Can workers provide a big break for WHSmith?

Just about every imaginable retail frontier has been opened up in the past 10 to 15 years.

Overseas expansion and the advent of multi­channel retail have brought unprecedented opportunities to sell in new markets and in new ways.

But bookseller and stationer WHSmith believes it has found one as yet untapped spring of profitable growth: the workplace.

When it unveiled results a fortnight ago, WHSmith flagged workplace shops, in places such as big offices or business centres, as an opportunity for its travel division, which delivered record full-year operating profit of £53m and for the first time delivered more to the bottom line than its high street arm (see box, right).

Work in progress

WHSmith already has eight workplace shops and expects to open another 40 over the next five years. Such stores are typically sited in commercial districts, such as Manchester’s Spinningfields

- which pitches itself as the city’s equivalent of London’s Canary Wharf - or big offices such as those of financial services firm AXA.

WHSmith chiefs believe workplace stores potentially represent a “large” market with similar economics to its retail business in hospitals, where it has 103 shops at present and intends to open another 50 over a five-year period.

A WHSmith spokeswoman says: “Our experience serving busy commuters in railway stations and workers in hospital locations led us to believe we had a format that could work in a workplace environment.” The workplace venture has “a lot in common with the hospital format, with the provision of quality retail being relatively low on landlords’ priorities”, she says.

The retailer’s identification of new locations has proved prescient in the past. WHSmith’s hospital programme is being replicated by Marks & Spencer, whose franchise partner SSP has so far opened three such shops and envisages 20 eventually.

But workplaces bring dynamics of their own - many are closed at the weekend, for instance - and few retailers have chased the market. Waitrose, which runs a well established store at BA’s Waterside headquarters at Heathrow, has no plans for more workplace shops.

WHSmith, however, is confident that a market exists and has tailored its offer appropriately. Workplaces with about 2,000 employees can sustain a store, the retailer says.

Shops typically average 1,000 sq ft and confectionery, drinks and sandwiches feature prominently in recognition of the lunchtime trading peak. Services such as dry cleaning may also be offered if appropriate.

Allegra Strategies project director Steve Gotham says WHSmith’s workplace push may eventually pitch it against big catering groups such as Sodexo and Aramark, which already have a presence in various types of workplace - including small convenience stores in some cases.

And while he agrees broadly with the retailer’s initiative, Gotham also has some niggles. He says: “The travel side of the business is going very well. They’re right to look at alternative locations to capitalise on that.

“Aside from newspapers I recognise Smith’s has a range of sandwiches but they’re not strong in food and beverages. It’s not a highly obvious step.”

But Verdict senior analyst Malcolm Pinkerton says that WHSmith’s enterprise is sensible in the light of the extent of competition it faces on the high street. Workplace shops he says, like those located in stations or hospitals, deliver a “captive market” to the retailer.

“They’re looking at their proposition and thinking, where can we fit? Where are we needed?” says Pinkerton. He thinks that a food partnership could be an option for the retailer, enabling it to improve the lunchtime offer to customers.

Trading trends

Gotham points out that WHSmith will need to be alert to workplace trading trends. The high footfall at lunchtime, for example, necessitates “very efficient throughput” of customers.

And some types of workplace will be better than others, even if the numbers of staff are similar. “The locations need to be good, ideally also tapping into business customers who are visiting, and the positioning of the [retail] site needs strong visibility,” says Gotham.

Planet Retail research director Greg Hodge says that in the US, workplace retail - usually catering specialists - is a growing trend, and gives the example of sandwich specialist Potbelly, which has workplace stores.

Hodge acknowledges that there may well be challenges in such locations for WHSmith - such as restocking over the weekend and ensuring price competitiveness - and says that success will also depend upon the exact nature of the financial arrangements WHSmith has with office owners.

But he believes there is a clear market opportunity. “Customers want options,” says Hodge. Retailers can take advantage of a captive market and up the game in comparison with established workplace operators, he says.

“The current offer is often average and consumers aspire to something better - this is the next step that retailers can take.”

Monica Lucas, president of consultancy Pragma, which has previously done research into retail prospects in the workplace, also thinks that WHSmith has identified a growth route worth following. “It’s a very sensible idea and I think WHSmith has a very good opportunity to do it,” she maintains.

But she notes a key distinction between workplace shops and others in the retailer’s travel division. Unlike in a railway station or airport, shops catering for workers in their offices must appeal to the same base of customers daily - not a constantly changing set of consumers who often are just passing through.

“That means you need to vary the offer to encourage people to come every day,” she says. “It can be an important part of the community, but there needs to be a reason for people to keep coming back.”

On the evidence of how WHSmith has managed its travel division so far, Lucas thinks it will be alert to that danger. She says: “It knows you can’t regurgitate a cut-down version of the high street. It has to be targeted to a catchment and when the catchment is that much smaller, it really has to be right.”

Arden Partners analyst Nick Bubb says that in big office blocks in the US it is not unusual to see CTN stores and believes a similar venture here could work for WHSmith.

He says: “It’s a perfectly sensible, though modest, way of growing the business. People often can’t be bothered to leave their buildings, especially if it’s raining.”

Growth opportunities

Bubb believes the venture is illustrative of how WHSmith’s travel division can still continue to grow.

“Add up the hospital stores, motorway service stations, other railway stations - wherever you look there are opportunities in apparently mature sectors,” he says.

There has been frequent speculation that WHSmith might demerge its travel and high street operations. A workplace chain represents another step forward, making the travel business more attractive, but Bubb is not sure a demerger will occur.

He believes a swoop on the travel arm - or maybe the airport stores - by a big established player in airport retailing is more likely, but says workplaces stores and similar projects do show that the division is about more than airports.

And Gotham says there are other places, often those where the large contract caterers are present, that may offer retailers workplace opportunities - local authorities and educational and defence establishments among them.

He thinks university stores may also be an appealing growth avenue. “Universities have quite decent footfall on a termly basis. There’s been some interest from coffee chains and c-store chains,” says Gotham.

Workplace shops are undoubtedly an opportunity, but likely always to be an add-on, Gotham thinks, as evidenced by the fact that Waitrose has never opened more since Waterside. “The more profitable locations have full, unrestricted public access,” he concludes.

But Hodge believes the workplace channel could be important for WHSmith and, by extension, other retailers. He says: “Hospitals have obviously been a success. I wouldn’t be surprised if 50 [workplace shops] is a toe in the water - the thing is to get the model right. There’s the opportunity to grow where there are people.”

As retailers chase growth, and as they increasingly extend the service aspects of their offer, the workplace may become a new high street in its own right - or at least a worthwhile secondary trading location.