Learning to play their cards right

Last week’s profit warning from Clinton Cards showed two things: being in a market-leading position does not necessarily provide shelter during tough trading conditions, and selling low-priced products does not guarantee sales.

It also prompted some to ask whether Clinton’s mid-market positioning had left it exposed to a squeeze by value specialists at one end and upmarket competitors at the other, and whether a new generation of online specialists was exerting pressure.

Clinton is number one in its market, with a share of about 20%, but it is coming up against tough competition from all sides.

Wakefield-based Card Factory, acquired in a £350m deal by private equity firm Charterhouse in April, has 480 stores and has sewn up the discount end of the market.

At the premium end, 65-store Paperchase this week secured backing for a £30m management buyout from its owner Borders Inc. The business is expanding and has this year secured a deal with HMV-owned bookseller Waterstone’s to sell cards in its stores. And Scribbler, which has 18 stores, is also expanding. It now has shops focused on the quality market in high-profile locations, such as Westfield London, and is searching for a further five stores at the moment.

Supermarkets have been encroaching on Clinton Cards’ share, too. The grocers increased space for greetings cards and party lines in the wake of the collapse of Woolworths.

And the Moonpig website, set up in 1999, was the first to offer a sophisticated way of personalising greetings cards online. It is going from strength to strength and other retailers are trying to emulate the offering (see box page 23).

So where does all this competition leave Clinton Cards? It has clearly taken a toll. The retailer plunged its Birthdays chain into administration last year before buying back the most profitable stores.

Last week the retailer blamed the poor performance of its 13 Birthdays stores in Ireland for its profit warning, and warned that group-adjusted operating profit from continuing operations will be “similar to last year”.

Cards on the table

Group managing director Clinton Lewin recognises the threat posed by rivals such as supermarkets and Card Factory but insists his business occupies a unique place in the market and does not believe it is being squeezed because it is mid-market. “We sell a range that covers all price-points,” he says. “You can buy a card in our stores for 75p or up to £25.” He points to initiatives now under way to strengthen the business. “We are protecting our end, trying to ensure consumers come to our stores,” he says.

Clinton Cards is embarking on an overhaul of its store format, the first in many years, and will “fairly soon” launch its own personalised greeting cards online offering. Lewin says: “It will certainly complete the range for us to be able to offer something personalised. At the moment, that’s missing.”

A third of Clinton Cards’ products are own-brand and the retailer aims to grow that proportion. Own-brand has been a big factor in the success of Card Factory. Clinton Cards also aims to open more stores with a view to growing its market share. Lewin jokes: “We’re aiming to be referred to the monopolies commission - that’s always a goal.”

Nick Coulter, analyst at house broker Numis, also thinks Clinton Cards can hold its own. He says that while “a low-footfall environment in mainland UK” and a “stubborn underperformance of the 13 Irish Birthdays stores” have affected performance, the retailer has “maintained cost and cash discipline and will benefit from self-help” in the year to next July. Although the broker revised its EBIT forecasts to £15.7m, down from £19.5m, Coulter says: “Clinton remains the clear market leader in card retailing.”

A static market

Lewin believes the cards market was slowing down even before the credit crunch. “The market has been static for five or six years,” he says. “Average spend has been a bit less over the past three years because of the recession.”

He forecasts that the £1.5bn greetings card market will remain static for some years to come. “It’s a large market and we are all vying for a larger piece of the pie,” he says. “I think there will be more fallout. That’s more likely than the market growing.”

There has already been some consolidation with the fall of Celebrations, which ran the Card Ware­house and Cardfair fascias. Its closure of 288 stores after its collapse in 2008 left a gap in the market, which Card Factory strove to fill, snapping up 74 stores.

Woolworths’ closure in January 2009 also left a gap, which Timothy Melgund, chief executive of Paperchase, says retailers are still vying for. “At the low end of the market you’ve still got people fighting for the share that Woolies took out, including WHSmith and Card Factory,” he says. At the premium end, where Paperchase sits, he thinks that “value and differentiation are becoming more important”. Own-brand and exclusive products help give Paperchase a point of difference.

Milton Guffogg, former chief executive of Celebrations, believes this is what gives some retailers the edge. “The market is split into two,” says Guffogg, pointing to Card Factory at the value end and Paperchase at the premium end. “Both retailers differentiate themselves and bespoke products are unique to both.”

Melgund, whose tie-up with Waterstone’s will enable him to open concessions in 20 of its book stores this year, says that, while he is mindful of soggy consumer confidence, the outlook for Paperchase is good. The retailer seems to be playing its cards right - he says it is running “considerably up” on last year on a like-for-like basis.

Signed, sealed, delivered

WHSmith seems to be doing well out of cards, too. While it does not reveal sales for greetings cards specifically, its like-for-like sales in stationery, including cards, increased 2% in the six months to February 28, 2010.

Card Factory, which declined to comment, is also thought to be prospering. In April the retailer was sold to private equity firm Charterhouse for more than £350m. A number of private equity houses vied to buy the retailer, which has cornered its end of the market with own-brand lines, aggressive expansion and a vertically integrated business model. The retailer generated £210m in revenue in the year to January 31, with underlying profits of £53m.

Numis analyst Andy Wade says Card Factory should be praised for its success, but he points out that it is hard to know how the privately owned business is performing and it is possible it is not faring any better than Clinton. He says: “It is difficult to know how Card Factory is doing. You only get to have the figures once a year.” Wade adds that Card Factory’s profits might have taken a hit too, like Clinton’s. He also points out: “If you are opening stores [as Card Factory is], then your turnover and profit will grow.”

Greetings cards are big business in the UK. According to Lewin, this country has the biggest cards market in the world. A billion are sold each year - 50 cards per capita. “It’s a good market to be in,” he says. But he acknowledges that greetings cards are not immune to the recession and that Clinton Cards has the same costs and rents burden as everyone else. “We have to find more ways to entice people to spend more on cards,” he says. “It’s a tough environment and will be for quite a while yet.”

Greetings cards retailers have traditionally been able to rely on occasions such as Christmas and Valentine’s Day to drive sales. But, says Lewin, after a disappointing Father’s Day, the market is becoming “difficult to predict”, hence the profit warning last week, only three months after the retailer had said it expected profits to come in ahead of expectations.

But for Scribbler, occasions are still doing well and in the long term the market will remain steady, as people will always send cards, according to Scribbler founder and chairman John Procter. He says: “People like to receive cards and get fed up with email greetings. Occasions are still doing well. If you have good product and don’t have too many overheads, there is no reason why you shouldn’t prosper.”

With competition intensifying in the sector and more consolidation in prospect, all card retailers will have to play to their strengths to ensure they continue to make the most of as many occasions as possible, be they ‘Grandparents’ Day’ or pets’ birthdays.