|
|
|
You are here: Home > Current Topics > Mind your Business > 16 January 2006 |
|
|
|
|
|
If you wander down any high street or shopping mall, there is a fantastic array of different shops all offering a variety of things to tempt us. Take so-called 'high street fashion'. You have such a choice - Topshop, Miss Selfridge, Dorothy Perkins, Burton, British Home Stores (now known as BHS) and Tammy, to name but a few. But how much choice do you really have? You might think that all these stores are separate shops, and in some respects they are. They might be catering for a slightly different market or market segment, but in fact they are all owned by the same company and behind that company is one man! Burton, Dorothy Perkins, Evans, Miss Selfridge, Outfit, Topshop, Topman and Wallis are all part of the Arcadia Group Limited, which is owned by Philip Green. Philip Green also owns BHS and Tammy, which trades as a brand within BHS. In the 2004 Times Rich List, Mr Green was estimated to have a personal fortune of £3.6 billion! 
Dorothy Perkins and Burton - two separate stores? Yes in some ways, but no in others. Behind both of these is one man - Philip Green. It is little wonder he is referred to as the 'king of the high street'. This sort of business ownership is not unusual. Many of the brands we know on the high street are all part of the same group and whilst it may seem that there are lots of independent stores to choose from, the reality is that many of them are all inter-related in some form or another Other examples of this web of business ownership include the Speciality Retail Group plc - heard of them? Probably not, but they own Racing Green, Suits You, Young's Hire, Woodhouse, Chester Barrie and Suit Direct. HMV and Waterstones are part of the same group; The Shoe Studio Group Ltd owns Chelsea Cobbler, Roland Cartier shoes, Roberto Vianni, Nine West, Bertie, Pied a Terre and Principles. The DSG Group owns Dixons, Curry's, PC World and The Link, and Kingfisher own B&Q, Screwfix Direct and Woolworths. 
HMV - Not just a simple chain of music stores selling CDs. The international arrangement of different forms of business ownership and its ownership of Waterstones and planned takeover of Ottakars is typical of many such arrangements of business ownership. All in all, that does not leave much room for too many other high street stores! Of course, plenty of smaller stores do exist, but the trend in recent years has been for stores to become increasingly more consolidated. By this we mean that the ownership of the stores falls into the hands of a smaller number of businesses or owners. However, what is important in many cases is to ensure that the brand lives on. The brand is not just the name of the business; it is what the business is associated with and recognised for. Think of Topshop and what comes to mind? High quality expensive clothing that you would be worried about wearing on a raucous night out? Probably not. Functional clothing that is of good quality but reasonably priced - the sort of clothes you buy, wear a few times and then ditch as you change your wardrobe and attempt to keep up with the fashions. That is probably more like what Topshop aims to be and very successful it has been at fulfilling that role. In many ways the high street is rather deceptive, giving the impression of a crowded market place with high levels of competition. The reality might be different but that does not mean that we do not have a choice! |
The following theories and concepts are relevant to this news item:
Look in any standard textbook on business ownership and it all seems reasonably straightforward. You start off as a sole trader, move on to become a partnership, then a private limited company and finally the pinnacle of success is as a public limited company! In reality things are quite different.
One crucial point to remember when looking at business ownership is who is setting up the business and why? If it is an individual with a new business idea then the type of start-up model might be a choice between a sole trader, partnership or private limited company. With the latter two, the individual might be using members of the family as partners or shareholders who will contribute to the initial finance of the business.
For large businesses, however, the issues might be quite different. Many larger businesses will be setting up different types of business within their organisation. It might be setting up a new operation abroad or an associated business to help the core business. This might involve setting up a distribution arm, for example. Rather than having it as part of the whole business, it might be set up as a separate business in its own right but dedicated to servicing the needs of the core business.
Having a range of different businesses with different brands might be a benefit to a company in the fashion industry. Copyright: LotusHead
In such circumstances, the sub-business is likely to be set up as a private limited company with the only shareholder being the main business. This type of organisation is fairly common. In addition, the rise of private venture capital is of growing importance in the business world. Essentially, venture capitalists are groups of private investors who look for business opportunities to invest in. If they do spot a suitable business opportunity, they tend to buy the business and keep it as a private limited company where it remains under their control.
Business ownership, therefore, is not quite as straightforward as textbooks might suggest. However, the essential reasons for a business being placed in a specific type of ownership are likely to be pretty much the same regardless of the size of the owner!
Economies of Scale are the advantages of large scale production that result in lower cost per unit produced.
The important thing about this concept is the term 'scale'. This is not just about a firm expanding by selling more, it is referring to the implications of a change in scale. When Philip Green bought the businesses in the Arcadia Group, there was a change of scale. Mr Green in effect purchased the 2,000 stores that make up the group. Each store in itself is one representation of a scale of production with its own cost structure both fixed and variable. When you add all these stores together the scale of operations is clearly significantly different to that which would be the case if there were only 500 stores.
This very large scale of operations means that there are a range of advantages that Philip Green can gain that lead to a lower unit cost. Note that the total costs are going to be significantly higher - 2,000 stores cost a good deal more to run than 500 stores! However, the average cost per item might well be lower as a result of these advantages.
The reason for this is that Mr Green can use a range of tactics that increase output/sales at a greater rate than the increase in the costs. For example, within the group there might be people employed specifically for their skills in buying new stock. Their expertise in understanding the market, the fashion industry, knowing where to look for new supplies, what fabrics and styles will sell and what will not might be crucial in the success of a season's sales.
Some firms need to operate on a massive scale to make it worth producing at all. As long as output rises at a faster rate than costs then the unit or average cost will fall. This is the essential principle of economies of scale. © Photolibrary Group
Hiring this sort of expertise might not come cheap. Let's assume that Mr Green pays his buyer for Topshop £150,000 a year. Not a bad salary. The economies of scale will arise if the contribution that this person makes to the output/sales of the business is worth far more than the salary costs. The cost per unit, found by dividing total cost by the number of units of output, will fall as a result.
Mr Green might also gain other benefits by being able to negotiate with suppliers around the world on prices. It's not just 'bulk buying' but the relationship that large firms are able to build with their suppliers that helps and leads to lower average costs.
There is an old saying - don't put all your eggs into one basket! For a business, relying on one area of the market can be dangerous. If that market slows down for any reason, for example as a result of a slowdown in the economy, then it could mean financial difficulties. This might particularly affect businesses in very competitive industries where the margins they are working with are slim. The margin can be thought of as the difference between the price and the cost of production for each unit.
Once sales decline, rival firms might decide to compete by reducing price. This trims margins even further; some firms will suffer and may have to close down stores or even sell off the business. Allsports, the high street sports clothing chain with 177 stores, was recently bought by JD Sports after being in administration, blaming a price war as the reason for its demise.
Diversification, therefore, might be a way of a business getting involved in different activities. In so doing, the hope might be that if one section of the business is doing worse than expected, other parts of the business might compensate for this and keep the group as a whole on an even keel.
2 + 2 = 6. It sounds ridiculous but in business terms this is what synergy is all about. Synergy occurs where the whole is greater than the sum of the parts. For example. Mr Green's Arcadia Group consists of seven brands. Individually, they might all be perfectly good businesses but together they form a powerful retail presence on the high street and the cost savings that the group as a whole can achieve, the sharing of information, the sharing of knowledge from within and outside the business and so on can all serve to make it good business sense to have each of these different businesses under one ownership.
Fashion label owners often form agreements with models to represent their brand image to consumers. © Dreamtime
Branding is about achieving recognition and identity for your products or services. A brand is not just a name; a brand has to be recognised by customers and invariably associated with something. It has to have an identity and that identity reflects what the customer might be looking for out of the product.
There is a common perception amongst exam candidates that a brand has to be a luxury product, such as Prada, Armani and so on. This is not the case. Matalan, Primark and Poundstretcher are all brands but they are not associated with high priced products. Instead they would hope to be seen as good quality, reasonably priced (the word 'cheap' might not be what they would naturally choose) products that are within the range of many ordinary customers. Parents might harbour a desire to dress their three children in Armani clothes but on a combined income of £500 per week this is not going to be the case. Making sure their children have clothes that are functional, have some respect for fashion but which are affordable is what brands like Matalan are trying to do.
This sort of market is a big one and such firms will rely on selling in volume rather than having high margins on each item but selling less. That is what the high fashion brands do. They will certainly not sell large quantities (by comparison) of shirts at £300 a time, but the margin they make on each item is much larger. The whole intention is to retain an air of exclusivity and having a high price does that effectively by squeezing out a large part of the potential market. After all, what is the point of having Armani clothes if everyone has got them? It would defeat the whole point of telling your friends you have bought an Armani suit! Armani would want to be associated with exclusivity, quality and the style that boasts high incomes.
For Philip Green, therefore, the benefits of having a variety of different stores means that different market segments can be targeted that wish to be associated with that brand. Tammy, for example, is associated with young girls' fashion - between the ages of probably 9-14; Evans is associated with fashions for the 'fuller figure' and Topshop might be targeted at the 18-25 age groups primarily.
Two pairs of trainers - which is the most valuable? If the Nike pair are £90, what would you pay for the ones on the right?
