Does Debenhams’ digital-led strategy go far enough?

It is perhaps no surprise that ex-Amazon boss Sergio Bucher is embarking on a digital-led strategy as the new CEO of UK department store chain Debenhams.

His eCommerce expertise, developed primarily during the three-and-a-half years he spent as European fashion vice president at Amazon before joining Debenhams in October 2016, played a key role in him securing the job. Now six months in, he’s laid down his plan for the Debenhams of the future.

Dubbed 'Debenhams Redesigned', the turnaround strategy he announced last week includes plans to build on the retailer’s well-regarded eCommerce proposition (online sales grew by 14.6% in the first half of its financial year, with the UK up by 12%) while reducing the size of its store estate and warehousing facilities.

The plan is to assess ten stores for closure and consult on the winding down of one central distribution centre and around ten smaller regional warehousing facilities. This move comes just five years after the company, which operates 165 shops today, indicated it had the potential to build a much larger store portfolio.

Kate Ormrod, lead retail analyst at retail business intelligence firm GlobalData, underlined that change of direction, saying: "Having stated in 2012 that there was potential for up to 240 stores across the UK & Ireland, this move serves to highlight just how the online channel has changed retailing."

Bucher said he wants Debenhams to become a leader in “social shopping”, leveraging its potential to establish itself at the heart of consumers’ leisure time. He is overseeing development of a new mobile platform to facilitate people sharing their shopping experiences with friends and family and engaging more thoroughly with the Debenhams brand.

Planned development of the retailer’s click & collect service, which is already viewed as a company strength, will see Debenhams look to tie the store pick-up facility in with personal shopping and the business’s social media channels.

Market headwinds

It has been well documented the retail industry is in a period of disruption, with modern technology and additional channels helping to foster a more discerning shopper compared to previous generations.

With the internet offering a smorgasbord of options for consumers, be it fashion, homewares or many other categories, there is an argument the traditional USP of the department store no longer exists. Cost pressures associated with large property portfolios and substantial workforces are also giving an advantage to the digital-first players such as Amazon and Asos.

Jonathan De Mello, head of retail consultancy at retail property group Harper Dennis Hobbs, said Debenhams "hasn’t gone far enough" with its plan to review store closures. Instead of ten stores up for review, he noted, it should be 20 to 30 to bring it closer to the size of competitors John Lewis and House of Fraser and bring down property costs.

"The growth of online retail has absorbed many product categories that aren’t necessarily needed in a department store environment, but you still need stores and there are consumers who want to browse, experience and feel products in shops," he added.

"That’s something the internet can’t provide, but you just don’t need stores in as many locations or in the smaller locations."

These trends are underlined by Debenhams’ commercial figures for the six months to 4 March 2017, which show UK gross transaction value reached £1.34 billion and like-for-like sales were up by 0.5%, but domestic operating profit fell by 11.3% to £67.5 million.

EBITDA decreased by 6% to £118 million driven by a change in the gross margin rate and the net impact of store cost increases in rent and the National Living Wage.

And despite relatively healthy sales figures at other department store chains, there are pressing challenges there too. John Lewis recently announced a swathe of job cuts to cut costs and House of Fraser has seen multiple senior executives leave over the last year amid questions surrounding the relationship between ownership and management.

In terms of department stores repositioning themselves for modern retailing, De Mello remarked: "The places people tend to gravitate to are city centres and malls – and they go there to shop.

"In that instance, you need to offer as full a range as possible, but there could be a more edited offer in other town centres focused on products you can’t buy easily or experience easily on the internet. The mix of products needs to change to cater for the fact that people in a city or mall environment would want greater variety but in smaller towns it may be more of a convenience-orientated purchase."

He added: "Debenhams is trading in way too many smaller retail centres, and as a result its profit margin is comparatively lower than some of the other department stores. That’s a legacy estate issue that needs correcting."