Keynote – Outlook For The Retail Industry
Eversheds’ annual Retail Conference kicked off last Thursday with an excellent overview of 2015 for the sector, followed by predictions for 2016 from David McCorquodale, KPMG UK Head of Retail.
David reviewed the current economic environment and how this impacts on retailers, including slowing growth in China, challenges in the Brazilian and Russian markets and currency exchange. The latter has been one of the factors making UK retailers an attractive investment platform for international players, such as Steinhoff.
David then moved to the outlook for 2016 in retail, which included technological innovation, increasing cost base, culture of discounting, personalisation to encourage loyalty, more pressure for grocers and going global. He set out that investment in technology, mobile, fulfilment and convenience is needed to make shopping easier and quicker for customers, but it can take time to reap the rewards of these investments, and increasing technology brings with it growing risk of cyber-crime. In addition to investments in technology, there are other developments hitting retailers’ bottom lines – the National Living Wage is due to add 5-7% to payroll. Finding the right cost balance is key and a challenge, with consumers being accustomed to value post-recession. Increasingly consumers are planning spending in advance, shopping around and then chasing discounts from outlet to outlet. Promotions need to be multi-channel thereby increasing supply chain costs, so big data will be the key to making crucial supply and margin decisions. Increasingly retailers are using personalisation to encourage customer loyalty. Another tough year is expected for the grocery sector with David predicting consolidation in this area in the years ahead. Internationalisation is a great opportunity for British brands in particular, as they are well respected abroad but it’s key to ensure you are strong in your home market before looking outside it.
David also looked at the top ten consumer driven trends that will define the future of retail: internationalisation; convenience, fulfilment; discounters; innovation; business model; connected home; declining margins; omnichannel and consumer power. All of these present their own challenges and opportunities to retailers. Innovation and omnichannel will be impossible to ignore in a world “where there are more people with mobile phones than those with running water in their homes”. Indeed, David predicted that with omnichannel being so prevalent and being what consumers now expect as standard, that it will soon simply become known as “retail”.
International Expansion – China
Internationalisation is a huge growth driver in the retail sector and retailers are increasingly looking beyond their borders for potential opportunities, particularly within China. Eversheds Retail Partner Susan Samuel moderated our panel, which included Steven Hope, Senior eCommerce Adviser at UKTI, Sohail Shaikh, Director of International Development at Mothercare, James Rogers, Managing Director of CR Retail and Ben Morgan, Co-Founder and Director of Pivot. Our panellists looked at the different approaches for retailers to consider when planning to enter the Chinese market.
Retailers are aware that the most risk adverse way to test a new market is via e-commerce. However, the panel highlighted that retailers shouldn’t underestimate just how important bricks and mortar store presence, can be. A physical presence allows a retailer to educate consumers about their brand image and quality, which isn’t always achievable online. Still, it is important to be wary when choosing franchise partners, ensuring they are completely aligned with the brand. Consumer trends are moving away from quantity, to quality and personalisation, so the ability to consistently communicate your brand and what it represents is more important than ever.
Whichever type of retailer you are, there will be a market for it in China. The question is, what can you offer the customer that isn’t already there? In other words, research is critical. China is a huge market, and a product strategy that works in one area might not work in another (for example, there are huge differences in climate in different parts of China). Understand the demographic of the consumer, and tailor your approach accordingly because the consumer won’t change for you.
Looking closer to home in the UK, whilst there are not many Chinese brands looking to enter the British market, Chinese and other foreign retailers and investors are looking to invest in UK brands and often to then sell these into China. 32 new billionaires were created in China in the last year alone, and we are set to see more and more Chinese investment coming into the UK.
If you would like to learn more about expanding your business into China, please come along to our breakfast briefing on 16 March.
The Retail M&A Market
Our keynote speaker David McCorquodale and Eversheds Partner James Travis discussed their experiences of retail M&A, as well as current trends and practicalities to consider.
David commenced the discussion by looking at how investing in retailers can actually be more about international money movement than anything else – this was seen as a key motivation in Christo Wiese’s acquisition of majority stakes in New Look and Virgin Active last year and Steinhoff’s current bid for Home Retail Group. UK retailers are seen as a safe investment and as a jumping off point for Europe, particularly for Chinese investors, as seen in Sanpower’s purchase of a majority stake in House of Fraser and Shantex’s bid for Phase Eight.
When dealing with buyers from different cultures it’s incredibly important to initiate a strong dialogue and build a relationship as early as possible. Chinese investors think long term so it is worth investing time in building the strong relationship. Buyers from China for example can be keen to understand not just the business but its brand inside out before committing, a process which can take months. It is viewed as absolutely essential. Chinese or Japanese investors are unlikely to buy 100% of a retailer straight away but ‘dip their toe in the water’ with 15%, seeing how it progresses, and then investing more, further down the line. In Russia, a sale and purchase agreement can be seen as the start of the negotiation, not its successful conclusion.
With deals increasing in breadth and scope, project management is key, and James looked at the key issues to consider here. Integration is key and in-house legal teams are ideally placed within retailers to ensure this takes place as they are most likely to have a full view of the different elements of the deal being worked on by different parts of the business. Getting everything on the table from day one is important. Deals with all documentation and deeds shared at the outset will run more successfully than those in which vital information is only shared two or three months in, with no real understanding of which responsibilities lie with who. For cross-border deals, having a tight network of overseas lawyers is increasingly important. Open communication is the key to a successful transaction, so having a comfortable relationship where you can pick up the phone to a colleague is important.
“Finally, technology is advancing in M&A and professionals are being challenged to evolve the way they work. For example, find innovative ways of handling volume tasks such as through the use of artificial intelligence. We expect to see technology advancing further to assist and support cross-border deals.”
Top Tech Trends In Retail
Eversheds Partners’ Charlotte Walker-Osborn, Paula Barrett and Katie Vickery took us through some of the legal implications of the latest and upcoming retail technologies, including additive manufacturing (also known as 3D printing), drones, the Internet of Things and use of robots/artificial intelligence (AI). For retailers considering additive manufacturing, the legal issues raised depended on the model they wished to adopt – with key considerations including the intellectual property position(s), insurance coverage, who carries the manufacturer obligation and importing obligations. AI and automation raise a wide range of issues from liability for AIs and their legal or ethical status, and potential application/evolution of redundancy law – Deloitte’s 2014 survey found that 35% of UK jobs are at high risk from automation over the next two decades. Security issues and potential cybercrime is arguably the number one issue for the Internet of Things – last year’s research by HP identifying 250 common vulnerabilities across a typical connected devices in a home/business. Adoption of drones in business is making slow progress, with the law failing to keep up, albeit progress is beginning to be made with a law covering drones being adopted in Ireland. Interesting issues around liability for damaged goods dropped by drones and/or damage generally arise, as well as capturing of personal data.
The team then looked more deeply at some of the privacy issues surrounding adoption of the latest technologies. Particularly in relation to the increased use and sophistication of analytics tools, as well as profiling capability. Whilst personalisation brings real value to retailers, it’s crucial not to drift too far down the “cool to creepy continuum”, for brand reputation as much as compliance. With the increased ability to gather information comes greater data protection responsibilities. Carrying out privacy impact assessments is a good way of establishing of will happen and addressing early on. Discussions also covered the changing privacy framework, in particular in relation to profiling under the proposed new General Data Protection Regulation, the degree to which privacy notices will need to change, and the right to object to profiling. Many retail companies are not sufficiently addressing the full breadth of personal data they can be collecting through the technology they deploy in store or their omnichannel environments. An example is the ‘handshake’ or probe requests and responses which are occur when a personal Wifi enabled device contacts in-store WiFi and MAC addresses are collected. Even if the customer doesn’t log on to the WiFi service, still a unique identifier of each device is often captured, which can be enough to enable tracking of that device through store for example. This identifier can constitute personal data and the resultant data protection compliance requirements that go with that e.g. notice provision and limitations on data use. More information on the GDPR can be found on our GDPR portal.
If you would like to hear more from our TMT team, please join us at the launch of our Cloud Computing study in collaboration with The Lawyer on 8 March. Click here for more details and to book your place.
Engaging With Your Internal Stakeholders
Denise Jagger, Eversheds Partner and former General Counsel at Asda, highlighted the importance of effective engagement with internal stakeholders. Denise explored the ways in which employees, particularly in-house lawyers, can ensure that they integrate themselves fully into a retail business, changing external perception and offering added value to their wider team. This included focusing on greater face-to-face contact between in-house groups and the rest of the business, inter-departmental networking, attending company and external conferences and ensuring that colleagues understood exactly how to reach you and what you could provide for them.
Denise examined the importance of both aligning with corporate objectives and understanding your colleagues. In taking a proactive role in risk management and business planning, delivering training sessions, building relationships with key decision-makers and aiming for cross-functionality between teams, in-house lawyers could ensure that their colleagues viewed them in a way that was integral to the business, rather than simply just a legal advisor.
Finally, Denise highlighted the various ways in which internal and external endorsement can be used alongside all of these other tools to “establish a virtuous circle”, becoming a vital and integrated member of a wider commercial team, equipped with the correct information to enable the exercise of commercial judgment alongside technical expertise.
Knowing Your Suppliers
Managing the modern supply chain has become even more complex and business critical for retailers than ever before. Eversheds Partner Katharine Vickery moderated our panel of experts, Rosie Reeve, CSR Manager at the John Lewis Partnership, David Croft, Social Compliance Director EMEA at Bureau Veritas, Lee O’Connell, Consulting Director at Eversheds Consulting, and Eversheds Partner Marc Meryon, who considered the key issues to factor in to ensure that supply chains operate under the proper conditions.
To begin with, the panel looked at the initial issues retailers should consider before reviewing their supply chains: understanding the human rights issues; understanding your entire supply chain; and working out where issues are most likely to arise. Taking these in turn, when understanding human rights issues, our panel recommended that it is important to first understand what we mean by human rights. They can be both vertical between the individual and the State like the UN Guiding Principles but also horizontal through socio-economic conventions. A key issue when looking at your entire chain is deciding how far you go down your supply chain when auditing – abuse far down the supply chain can still damage brands and often issues are hidden from auditors which can make it more challenging to get a true picture. When deciding where issues are most likely to arise, retailers should consider saliency issues and map their priority suppliers by both revenue spend and geography. For areas where issues are more likely to arise, retailers should not simply rely on audits but go beyond these and make additional checks. There are many collaborative projects already working to tackle systemic issues, which retailers can consult, such as the Ethical Trading Initiative.
If the audit process reveals issues that need to be rectified, our panellists looked at the next steps to take, the first being to work with your suppliers to put an action plan in place. If they do not respond swiftly enough, then consider temporarily stopping supply, with termination as a last resort. Retailers should bear in mind that brand reputation is key. Our panellists considered the consequences likely to ensue where a retailer is identified as having unethical practices in its supply chain, which included not only potential loss of business but also the possibility of becoming a target for corporate campaigners who will seek to disrupt your business as a result.