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Retail Change and RetailLogistics in the UnitedKingdom: Past Trends andFuture ProspectsJohn FerniePublished online: 28 Jul 2006.

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Retail Change and Retail Logistics in the United Kingdom:

Past Trends and Future Prospects

JOHN FERNIE

The article discusses the factors which have influenced retail change in the UK and the impact of these changes on the logistical support to shops. During the last 30 years there has been a retailing revolution in the country. Consumers have become more afluent, discerning and mobile, and retailers have responded to consumer needs by offering a range of formats in city centre and out of town locations. A major part of this retailing revolution has occurred in the field of logistics where British retailers have gained control over the supply chain, reducing lead times from the manufacturing plant to the store. The grocery sectol; in particulal; has a streamlined logistical system with investment into composite distribution centres and transport to supply an increasing number of superstores. This logistical framework is now being challenged by technological, environmental and political change. The government's policy to rninimise environmental damage and revitalise town centres poses challenges for logistics managers. Furthermore, the viability of home shopping is being tested by 'traditional' retailers with the prospect of the take-off of electronic retailing by the millennium. The article discusses these new formats and the logistical consequences of their development.

INTRODUCTION

While there has been a 'logistical transformation' of British retailing during the last decade [Sparks,1997], a period of relative stability has been reached in the 1990s. This is likely to give way to turbulence as new forms of non- store retailing gain greater acceptability and conventional logistical

John Fernie is Director of the Institute for Retail Studies, University of Stirling, Scotland, FK9 4LA.

The Service Industries Journal, Vol. 17, No.3 (July 1997). pp.383-396 P U B L I S H E D B Y F R A N K CASS, LONDON

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3 84 THE SERVICE INDUSTRIES JOURNAL

channels accommodate a rise in home deliveries. The article provides an overview of the main changes in the UK retail environment to date, the logistical responses to them and finally the possible impact of future changes upon logistical strategies of both retailers and manufacturers. In this final section analogies will be made with the situation as it evolves in the USA in order to assess the likelihood of success or failure of new technologies and formats.

FACTORS INFLUENCING C H A N G E

The factors influencing change are largely consumer-driven in that the structure and composition of the British population has changed markedly over the last 15 to 20 years. As these consumers have become more mobile, affluent and discerning, retailers have had to respond to changing consumer needs. Nevertheless, what is deemed to be acceptable retail development has been the subject of continued debate by successive governments as they initiate policy around the diktat of what is in the public interest. In essence, retail change has been driven in the past by the interaction of consumer, retailer and government; in the 1990s the role of technology is increasingly important as an agent for change.

Although the population has remained static over the years, the numbers of people in the older age categories are increasing to the extent that 25 per cent of the population is projected to be over 60 by 2020 [Cameron-Waller. 19951. Not only is the population older but an increasing number of single households are evident (from 20 per cent of all households in the 1970s to 27 per cent in the 1990s). There also has been a shift in the location of the population away from major metropolitan areas to smaller-sized communities [Champion, 19891. This has occurred as people seek better quality environments in which to live, and as personal mobility has increased through the steady rise in car ownership. These broad changes in the demographic profile of the UK consumer, coupled with commensurate changes in consumer behaviour have led to a more complex set of values pertaining to behavioural patterns. As consumers become more mobile, not only are they willing to travel further to purchase products but they have become more experimental in their behaviour as they are subjected to 'new' products while they are on vacation or business, while retailers and their suppliers have become creative in encouraging consumers to try innovative products. Increased female participation in the workforce, the time pressures on shopping and cooking activities, the high levels of home ownership and time-saving kitchen appliances have all affected how and when products are purchased. It should be noted, however, that although the gap between the highest and the lowest income group is increasing, there is

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RETAIL CHANGE IN THE UNITED KINGDOM 385

a rise in the number of low-income consumers whose behaviour is strongly influenced by price [Dawson, 1995; Cameron-Waller, 19951.

Price is currently a major factor in a consumer's choice of product but this is primarily a function of cyclical trends in the economy; in times of growth and high consumer expectations, such as the mid- 1980s, consumers increased their frequency of replacement of a range of discretionary purchases; in the 1990s the reverse is true with a tendency to postpone purchases until uncertainty is removed. The legacy of the 1980s, however, is that consumers expect products of reasonable quality, provided by retailers offering, inter alia, variety, good customer service and a concern for environmental matters.

The combination of all these factors has resulted in a complex set of values associated with consumer behaviour. Sheth et al. [I9911 have listed five sets of values to encapsulate different behavioural patterns: functional, social, emotional, epismetic and conditional values, and Dawson [I9951 has shown with the example of food shopping that a consumer can embrace a range of these values according to the purpose of the shopping trip. The retail response to these changes in consumer behaviour has made this sector of the UK economy one of the most dynamic of them all. No longer can the UK be classified by the Napoleonic phrase as 'a nation of shopkeepers'. Over the last 30 years this sector has been transformed from a large number of small independent retailers to large, publicly-quoted corporations. Although Table 1 shows a large number of businesses operating collectively from over 300,000 outlets, the sales from these are concentrated in a small

T A B L E 1

TOTAL RETAIL T R A D E 1980-92

Year 1980 1982 1984 1986 1988 1990 1992

Number of businesses 256,139 248,950 246,931 244,006 237,832 241,704 219,131

Number of outlets 368,253 356,590 349,728 343,387 338,248 348.920 3 18,75 1

Persons engaged (000s) 2,408 2,258 2,317 2,334 2,347 2,468 2,324

Retail turnover' (f m) 59,757 70,167 82,794 97,296 114,705 132,704 144,135

Inclusive of VAT

Source: Business Monitor. SDA25. Retailing 1992.

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386 THE SERVICE I N D U S T R I E S J O U R N A L

number of large companies. Table 2, for example, shows the degree of concentration by sectors of activity and the Corporate Intelligence Group, in its annual Retail Rankings, has shown that the top ten British retailers have increased their market share by over 10 per cent in the last decade and now account for approximately 38 per cent of total retail sales [Corporate Intelligence Group, 19961. This concentration of capital has been most marked in the grocery sector and has been the subject of comment by Wrigley over the last decade [Wrigley, 1987,19911. Indeed, because of the 'store wars' in the late 1980s and early 1990s, the major companies found themselves with overvalued assets leading to the reduction of store development programmes and the depreciation of assets and one-off write- downs of surplus land [Wrigley, 1994, 19961.

TABLE 2

C O N C E N T R A T I O N I N R E T A I L I N G B Y K I N D OF B U S I N E S S . G B 1992

--

Sectors of Activity Total Turnover The largest five The largest ten f Million enterprise groups enterprise groups

account for accounted for Amount Amount

Em 70 f m %

Food 43,479 18,391 23.1 25,261 58.1

Drink. 20,956 4,836 23.1 7,681 36.7 confectionery & tobacco

Clothing, footwear 2 1,742 7,872 36.2 10,671 49.1 and leather goods

Household goods 29,389 5,862 19.9 8,780 29.9

Other non-food 26,035 6,336 24.3 9,000 34.6 goods

Hire & repair 1,509 951 63.0 1,012 67.1

Sales by non-store activity 10,035 3,683 36.7 4,560 45.4

Total Retail Trade 143,645 31,539 22.0 46,286 32.2

Source: Business Monitor SDA25, Retailing, 1992

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RETAIL C H A N G E I N THE UNITED K I N G D O M 387

Commensurate with the shift in location of population has been the shift of retail development from downtown to edge or out of town. These developments have been described as 'waves' commencing initially with food superstores in the 1960s and 1970s, followed by electrical, carpet and DIY superstores located in retail parks in the 1980s [Schiller,1986; Fernie, 1995al. Tables 3 and 4 show the extent of these developments since the

TABLE 3

NEW SUPERSTORES A N D HYPERMARKETS 1963-93, GB

Sales Area Cumulative Store Cumulative Opened Total

Year Opened Total OOOs sq.ft OOOs sq.ft

1990 89 733 3,566.3 28.41 1.6 1991 65 798 1,729.2 30,140.8 1992 64 862 2,249.9 32.390.7 1993 74 936 2.500.1 34,890.8

Source: IGD Stores Database.

Average Size Opened

OOOs sq.ft

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388 T H E S E R V I C E I N D U S T R I E S J O U R N A L

T A B L E 4 B R I T I S H S H O P P I N G D E V E L O P M E N T S FLOORSPACE STATISTICS

( G R O S S 000 SQ.FT) -- --

Year Town Centre Retail Parks Other Out-of-Town

Total 1 1 1,755 30,996 14.538

Source: Hillier Parker Research, April 1994.

early 1960s. As these retail parks became more sophisticated, a third wave of development was foreseen for the 1990s, namely the out of town shopping centre. Indeed, one of the most successful malls, Metro Centre in the north-east of England, was an upgraded retail park. This third wave has never really materialised, with only a few major developments being built because of a combination of economic recession, developer uncertainty and vacillating government policy. Instead, a much more modest fourth wave is

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RETAIL C H A N G E I N T H E U N I T E D K I N G D O M 389

under way primarily initiated by US imported retail formats, such as warehouse clubs and factory outlets.

In essence these newer retail formats may be categorised as belonging to destination retailing in that consumers are willing to travel considerable distances to visit these locations because the pricelvalue relationship is well established in the mind of the consumer [Wileman,1993]. Grocery superstore and retail park operators have moved from being proximity retailers with an emphasis on high street locations to destination retailers operating from non-central locations. To some extent a blurring of these categorisations is beginning to take place as grocery retailers begin to develop proximity formats and well established retailers such as Marks & Spencer operate in both environments.

The shift back into the city centre by grocery retailers is due to the hardening of approach by government to out of town development., Planning policy has oscillated from a strongly regulated approach up to the 1970s, to a laissezzfaire stance in the 1980s, and now a more controlled attitude. In the 1970s these new forms of retail development met with considerable resistance from planning authorities and appeals were a feature of this period. Once superstores became an acceptable form of development, both food and non-food operators began to develop out of town sites. The 1990s are experiencing further change. Both major political parties are committed to revitalising city centres and this was reinforced by a Parliamentary Select Committee which investigated the issue [House of Commons Environment Committee, 19941. This has meant a dramatic slowdown of development since the buoyant years of the late 1980s and early 1990s. Grocery retailers are now turning their attention to smaller schemes in city centres or, more significantly, to growth opportunities in foreign markets.

Although the role of government in guiding land-use planning is of relevance to this discussion, i t should be noted that government policy on a range of issues, such as food safety, opening hours and competition, has influenced retail development. The Office of Fair Trading has been an influential watchdog in determining what is in the public interest in terms of fair competition [see, for example, Office of Fair Trading, 19851.

THE LOGISTICAL CONSEQUENCES OF RETAIL CHANGE

The nature of retail change identified above, especially the locational changes, has transformed the way in which products are delivered to retail outlets. The healthy net margins enjoyed by British retailers have been partly attributed to the efficient logistical support to stores which has evolved over the last 20 years [Fernie, 1995bI. This cvolution is

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390 T H E SERVICE INDUSTRIES JOURNAL

characterised by three main stages: a supplier-driven stage, the creation of retailer regional distribution systems i n stage two and the final shift to a retailer-controlled logistical stage. Each will be discussed in turn.

Until the 1970s most British retailers received products direct from the manufacturer from either their factories or one of the numerous field warehouses strategically located to supply hundreds of stores throughout the country [McKinnon,l989]. Store inventory levels were controlled by branch managers who bought direct from manufacturers, often with the assistance of sales representatives. Lead times were long and much stock was held in the backroom of the shop. This meant that improvements in stock turn were difficult to achieve; indeed, if demand for particular lines were high an out- of-stock situation would occur because of the relative inflexibility of suppliers' deliveries and the need to redistribute stock around branches.

In order to improve stock availability and gain greater control over the supply chain , retailers began to centralise their distribution through the construction of large warehouses for the receipt of suppliers' products. Companies such as J. Sainsbury and Boots had centralised much of their stock by the late 1960s and early 1970s and other companies followed with the laggards, the DIY and newsagent chains, carrying out such schemes in the 1990s. Retailers negotiated volume discounts with suppliers, invariably on ex-works conditions, and consolidated stock at warehouses prior to replenishing stock at stores at greatly reduced lead times. Most of the innovation in retail logistics was carried out by the high volume operators, such as the food retailers and the mixed retail businesses. The food retailers, in particular, developed the concept of composite distribution which is unique to the UK. Composites are large, multi-compartmentalised, distribution centres which allow the storage of products at different temperature ranges under the one roof. Similarly, the trucks are also able to carry mixed product ranges when they deliver to stores. This produced a streamlined, efficient system because the superstore was the predominant trading format in the UK.

Over 80 per cent of the stock of British retailers is now centralised and in the case of the food retailers this figure is as high as 98 per cent in some companies. Furthermore, this major development has dramatically transformed the food distribution network in the country. Food manufacturers' networks have been decimated with the construction of composites and other regional distribution centres. However, a large new market was created in the provision of distribution services. Throughout the 1980s when major investments were made into logistical networks, British logistics providers such as NFC, Tibbett and Britten, Wincanton and Christian Salvesen won sizeable contracts to run this support function for retailers.

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RETAIL CHANGE IN THE UNITED KINGDOM 39 1

The final stage of logistical development is still under way as retailers continue to control the supply chain. In stage two stock was moved from the back room of stores to distribution centres; lead times were reduced but stock was just pushed further up the supply chain. Now retailers are moving towards a JIT system for the replenishment of stock. As sales-based ordering increases, products are delivered in smaller quantities from factories and are cross-docked across distribution centres. This gradual reduction of retail-held stock, however, has posed problems for manufacturers. The shift to centralisation had allowed manufacturers to concentrate upon R&D and manufacturing whereby the distribution function was relinquished to retailers or third-party experts. Cost reductions were achieved through a streamlined logistics chain allowing full trunk loads of product to be delivered from plant to warehouse. Whiteoak [I9931 maintains that this new phase can only add cost to manufacturers and benefits to retailers without appropriate collaboration. To be fair, it has to be stressed that supply chain collaboration is better in the UK than in most other countries (see, for example the GEA [1994] report on European collaboration). Indeed, in 1996 European retailers and suppliers have been brought together to discuss how the concept of efficient consumer response (ECR) may be applied in practice. The Institute of Grocery Distribution (IGD), the lead body in the UK, has hosted two conferences on this theme. Nevertheless, the extent of retail control over the supply chain is a function of the unusual situation in the UK where retailers not only challenge manufacturers in areas traditionally considered to be the responsibility of the manufacturer but are dominating particular sectors, such as distribution. Through the use of store and loyalty cards, retailers are responding quickly to consumer needs and the food retailers in particular are developing thousands of own brands each year [Fernie and Pierrel, 19961. Few grocery retailers in the world can take on the might of Coca-Cola, Unilever, Procter & Gamble or Mars through the launching of own brands with a quality image to challenge these category leaders.

T H E C H A L L E N G E S FOR T H E F U T U R E

The shift in the balance of power from manufacturer to retailer over the last 30 years has been facilitated by the use of information technology. The swift technological adoption of EPOS and ED1 and the applications of IT to all parts of the business have given retailers the ability to respond quickly to changes in the market environment. Possibly the most significant likely change to affect the retail environment in the near future will be that associated with the 'information superhighway'.

The cynic is likely to argue that there is an element of dkju vir about the

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392 T H E SERVICE I N D U S T R I E S J O U R N A L

hyperbole concerning teleshopping or electronic shopping. Non-traditional home shopping was always going to transform retail markets but the vision was never realised [see Talarzyk and Widing, 1994 for a US viewpoint]. In the UK, experiments were carried out, often with government support, to deliver groceries to consumers. But once subsidisation ceased, the cost for both consumer and operator became prohibitively high. Why within a period of ten years is there greater enthusiasm in the trade press about the coming of electronic shopping? The potential take-off of this retail format is related to its technological sophistication, its cost and the added value that i t can give its customer compared with those from conventional shopping. As British Telecom in the UK and other major companies in Europe and the US are willing to invest in trials of interactive services, the prospects for home shopping are good, especially as the public is becoming tuned to the information age as personal computers have become cheaper and more powerful with a wider range of multimedia applications.

It should be noted that TV shopping and electronic shopping have made little impact to date. For example, only 2.5 per cent of American consumers patronised these formats in the last year [Rousey and Morganosky, 19951; the figure for the UK was only 1.3 per cent [Healey & Baker,1995]. Furthermore, TV shopping in the US has not fulfilled its early promise and 1995 has witnessed the demise of several shopping networks [Redler, 19951. Quality, Value and Convenience [QVC], one of the two major TV shopping companies in the US, entered the UK market in 1993 but results have been disappointing. This is not surprising in that the UK has one of the lowest penetration rates of cable TV in Europe [Redler,1995; Mandeville,l995]. Nevertheless, QVC and other companies involved in shaping the future of home shopping foresee a world of interactive communication rather than the one-way TV transmission of the present. No single approach has emerged as a clear winner to date as the 'battle of the boxes' continues as to whether a home computer or TV device will dominate the interactive home shopping market [US News and World Report, 19941.

On both sides of the Atlantic, scenario approaches have been adopted to forecast outcomes in the early part of the next century [Mandeville,1995; Anderson Consulting,l994; Gemini Consulting, 19971. The reality is likely to be towards the slow, incremental approach as new global opportunities are offered to providers and consumers of goods and services. With these opportunities come a host of problems pertaining to legal issues of cross- border trading and security of payment methods [Economist, 1995; Bi~sirtess Week, 1995; Reynolds, 19961.

Table 5 summarises the prospects for all home shopping activity in Europe by 2000 and identifies the likely winners and losers as the market evolves. Although this represents a 'realistic' view of the future, the figures

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RETAIL C H A N G E IN T H E UNlTED KINGDOM 393

TABLE 5

PROSPECTS FOR H O M E S H O P P I N G I N E U R O P E IN 2000

Food sales via home shopping 10-15'70

Non-food sales via home shopping 20-25%

Main communications media Cable, telephone [Internet]

Most popular home devices [I] TV plus set-top box [2] PC-based communicating multi-media device

Largest market Two-income professional households

Still growing TV shopping

Falling Catalogue mail order

Overall winners Existing mail order companies [but under a different name];

Packagers of on-line services to the home; Software houses; Distribution companies; Owners of infrastructure; Manufacturers of leading brands; Highly efficient large retail companies; Small retail high street specialists with high service

levels; Youngish professionals.

Overall losers Retailers who opt out; Less efficient retailers; Traditional advertising agencies; Retailers and banks with large property holdings; Lesser brands; Manufacturers of in-store equipment; The old frail poor.

Source: L. Mandeville, 1995, Prospecrs for Honle Shopping in Europe, lT Management Report, Pearson.

are optimistic, especially for the UK. A survey of major European retailers by one of the computer services providers, Hoskyns, shows that retailers are taking a defensive strategy to the advent of Internet services with only a small increase in sales forecast through this medium in the next decade [Hoskyns, 19951. Their survey suggests that by 2006, 9.8 per cent of sales will be direct to customers and this excludes traditional mail-order. As one half of these sales will be through the Internet, Hoskyns concludes that retailers are going to lose sales to an ever widening range of competitors.

To some extent this process is already under way in the UK for certain categories of merchandise. Suppliers of software, computer games, books,

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CDs and flowers already have the logistical support to develop their business on the Internet; this clearly has implications for traditional retailing in these product markets, a threat recognised by W.H. Smith which joined Compuserve's UK Shopping Centre in 1995 [Retail Week, 19951. In other product markets, electronic business is moving at a slower pace. The two main British food retailers, Tesco and J. Sainsbury, retail wine on the Internet and drinks and beer suppliers (United Distillers and Bass) are selling direct on the Net. Bass's decision angered one of the UK leading wholesale groups sufficiently for it to suggest to its customers that they should boycott Bass brands [Grocer, 19951. In the longer term, food and drink suppliers may use this channel of distribution to regain some of their lost power in channel relationships. For retailers, an opportunity exists to remove the boring, low-margin, bulky items from their shelves to increase the number of high-margin, consumer-'friendly' products.

In non-food markets, traditional retailers will develop a dual strategy to explore marketing opportunities; already cotnpanies such as Marks & Spencer are enhancing their mail-order presence as a possible stepping stone to electronic shopping. Other companies, such as Selfridges, are using the UK Shopping Centre as a market development strategy to take Oxford Street to other pans of the country. This strategy is reminiscent of the traditional mail-order approach in the last century to reach remote consumers; all that has changed is the technology. It is clear that the demise of the shop is premature; the survey by Hoskyns showed that home shopping was being used to bring people into their stores. Indeed, in the US home shopping is often used as an indicator of demand to justify new store investment [Reda, 19951.

In terms of logistical changes to support ncw developments, these will be minimal in the short term. The Hoskyns survey [I9951 showed that, with the exception of mail-order companies, 95 per cent of the companies in their sample proposed store pick-up of goods. If electronic retailing does take off in the next decade, this will change as a dual distribution strategy will be required for traditional retailers. This offers major opportunities for mail- order companies if they can reposition their product offering to the new electronic consumer, who is quite different from the classic mail-order shopper. However, these companies do have the logistical infrastructure and expertise to deliver goods to the customer. Similarly, the logistical service providers in the UK should capitalise on this market as i t grows. These companies have already worked extensively with retailers and manufacturers in the provision of logistical services at both homc and overseas. As the Internet offers further international opportunities, further contracting out of the distribution support function is likely.

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RETAIL CHANGE IN THE UNITED KINGDOM 395

The last 30 to 40 years have witnessed a retail revolution in the UK which has subsequently led to a transformation of logistical practices. Consumers have become more affluent, discerning and mobile. Retailers have responded to the challenge by offering consumers a range of store formats in both city centre and out of town locations. Retailers have improved the efficiency of their operations and the engine of growth and enhanced profitability has often been attributed to good logistics. In the grocery sector, in particular, the development of the superstore and the composite distribution centre to supply it have resulted in a streamlined logistical system.

This logistical framework is now being challenged by technological, environmental and political change. The government's policy to restrict further out of town developments to both revitalise traditional town centres and minimise environmental damage poses as many questions as possible solutions. What will be the extent of traffic congestion i n our town centres as consumers drive to the shops and retailers try to deliver to them? As retailers will have to comply with waste recycling regulations in 1997, 'reverse logistics' will aggravate this situation as packaging is recovered through the supply chain. Will the consultancies which advocate the meteoric rise of home shopping either through traditional mail-order or the Internet be proved correct? Will shopping become such a chore that we shall order from home and a new logistical network based on the current mail- order system will become the norm? Such a transformation is unlikely in the short run but clearly retail logistics in the UK is entering a new phase towards the end of the century.

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Disrriburion Managemenr, Vo1.23, No. 10, pp.4-20. Economisr, 1995. 1 July. Fernie, J. and F.R.A. Pierrel, 1996, 'Own Branding in UK and French Grocery Markets'. Joltrncrl

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