The wrong cut

So HMV looks increasingly likely to sell Waterstones.

They would be selling the only part of the business with a potential long term future. There may (or may not) be a future in retailing books, but there surely is not one in retailing CDs and DVDs. As planned purchasing migrates online (where its easier, cheaper and there's a bigger range in stock), then the remaining opportunity is for impulse purchases. I still buy books, for example, in railway stations and airports. But books have built-in functionality that HMV's products do not. There's an HMV at the airport, but what is the point of buying a CD when I've no way, while in transit, to get it onto my iPod; or a DVD, when my netbook doesn't have a DVD drive. Far easier to simply download something (and cheaper, too).

We may eventually do most of our reading on Kindles (who knows), but even if we do, we'll still be able to pick up a book out of convenience. No such future awaits the CD. It may make sense, in the short term, to sell Waterstones - given Waterstones poor performance and HMV's losses. But you wouldn't want to be left with a stake in HMV.

Brave New Year

Two instant lessons from Christmas retail:

1) The move to online is accelerating.

2) Consumers are squeezing brands and retailers viciously by demanding deals and discounts.

Next's figures (a reasonable barometer of the High St) are down, blaming both "extreme weather conditions and increased competitor discounting". But its the discounting - not the snow - we have to worry about, for that's where the pressure on margins lies. The snow may come and go, but in a cut throat retail environment, with so many companies in weak positions, the discounting is sure to go on.

The move to online is the obvious root cause of HMV's woes. This is the sharp end - how much future is there, really, in high street music and video selling? Will shutting 60 stores really save their business? Does a 20% drop in share price adequately reflect the possibility of the company collapsing?

Online shopping on Christmas day itself is predicted to have reached £153m in the UK - and been a more popular pastime than attending a Christmas church service. That's where we're at, people. (A very effective piece of PR for IMRG).

So first priorities for 2011:

1) Make sure your brands' online presence is right. Invest some time reviewing Search Engine performance - and doing something to improve it. And ensure your online retail distribution is sufficiently broad.

2) Think - hard - about how to compete in a perpetually discounted world. How can you offer discounts without undermining your brand? (because simply refusing to discount is probably suicidal). And how do you demonstrate and justify the added value that will make consumers buy the premium variant when low cost alternatives exist? Time to shine a bright light on brand architecture - so often the darkest recess of marketing strategy.

The end of the world is nigh, and other news

My mother probably gets frustrated that when she asks me any question along the lines of “where would I find...” I roll my eyes and reply “Google it” or “look on eBay”. My mum is no slouch – and no technophobe, but it takes time to learn new habits. I noticed myself doing something strange last week. I went online to buy a light bulb. It was an unusual type and I’m fed up of trailing round B&Q/ Asda failing to find the right ones and then coming home with the wrong thing. But even so, it was a very small purchase – online has historically been perceived to be cost effective only for bigger spends.

In fact, I looked back at my online shopping over the last year and was amazed by the number of transactions of less than a fiver. Crucially, the cost of delivery has ceased to be a limiting factor – presumably because it’s less than the cost of running a physical store. I don’t think I’m alone. MasterCard’s February SpendingPulse report claims that overall online spend rose 16.7% in the last year, while average transaction value online dropped 3.7%. They attribute this to a fundamental change in habits. (It’s US data, but the UK won’t be far behind).

Once every household is online (something governments across Europe promise to facilitate even for the disadvantaged), and we’ve all learned a few new habits, what will we do with all that empty high street? Apart from clothes shops, and impulse shops will we need actual bricks and mortar retail? How many consumer goods brands are really confident they can win new shoppers solely online? Brands like Apple and Nike have had flagship stores for years – masquerading as retail but really offering a good dose of brand experience. But a lot of categories will have to work very hard to create a true brand experience (what would actually happen in Ariel-Town?)

Worrying news for many, made worse by evidence emerging that the downturn has resulted in apparently permanent changes in consumers’ attitudes to ‘value’ – i.e. the importance of price. We are more willing to shop around for a bargain (as noted by the Wall Street Journal) and we place less faith in the quality promise of brands. Marketing Magazine reports a study showing 67% of people think store label products are as good as branded ones, with the same number saying they had switched to store label brands to save money, and 64% saying they wouldn’t switch back even if the economy picks up. It was always inevitable that the economic upheaval of 2009 would change the rules forever – I think we are just beginning to see the signs of what that means.

Falling trees. Shaping contingency strategies.

After a short lull (the media even rallied with a few 'green shoots' stories), another cascade of financial awfulness. It seems unlikely that the car makers will all survive without massive subsidy - which governments appear unwilling (probably wisely) to provide.

Detroit's problems are multi-fold. Cars are expensive capital investments, not an appealing idea for worried consumers. And most car purchases in markets such as the UK are really discretionary - product performance means that the old one probably still works (mine just sailed its 7year MOT). On top of that the big 3 made some truly terrible strategic choices, such as too much emphasis on Chelsea Tractors, and being distracted by vanity brand acquisitions (Jaguar, Volvo...) when they should have been more worried about their own failing product development capabilities. Not to mention the lack of stakeholder insight demonstrated by the infamous private jet trip to Washington. (The day which surely sealed Richard Wagoner's fate?)

But not all of their problems are unique. For example, other industries depend on purchase finance loans ('buy now pay later') to close the sale - and these are now both less appealing and less easily provided. It can be little more fun right now selling sofas than it is selling the apartments to put them in.

And there are plenty of other ways consumer spending behaviour is changing - as any fashion retailer will tell.

It is not even necessary to be a failing company. Being a supplier to, or customer of, one may be enough. Zavvi were undone by their dependency on Woolworth's logistics. Bad news for sheet metal suppliers today is bad news for the customers of sheet metal suppliers tomorrow.

It isn't always possible to avoid falling trees. But a little contingency planning could mitigate some risks - such as reducing dependency weaknesses through diversified supply chains. It could even create opportunities. Where might gaps in the canopy open near you? What are your competitors' weaknesses? And how could you exploit them?