Diversification: A lucrative sideline or fatal distraction?

Did you know that Next owned a camping business, House of Fraser once ran an undertakers and Debenhams owned a supermarket chain? 

Such wide interests would be deemed illogical today, but retailers have over the years indulged in various – sometimes madcap – diversifications that have frequently failed to boost business.

Undeterred by such inglorious failures, last week entertainment group HMV revealed its move into the world of cinemas with the opening of a first venue this autumn above its Wimbledon branch in London. The retailer sees potential to roll out 20 more above its larger stores if the first succeeds.

At a time when many retailers are sticking to their core businesses HMV has branched out into several new fields. There is its tie-up with Orange to sell the mobile phone group’s products and services, as well as HMV’s joint venture with live entertainment group Mama. The HMV name now adorns venues including The Forum in Kentish Town and it hopes to profit from selling concert tickets and merchandise.

HMV chief executive Simon Fox says that the Mama venture is progressing well and that the retailer’s move into cinemas “further demonstrates how the HMV brand can be stretched into other entertainment-related businesses”.

The traditional retail entertainment market is undergoing a metamorphosis as the onslaught of the supermarkets and digital downloads makes the business of selling CDs and DVDs far less profitable. HMV recognises this and its answer is a strategy that takes it away from pure retailing. “We’re building a new business model that allows for the change in the mix we are experiencing. We are getting into the experiential side of entertainment – we are joining the dots,” says Fox.

So when does diversification work for retailers and when is it just a distraction? It is almost certain that Debenhams has no imminent plans to re-enter the grocery sector, but in difficult economic climes, is sticking to what you do best the right thing to do, or can some forms of diversification reap rewards in this rapidly changing world?

AT Kearney retail and consumer partner Hana Ben-Shabat says: “Adjacent products and services can make sense if you can execute it and deliver the same way you deliver the rest of your business.”

She points out that sometimes extension of reach is essential for survival. “Take IBM,” she says. “It used to just sell PCs, but as the whole hardware market became cheaper and cheaper it moved into services, which now account for about half of its business. This meant it survived.”

Ben-Shabat says that HMV’s push into wider entertainment is understandable but suggests that more action could be taken to revitalise the underlying retail business rather than take the diversification route.

She says: “In a category that is shrinking you have to ask why it is shrinking. What are the new technologies coming in and how can I get involved?”

Managing director of Orchard Retail Consultancy Paul Joyner is a little more forthright on HMV’s diversification. “They should have moved to fill the space now occupied by iTunes or Youtube, which would have had far greater resonance with its target market,” he says.

Joyner argues that running a cinema is very different to running a shop. HMV’s cinema venture is in partnership with established player Curzon Artificial Eye but Ben-Shabat still worries it could prove difficult to compete against established competition.

Retail Knowledge Bank senior partner Robert Clark also believes that competing in a well-established market may prove to be a challenge. “Specialists will close ranks if they see you coming. It should not be taken lightly,” he says.

Failure to launch

Even some of retailers’ more logical diversifications have failed over the years. Boots has tried its hand at several ventures. Boots for Men, for instance, was a men’s chain tried in the 1990s to take advantage of a growing trend in male grooming, but was abandoned.

Boots also ended its Wellbeing services – set up to offer treatments such as Botox – in 2003. The health and beauty group would also probably rather forget the £900m acquisition in 1989 of the Ward White group, which included Payless DIY and Halfords. “That was a disaster,” recalls Pali International retail analyst Nick Bubb. “As ever it is all about execution. Wellbeing was not a bad idea, just not well done. It was clinical and not very exciting.”

He advises that retailers stick to what they know. “Shareholders can invest in different markets if that is what they want to do,” he argues.

The supermarkets have traditionally been best at diversification. When Tesco first dipped its toe into the non-food market – then untapped by the grocers – some analysts thought it was an unwise move. Now non-food is key to the growth of the supermarket sector.

Tesco has not stopped since and is now pushing into the financial services sector with planned bank branches inside its stores. But even for Tesco, there has to be a limit.

Joyner says: “Tesco’s financial services have been very strong. It has understood the requirements of its customers and taken its brand values to new areas. Could Tesco do cinemas though? No.”

Tesco has chosen a suitable moment to extend its reach into banking, according to James Edsberg, partner at business adviser Lighthouse Global. “The brands closest to the consumer are the supermarkets and the banks – because we all interact with them every week,” he says. “But banking brands have suffered catastrophic damage over the past 12 months and people simply don’t trust them in the way they did. So there is a huge opportunity for retailers that have maintained their solid and trusted platform – particularly the supermarkets – to go further into financial services.”

He calls this “opportunistic diversification” and says “those that understand their customers will see the right places to diversify”.

However, even the richest and most powerful companies do not always succeed when it comes to widening their reach. Steve Gotham, project director for retail consultancy Allegra Strategies, says: “There can be a point where you stretch too far. Arguably Virgin is a good example of that.”

Virgin dabbled in many areas of service and business, but for one Virgin Megastores and its foray into clothing never brought great success. The clothing venture never really took off and by the end of this summer the last of its US Megastores will close.

However, Gotham does not dissuade retailers from seeking new areas for growth. “It is the right thing to be thinking of ways to capture more money from existing customers; it can be easier than attracting new ones,” he says. “There is no quick fix, but where you have loyal customers it makes sense to lock them in.” He also notes that it is key to communicate to customers very clearly what the retailer is doing and invest in making sure the message
gets through.

Joyner says that John Lewis has done this well with its Greenbee financial services website. “John Lewis has made the best of its brand value and that it has a great reputation for service,” he says. “There is a level of investment, though, and it has proved tough.”

For JJB Sports, shifting away from core sports retailing – into fitness clubs and fashion – was both a blessing and a curse when the business almost came to the point of collapse.

MHE chairman Edward Whitefield says: “JJB’s health clubs turned out to be more successful than its core business.” The clubs also offered JJB a lifeline when it was able to sell them to founder Dave Whelan and pay down crippling debt.

But former JJB chief executive Chris Ronnie made an ill-advised decision to form a fashion lifestyle division with the acquisitions of Qube and Original Shoe Company. These haemorrhaged money and had to be put into administration, as part of JJB’s revival strategy under new management to concentrate on the core business.   

Whitefield says that the worst time to branch out is when a business faces difficulties. In the late 1980s, when George Davies was still heading Next, he bought Combined English Stores, which included several businesses (a chain of chemists and a carpet business to name but two). He also bought a chain of newsagents. These were all divested when Sir David Jones came to rescue Next. “The overwhelming evidence is that the last moment on earth when you should diversify is when you are in trouble in your existing business,” says Whitefield. 

It does work, he says, when new businesses or areas that retailers want to introduce are run by the experts. “You can’t just develop skills overnight,” he says. “Auchan in France has hypermarkets, restaurants and discount clothing stores. Rather than being organised by central management,
it bought thriving businesses and allowed them to flourish with their own management.”  

Joyner says that ignoring new opportunities could be a mistake, although it is tempting while retailers are trying to fire-fight the present economic conditions. “It is very easy just to concentrate on your core business, but if you are not thinking of where to go when the economy comes back you will be in trouble,” he cautions. “Those identifying opportunities are sensible. If you don’t take advantage of changing markets you will be left behind.”

Opportunities may continue to present themselves as more retailers become victims of the recession.
“There is a market out there for pick ’n’ mix and toys with the collapse of Woolworths, so there is a chance to move
into markets that have been left
behind,” says Joyner.

Some products have been tested again and again by retailers. Tesco, Asda, Woolworths and most recently Lidl in Germany have all tried their hand at selling cars, often with limited success. “If you go into a completely different business model it can get complicated,” warns Ben-Shabat. 

Likewise, Whitefield stresses: “Diversification out of a problem is not a solution, but diversification on the back of a successful business can yield attractive fruit.”

So we may not see a chain of Netto hairdressers, Topshop selling trendy pets or DSGi investing in a fashion brand, but where markets are contracting and changing shape, stepping outside of the retail box in smart and inventive ways could be a path to success and a richer brand.