Comment: Retailers need a radical approach to compete with etailers

It was suggested recently that some online traders are getting an unfair advantage because UK trading standards and advertising rules are not being enforced for many websites, while their high street counterparts are strictly monitored.

Certainly we noticed that at Bathstore, where an online competitor routinely breached these regulations with misleading promotions, apparently with impunity.

It raised the question of whether there is a level playing field between online and traditional retail – and if not, whether something should be done about it.

Clearly, trading rules should be applied equally across all retailers. But this is not the only area in which an uneven playing field has developed.

We have all seen the extraordinary valuations placed on internet-based retailers in recent IPOs. Most of these businesses make very little profit, and some make none at all. The heady valuations are based, I suppose, on the expectation that the businesses will grow rapidly and achieve a scale that will make money in the future.

This brings two critical business advantages. Firstly, it means that these companies can raise money very cheaply by issuing new shares. That gives them easy funding to expand, or to support an aggressive attack on existing competitors.

More importantly, they are not expected to be significantly profitable, nor to provide a recognisable return on capital – for now at least. This brings extraordinary freedom, especially to pursue predatory pricing and long-term loss-leading strategies. A great example is Amazon, which produces little return on its equity value, and has been supported by shareholders in growing share aggressively by sacrificing profit for nearly 20 years. This has enabled it to undercut traditional competitors continuously on price and gain some huge market shares.

I’ve often said that there’s no justice in business. There is no authority to complain to about what I’ve described above – it’s just how the business world works.

It is very difficult for existing businesses, especially quoted ones, to respond in kind. Imagine if, say, WHSmith were to tell its shareholders that it would make no money for the next 10 years so that it could beat online competitors on price to protect market share. How long would the chief executive stay in post?

But a soft approach won’t do. Retailers must be more radical and come out of denial about the amount of space they really need, acknowledge what is a viable cost base, and ditch harmful outdated beliefs, for example, that online sales are undermining store performance (which I still hear).

There are lessons from the airline industry, which had to cope with the rise of budget airlines: it was very painful for a period, often with huge losses, but shareholders backed good competitive strategies. Now many airlines would say that the process was beneficial, ridding them of unnecessary overheads and helping them move on from outdated ways of doing business. More retailers need to think like this.

• Simon Burke is chairman of Bathstore