Analysis: What Kate Swann brought to WHSmith

Catering for captive markets

WHSmith’s relentless pursuit of store openings in locations where it has captive markets, including travel hubs and hospitals, has led to a rise in revenue.

In 2010, sales at travel stores overtook the high street business for the first time and the retailer hasn’t looked back. WHSmith has shops in railway stations, airports, hospitals, motorway service stations and even the BBC Television Centre.

The retailer has combined clever footfall-driving deals tailored to travel locations – for example free copies of The Daily Telegraph with a bottle of water – with easy-to-navigate store layouts.

WHSmith has introduced self-checkouts in many locations to cut queues – attractive for travellers in a rush – and has opened complementary services such as Caffe Nuovo units in hospitals and bureaux de change shops.

Airport operator BAA caused a furore in 2009 when it granted exclusive rights to WHSmith to operate specialist bookshops in its London airports. The decision angered then rivals Borders and Hughes & Hughes, but allowed WHSmith to plough a lone and lucrative furrow. But the retailer has not had it all its own way.

Earlier this year, international giant Relay opened in the new Kings Cross station shopping complex, potentially posing a longer-term threat to WHSmith’s trade, while internationally Fnac is pushing into the airports market.

Overseas growth

WHSmith’s international businesses have not always been successful, but that has increasingly changed under Swann’s leadership.

In the trading update today, WHSmith said it had acquired Australian café business, ‘Fresh Plus’, consisting of 5 cafés in hospitals in Australia, to aid its international growth.

It said it is identifying further opportunities and continues to grow “in a low risk and pragmatic way”.

WhSmith now has 101 international units in locations such as Dubai, France, India, Ireland, Oman and Sweden, and aims to expand into new markets in Europe.

Smart margin management

One of Swann’s key strategies has been to move WHSmith out of low-margin categories such as entertainment and into high-margin ranges including books, drinks and confectionery.

The approach was exemplified by WHSmith’s exit from music. The retailer had competed hard with high-street rivals including HMV, Virgin and Fopp for spend on chart hits, but Swann managed a gradual exit from a low-margin category decimated by the emergence of online rivals Amazon and iTunes.

In its full year to August 31, travel sales grew by 2% with like-for-like sales down by 3%. Its gross margin increased by around 160bps in the period, driven primarily by active category mix management.

Panmure Gordon analyst Philip Dorgan said previously the focus on margin has combined well with Swann’s relentless focus on cost-efficiencies.

Multichannel development

WHSmith might not leap to mind as being at the forefront of digital retail, but it has quietly made moves to adapt itself to the multichannel environment.

In 2010 it bought online business the Gadgetshop from The Entertainer, adding another string to its bow and broadening its offer in the etail channel. The same year, it acquired greetings card operator Funky Pigeon, another online name that it has subsequently developed. Funky Pigeon became truly multichannel in 2011, when four railway station stores opened.

Not only did the acquisitions bring the retailer further into the etail era, they broadened its stable of brands. WHSmith runs a transactional website in its own name, and has incorporated services such as DVD rental and flower delivery.

Its Kobo ereader, launched in response to the threat from Amazon’s Kindle, provides another bridge between the online and offline worlds.

Add-on sales

Generating extra sales through add-ons has become a key part of the checkout process at WHSmith, a tactic that can be used across both the travel and high-street divisions.

Staff offer customers promotions at the till, such as a bar of chocolate for £1.

Given WHSmith’s retail proposition, basket values are low and confectionery items are one way of generating extra margin, even if the hard sell at the till annoys some customers.

“Anything you can add on will help,” says Peel Hunt analyst John Stevenson. “It’s all about getting the average transactional value up. If cross-selling wasn’t working, they wouldn’t do it. If you can get somebody to buy a chocolate bar at the till it makes a difference. Supermarkets look at multi-purchase deals where a single item doesn’t offer enough value by itself.”

Retaining strength in books

Book sales are doing well thanks to clever marketing ploys and WHSmith says there is more to play for in the category

In the full year, like-for-like sales were down 7% but gross margin was up year on year.

It is undoubtedly a tough market for booksellers as shoppers increasingly migrate to online players such as Amazon. Waterstones’ sales have been continually falling over the past five years and Borders hit the buffers in 2009.

However, books sales remain important for WHSmith, and Swann believes there is more to play for in the category. The retailer has been savvy with marketing initiatives, including a tie-up with TV personalities Richard Madeley and Judy Finnigan for The Richard and Judy Book Club.

It has also cleverly used promotions, and run deals with The Times to stimulate sales and footfall.

Over the past year the retailer has been well-placed to capitalise on the surge in interest in page-turners such as Fifty Shades of Grey. The retailer said today the second half was strong for fiction led by the Fifty Shades trilogy.

Cost control

Keeping costs down has been an integral part of Swann’s strategy – there was once even speculation that the number of lightbulbs at the retailer’s head office was reduced to save the pennies.

During her early days, Swann culled 270 out of 1,000 head office jobs in 2004-05 and has kept an eagle eye on  overheads ever since.

Total staff numbers have been falling over the past few years, according to Retail Week Knowledge Bank, which has recorded a drop since 2006 when staffing levels hit 17,116 from 2005’s 23,187. That number fell to 16,273 in 2011.

However, employment costs as a proportion of sales seems to be the Achilles heel of Swann’s mission, despite initiatives such as self-service checkouts. The 15.6% ratio it achieved last year is still on the high side, according to Retail Week Knowledge Bank.

Between 2009 and 2013, Swann identified £37m of savings that could be made, predominantly in more challenging high street stores. That was no mean feat. However, in the first six months of the current financial year, WHSmith exceeded its £12m cost saving target by £5m through initiatives such as store energy plans and other operational efficiencies.

Many have questioned when the opportunities for cost-cutting will dry up, but Swann continues to surprise.

Sticking to her guns

Swann’s strategy has had its critics – some say the retailer needs to focus on increasing sales rather than constant cost-cutting. However, Swann has stuck to her guns. Many have marvelled as the efficiency drive continues, enabling her to consistently delivers profit increases on declining sales.

Investec analyst David Jeary says the retailer’s “unwavering focus on cash generation and operational efficiency” is worthy of comparison with the mighty Next.

Management stability and staff rewards

Having piloted the WHSmith ship for nearly nine years, Swann is clearly well established.

Although there have been some senior departures, such as Richard Cristofoli to Debenhams and Alan Stewart who is now at Marks & Spencer, she has in the main retained a stable team.

Her successor, managing director of the high street Steve Clarke, has been at the retailer since 2004. 

Group finance director Robert Moorhead also joined in 2004 as finance director, retail, alongside director of high street Steve Clarke. He will assume the role of chief operating officer alongside his existing responsibilities.

Directors including Swann have been well rewarded and incentivised to ensure the business continues to move ahead.

In 2011, for instance, Swann earned a salary of £525,000 and took home a performance-based bonus of £1.05m.