Opinion: When it comes to retail, size isn't everything

They are usually the major beneficiaries of M&A – sometimes the only beneficiaries.

Sainsbury’s are keen, although their acquisition of Argos already told us that. Having only recently started to digest that, the company is embarking on a much bigger one.

There are clearly many hurdles to cross before the Sainsbury’s-Asda deal can go through, but as a general principle is getting bigger all it used to be? I think not.

This is not just about M&A, but about the role growth plays in everyone’s thinking.

We have all grown up believing that increasing scale is the major objective of all leadership teams. That this is the way to increase returns.

“Across the industry, most retailers have too many stores, often too big and carrying too wide an offer. And they aim for too wide an audience”

And while in theory (and often in practice) it still is, I would argue that this market is telling us there are some sales you don’t – or shouldn’t – want.

Across the industry, most retailers have too many stores, often too big and carrying too wide an offer. And they aim for too wide an audience.

These are all symptoms of chasing sales unconditionally, growing too fast, compromising on locations and pursuing peripheral customers.

Growth now needs careful qualification. If you want quality, defendable, sustainable earnings from your business, you need quality sales growth.

Focused growth

The winners in this market are disparate and varied. But they all have something in common: focus.

Absolute focus on a specific, defined customer. They resist diluting this focus in order to attract peripheral business.

Costco, Ted Baker, Zara and Aldi could all reach out way beyond their current trading models.

Costco could allow non-members in, Ted Baker and Zara could widen their appeal through diluted handwriting, and Aldi could expand SKUs and build fancier stores.

This would fundamentally change their essence, remove their trading advantages and eventually hit performance.

“Economies of scale are no longer a viable substitute for commercial nous – really knowing what your customers want and delivering just that in the optimum way”

They have all grown spectacularly, but in a very tightly managed way, relentlessly adhering to their core values and models.

Most of today’s disruption and outperformance is coming from relatively smaller, more agile, more focused players.

Economies of scale will always be hugely significant in retail. But they are no longer sufficient on their own and are no longer a viable substitute for commercial nous – really knowing what your customers want and delivering just that in the optimum way.

We are now seeing the early days of the biggest industry restructure ever seen.

Many businesses must get smaller before they can begin to think of expansion again, but downsizing alone isn’t enough.

Shutting stores is key, but so too is editing ranges and footprints, and refocusing on core customers.

This is fundamental stuff, requiring genuine retail trading skills. CVAs and administrations are a waste of time without tackling the business models themselves.

Sainsbury’s-Asda is a defensive transaction that will, to a degree, make it easier to defend the enlarged business.

But beyond cost-cutting and leveraging the economies, will it be a stronger trading entity?

M&A can be a useful element of the wider industry restructuring process.

However, prospering in this market is about being much more like the winners. Focus on core customers and deliver what they want. It sounds so simple.