Despite the challenges, a number of these companies have changed their approach and are starting to fight back against the online giants – the empire strikes back! The attraction from an investor’s perspective is that many of these stocks still trade on low valuations due to ‘group think’ with people put off by the overlying trend towards online retailers.
Some interesting companies we’ve noticed are successfully re-inventing themselves. One example that stands out is Game Group, the UK based retailer of video games and consoles. The company has recently refloated on the stock market just two years after going bust. Despite the onslaught from the likes of Amazon and a shift towards digital downloads, the company is thriving again as we enter the start of a new cycle driven by the launch of the next generation Xbox and PlayStation consoles. They have negotiated significant support from both Sony and Microsoft, the key suppliers of consoles, which has offered special deals and exclusive access to special editions. It is not in the interests of suppliers to see Amazon take the whole market. Sales over the last Christmas period were up 83% on the previous year and expectations are for almost 40% sales growth in H1.
Game’s management have made a number of other significant changes; it has significantly downsized its high street store portfolio to focus on its most profitable outlets but this has not resulted in a loss of market share which remains at 33%. Secondly, they have adjusted lease lengths downwards giving them much more flexibility and lowering the liability as long retail leases have often been a curse for companies in this sector. Similar actions have been taken with staff numbers to ensure flexibility depending on the release schedule. Finally, they have simply learnt to compete better and are marketing intelligently to customers.
Dixons is another example that recently announced a merger with Carphone Warehouse and has made similar changes within its own business. Prices are now much more proximate to those available from pure online retailers and the Carphone deal will enable them to offer more authority in digital products both online and on the high-street.
The clothing retailer NEXT has shown tremendous success in both its in-store and online sales. Multiple years of experience with NEXT Directory gives a platform to deliver to customers in whichever form suits them best, be it collect in store, same or next day delivery and even evening and Sunday deliveries. On top of all this, shopping remains a hugely popular leisure activity. You only have to go to any UK high street on a Saturday afternoon to observe this. Physical retailers give consumers the power to decide exactly how they would prefer to shop; something the pure online merchants simply can’t compete with.
Another area of the “old economy” which has adapted its strategy to compete in the new internet age is the postal sector. Once again these companies were viewed as ‘losers’ due to inroads made by e-mail, online marketing and the ability to store and transfer documents electronically. However, companies such as Deutsche Post which has seen a steady decline in its traditional letters business has also experienced booming demand for its global parcels delivery business, DHL. The shares have been a strong performer over the past three years as the market has begun to change its perception of Deutsche Post from victim to facilitator of online shopping and delivery.
High street travel agent Thomas Cook has seen a revival in its fortunes under new management by combining a slimmed down store offering combined with a compelling online strategy. Not only can tour operators help consumers on tight budgets given their buying power, but there is mounting evidence that the sheer volume of choice online can be confusing. Not everybody wants to disaggregate their holiday booking into its component parts, the great selling mantra of online travel. We believe this “tyranny of choice” is beginning to work against pure internet based retailers in many areas. It is their turn to try and fight back.