Last week Retail Week published an interview with Ehab Shouly, the owner of  the successful Tea Terrace concessions in House of Fraser stores, in which he defended Mike Ashley’s decision to fire the entire HoF board.

I’m surprised anybody was surprised by Ashley’s move. He doesn’t strike me as someone who bears fools gladly and anyway, what do you expect when you’ve presided over the disaster that was House of Fraser for three years. These people must have seen this coming … or maybe they expected to continue to operate under the RADA indefinitely. Then again, there are senior managers who view their role as an opportunity to milk the situation for as long as possible and move on. Whichever, I don’t think they have cause to complain.

Ashley is on a mission to resuscitate a business devoid of a pulse, but even if he wasn’t, in the digital age you can’t afford to fanny around and decisive action was essential. I’m only sorry that a few more business leaders don’t take the same approach.

Sometimes the problem with failing companies is the terms under which senior executives are employed. I touched on this in another article a few weeks ago and I’ve encountered more execs than I could count, who have been set objectives and provided with incentives that are counter-productive. It seems to me the root cause is usually to do with how investors engage.

In fact, neither investors nor CEOs are in it for the long term these days. Both have an eye on the door from the moment they sit at the table. Investors are planning a five-year exit at most and the latest research shows CEOs now last less than three years. Their priority is to come away with a decent bank balance, so if they can maintain the illusion of success for that length of time, it’s job done as far as they are concerned and the problems will be those of the next incumbent.

While any brand and therefore the organisation concerned is a complex community of people representing diverse groups – investors, distributers, suppliers, employees, customers and more – boardrooms are often self-obsessed and their concerns extend little further than shareholders and investors. It’s sometimes difficult to get business leaders to see things from an employee’s viewpoint or appreciate the importance of embracing suppliers and distributers as members of their community and this failure severely limits business potential.

I’ve seen quite a few retail CEOs incentivised to pursue sales growth without mention of profit, which usually results in an unhealthy focus on opening more stores. I’ve heard the excuse that this tactic provides opportunities to negotiate better deals with suppliers, but the reality is operational costs and cannibalisation of sales usually combine to reduce margin. I frequently encounter retailers where management teams have continued to run unprofitable stores for years, but in the digital age, real-estate is fast becoming a liability for retailers which is why today’s retail rescues usually start with drastic rationalisation of estate.

It also surprises me that the knee-jerk reaction of so many retailers to falling sales continues to be price-cutting. I would have thought by now that we’d learned that this approach was a slippery slope. In today’s environment particularly it’s only going to hasten the demise of a business. Yet this is the route House of Fraser management chose.

In fact Shouly claims to have resisted this policy and it seems he and other franchisees warned HoF management of the dangers of perpetual sales, but they disregarded the advice. HoF aren’t by any means alone in this and for some who follow the same path it’s probably too late to repair their brand. The thing is, when a business collapses like HoF, their only value is their brand. Damage that and you have no value at all and increasingly you’ll find there will be no white knight riding to your rescue.

Of all our retailers, Ashley stands out as understanding brands. His Sports Direct business is testament to this. It’s really pretty smart the way he works them. Many of the names on the products he sells are once familiar and sometimes iconic brands that disappeared from the market in recent years. Ashley has acquired the names and re-launched the brands, manufacturing new – and, it has to be said, often inferior – products and relying on residual brand awareness to establish a value proposition that perhaps they don’t deserve. The products he sells are by no means trash, they represent great value, but they rarely match the quality associated with the brands as they originally were. He takes the additional step of presenting them alongside blue-chip brands within the stores, further adding both to Sports Direct credentials and the credibility of the owned brands.

I’m definitely a fan. Sure, performance of these acquired brands may eventually decline as consumer expectations of them settle at a new, more realistic level, but the process continues to enhance the overall value of the Sports Direct brand. What’s more there isn’t going to be a shortage of failed brands like those already within the Ashley portfolio, so when the effect of those he already owns diminishes, he can just go out and acquire replacements.

I’m not privy to details of the residual value of the HoF brand, but my guess is it’s sufficiently robust to give Ashley an opportunity to build a sister brand to Sports Direct with a new, more affluent customer base. There are plenty of failing brands among the HoF franchisees. All he has to do is wait for them to crash and acquire them on the cheap.

Personally, I think the future looks good for House of Fraser under Ashley’s management and I’m really looking forward to seeing this one roll out.

 

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Phil Darby
October 16, 2018

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