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The winds of change pushing European retail on a fresh course

If a week is a long time in politics, then perhaps a year is an epoch in the fast-moving retail sector, writes Sean Fleming, launch editor of InternetRetailing’s sister title,

REFLECTING ON THE findings of the 2017 InternetRetailing EU Top500, it is possible to identify several themes to which the industry should pay careful attention in the years ahead. An examination of some of the changes that have occurred in the Index also demonstrates the importance of constantly improving upon what you do.

The summit of European retail performance belongs to the six retailers in the Elite category. These are the retailers that are simply an order of magnitude better than everyone else. This is not a question of turnover, growth, or any other commonplace two-dimensional metric, but is based on an assessment and analysis of best practice as it is applied against a set of criteria.

In 2016, the Elite retailers were Apple [IRDX RAPL], Bon Prix, Decathlon, H&M [IRDX RHAM], Next [IRDX RNXT] and Zara [IRDX RZAR]. Of those, Apple, H&M and Zara stayed up this year. They have been joined in 2017 by Boots [IRDX RBOO], IKEA [IRDX RIKE] and Nike [IRDX RNKE], all of which were in the 2016 Leading category.

Running to stand still

That three retailers were able to stay in the Elite category doesn’t mean they have maintained standards while others fell off the pace. Far from it – they have all continued to improve. Since standing still is not an option, remaining in the Elite category is a sign of constant progress.

The 2017 Elite retailer list has a very international line-up, with two Swedish, one Spanish and one UK retailer alongside two that are global brands of US origin. H&M, IKEA and Zara score highly in the way they operate as local retailers in every territory they serve, while remaining successful internationally. That’s not an easy balancing act, requiring focus, determination and attention to detail across all lines of business.

When IKEA opens a new store, as it last did in the UK in July 2016, it conducts in-depth research into the local market. As you might expect, this involves assessing consumer tastes but it also includes an analysis of the types and sizes of housing and homes. A walk through IKEA’s year-old Reading store will take you past room layouts and displays that reflect the way local people live.

Yes, it is a global player, with over 300 stores worldwide, but such zealous attention to detail at a local level means that while one IKEA store may superficially seem like any other, each has been configured very specifically to the locality it serves. Combine that with a clearly Swedish sense of identity (their crèche is called Småland – a play on words that references the location of the first IKEA store) and a highly centralised approach to operations that includes everything from manufacturing to recycling, and you start to get a sense of what being Elite involves.

Boots is the only British retail brand in the Elite category. What it gets right is the size of its on-the-ground presence – which it has maintained for decades – plus its broad range of services for its very large customer base.

Apple and Nike are not retailers in the traditional sense, of course, but they are very large international brands. More on this later.

The model

The next category are the 19 Leaders which, together with the Elite retailers, go to make up the Top 25 of the IREU Top500. This category is dominated by British retail names, with 15 out of the 19 hailing from the UK. Among these are Marks & Spencer [IRDX RMAS], PC World [IRDX RPCW], Screwfix [IRDX RSCR], Superdrug [IRDX RSUD] and Tesco [IRDX RTSC].

It may well be that UK retailers are outperforming all others, although there’s another reason for this British invasion. When the criteria and performance Dimensions were developed for the IREU Top500, the inspiration for what was working well (and what was not) was taken from the UK market. So in that sense, the model retailer could be said to have been British.

Yet while British retailers are currently performing well, a growing number of their European competitors also appear in the rankings, albeit toward the lower end. This stratification is a picture that may well change in the next few years.

One thing that’s already changed is the number of brands on the Index. Global brands such as Apple or Nike tend to perform well regardless of borders since their crosscountry, transnational relevance and reach plays well anywhere. However, for many retailers, it remains a challenge to break into new territories without diluting their offer or ability to respond locally.

The other inescapable truth is that a growing number of brands now also operate as retailers, running direct as well as indirect sales channels by developing and sustaining meaningful engagements with their customers via traditional channels of communication and social media. The line between retailer and brand is more blurred than ever.

Prime mover

It’s not just the number of brands in the Index that stands out, but also the extent to which internet retailing has begun to give way to retailing in a broader sense, with a relatively decreasing presence of the ecommerce startup. This is a reflection of retailer performance across the board. Retailers that get it right, that are pursuing excellence in a meaningful way, are doing so in an integrated fashion.

Performance and consistency at scale are key measures for success in the IREU Top500. To some, the absence of Amazon [IRDX RAMZ] from the Elite category may seem odd, with Amazon being the elephant in the retail room that everyone wants to talk about… constantly. Yes, it’s large and yes it does a lot of things very well. But Amazon doesn’t rank as highly in our Index as it does in the public psyche.

Will that always be the case? Predicting the future is a foolhardy pastime but it’s unlikely. Amazon has rarely stood still. Having taken on bookshops and won, it then disrupted its own business model with the Kindle and won again. The announcement in June of its intention to acquire US food retailer Whole Foods, the launch of Prime Wardrobe and its dalliance with drone delivery all demonstrate Amazon’s desire continually to keep moving.

Tomorrow never knows

With that in mind, the question of how the rest of the retail sector will approach innovation waits to be answered. Retailers have to focus on two simultaneous innovation tracks. One is around developing new services and IP, the other around their own operational capabilities and keeping the promises they make to their existing customers.

A lot of research and development resources are focused on providing incremental improvements in product, customer engagement and operations. But at best, these deliver short-term gains before the rivals follow suit and catch up. Yesterday’s innovations inevitably become tomorrow’s commodity and with that comes the erosion of any tactical, innovation-driven, competitive advantage they may have had.

Making the next truly significant leap in retail innovation will be about more than this kind of piece-by-piece search for marginal gains. How the retail sector chooses to square up to this challenge has the potential to shake up not just the rankings in the IREU Top500 but the sector as a whole.

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