Why did La Senza enter the administration?
Lingerie specialist La Senza went into administration in the first week of 2012. It is one of 183 UK retailers including: Barratts, Clinton Cards, Habitat, HMV, Focus DIY, JJB Sports, Jane Norman, Mothercare, Oddbins , TJ Hughes and Thorntons that got into trouble in 2011. This adds to the thousands of retailers that have already gone bankrupt without making headlines.
Coincidentally, just a week ago I visited La Senza at the Trafford Centre, Manchester; to take photos of bad visual merchandising examples for research in my next book on visual merchandising display.
Why do many retailers get into trouble or go bankrupt?
Let’s read what a La Senza spokesperson had to say about why La Senza went into office:
“Due to business conditions at La Senza’s high street locations and the general macro environment which is having an adverse effect on the company, La Senza’s board of directors has filed a notice of intent to appoint administrators.”
UK retail guru Mary Portas recently released her report on the High Street renaissance, commissioned by UK Prime Minister David Cameron; why the UK’s High Street is at risk of extinction. According to her report, the main reason for the High Street’s demise was that “The High Streets have reached ‘crisis point’ with the rise of super-malls, out-of-town supermarkets and Internet shopping.”
This follows another Colliers CRE report which highlighted the “downward spiral and degeneracy or failure” of the High Street.
The British Prime Minister’s willingness to get directly involved in the crisis in the retail industry highlights the seriousness of the situation. However, the UK government is not the only one expressing concern about the retail industry. The Australian government has also commissioned a report on the future of the Australian retail industry.
Thousands of jobs depend on retail. Any time a retailer closes, especially large retailers, they leave a huge void in the job market. So it is understandable that governments are concerned.
Did La Senza and the other big retailers that are in trouble really suffer because of the “challenging economic environment” or “challenging business conditions” to adopt the fancy language of the retailers themselves?
Is the UK’s high street threatened with extinction for the reasons outlined by Mary Portas and the Colliers CRE report?
I beg to differ.
The central problem with most retail businesses in the UK and in many developed countries is that they are run as not-for-profit organisations. The fundamental reason for the existence of any business is to make a profit. Any business that does not have profit as its primary goal will fail or languish in mediocrity.
It is true that companies must provide good customer service, take care of their employees and support the community. However, companies do not exist for those reasons, they exist solely to make a profit. Only after they have achieved the central purpose of their existence can they fulfill their other responsibilities.
Let me qualify this statement to avoid it getting ‘lost in translation’. I didn’t say that companies exist solely to make money, I said profit. There is a big distinction between making money and making a profit.
The retail industry is the only industry where increased sales is the key performance indicator. I am writing this White Paper on Boxing Day; which is the day most retailers make their biggest sales of the year. The irony is that even though they will make their biggest sales today, it doesn’t necessarily mean they’ll make their biggest profit margin today.
When the dust has settled and customers have returned home, while retailers count the numbers; will fall into the following categories:
- Profitable retailer.
- Balance retailer.
- Loss retailer.
How can retailers expect to make a profit by discounting their merchandise at 50% or 70%? Retail profit is an average of 3%. Even the most profitable retailers make 3-5% profit. However, the vast majority of retail profit margin is between 1.5 and 3%. So if a retailer makes a 3% markup and puts a 50% discount on their merchandise, how much profit will they make?
The peripheral reasons why most retailers go bankrupt are as follows:
- Lack of “level five” leadership.
- Lack of understanding of your target market.
- Lack of trained personnel.
- Lack of trained sales staff.
- Lack of product knowledge.
- Low salaries.
- Poor customer service delivery.
- Wrong loss prevention strategy.
La Senza went into administration because, like most retailers, it did not follow fundamental business principles. He was not focused on profit, but focused only on increasing sales. A company that increases sales without increasing profits will not survive.
