these outsource companies are capable of fulfilling the contracts they’ve been awarded. As scrutiny intensifies, the opposition parties are calling for changes in public-private partnerships and media attention remains firmly on emphasizing the fragility of the industry, with Interserve, Mitie and Serco all being cited as further examples of the sector’s problematic operations.
Whilst there are differences amongst these companies a familiar trend within the outsource market is to operate with high volume and low margins, a model that works well when there are a wealth of projects available and operating costs can be controlled to ensure a profitable contract. The disadvantages, however, can easily spiral and there are a number of financial obstacles to overcome:
- Low margins leave little room for maneuver – impacting an organisation's ability to reduce their sale price to match or beat the competition. If they do and the subsequent cost of sale is not reduced to match the decrease in price, profits and cash available for future investment is reduced.
- Less investment can result in less automation, inferior product, poor quality of service and customer complaints.
- Cash flow problems are an inherent risk with low margins.
- Low margin businesses tend to have to keep their supply chain under enormous pressure to constantly reduce costs, which can create fragility in the chain and also mean over reliance on some key suppliers, especially if they are single sourced.
- It can also mean the workforce are expected to work harder for less, which is obviously demotivating and difficult to sustain in an environment where we are approaching full employment.
- A degree of expenditure is necessary to allow a business to stand out from the competition and be active within its market. Staff training, technical investment and marketing are all such expenses but without sufficient margin to cover these then the business is hindered in its ability to optimize its functionality.
Historically, whilst prevalent in the construction industry, the issues of low margins were not a problem in the food & beverage sector, making restaurants a favourable business enterprise for entrepreneurs seeking to enter a successful profit-making market. Recent times, however, have seen a number of changes negatively impacting on this service industry, across both large chains and independent outlets, as is evidenced in recent coverage of once family favourites, Frankie & Bennies and previously successful stand-alone private entities such as Byron Burgers.
As with the outsourcing companies, despite the differences amongst the wide variety of restaurants available, yet again there are some sector mutual challenges to be faced:
- The dining sector is now fiercely competitive with a plethora of choice available to us, thus impacting on an establishment’s ability to attract and retain regular and profitable footfall.
- There are higher expenses to be absorbed with cost pressures from the national minimum wage increase in April 2017, rising prices of food imports and revised business rates mean escalating rental expenditure for those paying landlords.
- The restaurant market is labor intensive but the availability of workforce is decreasing with skilled and willing employees becoming more difficult to source. With the Guardian reporting a quarter of the 3 million people in Britain’s hospitality sector are EU nationals, Brexit uncertainties mean many are going with few arriving to replace them, hence the issue of staff will become an even bigger problem as we head towards 2019.
- There are many new innovative alternatives available to those of us who want a dining experience but not in the traditional restaurant style. Supermarket dining deals, pick-up and to-go services and delivered meal kits such as Hello Fresh are all outpacing the typical chain restaurant experience.
- The evolution of independent and niche dining, such as vegan and gluten free eateries, are further intensifying competition in an already crowded space.
Pardon the pun, but what can other restaurant owners take-away from the adverse news of Jamie’s struggling to survive? It seems to me that even if a business is currently successful in managing the issues above as we move towards more Brexit driven uncertainties there will be a further squeeze in consumer spending creating yet another hurdle for restaurant owners to overcome. The outlook is uncertain and innovative thinking is required to overcome the challenges ahead.
The subject of consumer spending brings me to the final piece of news I heard – not just any news, this is M&S news! It appears our rising costs of living negatively impacted on the usual festive retail extravaganza, causing problems not only for M&S, but House of Fraser, Debenhams and Mothercare too, all proving vulnerable in this uncertain world.
Once more there is evidence of shared difficulties, with larger retailers lacking the agility of smaller competitors to instantly react to market changes. Traditionally retail buying habits have been seasonally driven with buying patterns and sales forecasts planned many months in advance. The current market, however, is less constant with unpredicted changes in trends happening far more spontaneously. Many companies, especially those where production is manufactured overseas, are struggling to compete in the market where they are placing long-term supply orders, whilst operating in a market that is becoming increasingly short-term in demand.
The consumer is driving a hard bargain and retailers are under pressure to offer discounts and deals as a means to attract shoppers. Barclaycard reported an increase in Black Friday sales and many outlets extended trading hours to take advantage of the surge but the old adage of turnover is vanity and profit is sanity points to a note of caution here, with John Lewis’s post Christmas trading results highlighting that increased sales does not mean increased profits. Whilst they may be financially secure to manage the consequences of this, for smaller businesses unprofitable sales are often a warning sign that trade will not be sustainable in the long-term and such pricing strategies are not always commercially viable.
That said, clearing out old stock and making way for the new season is usually an absolute necessity in today’s market.
As to the future of the retail store, there are reported changes ahead. Online sales are predicted to continue to be strong but as competition for market share rises there is a desire to increase interaction with consumers to engage in deeper relationships and grow brand association. Whilst some large retailers will be looking to convert their properties, making them more fit for purpose in an industry becoming evermore online transaction driven, others will be seeking to gain presence in a means to blend the ease of technology and online shopping with the enjoyment and benefits of the shopping experience. Grant Thornton’s clicks to mortar feature highlights a number of online retailers adopting a presence in showroom stores to meet such consumer demand.
In summary, I did hear more than 3 news stories last week but I felt these were worth drawing attention to. As we have seen in this article whilst there are selective troubles and issues associated with a particular industry or sector it is apparent that struggling businesses face many similar challenges. When reviewing their strategy businesses would do well to use the filter outlined so many years ago by Michael Porter when he wrote Competitive Advantage. He outlined three primary ways for a company to achieve success - Cost Leadership, Differentiation and Focus:
- Cost leadership means you provide reasonable value at a lower price
- Differentiation means you deliver better benefits than anyone else
- Focus means you understand and service your target market better than anyone else
For anyone setting or reviewing their business strategy they would do well to be very clear about which of these strategies they aim to pursue and then executing it with precision.