Retailers look for new revenue opportunites

There’s no escaping the fact that times are tough, so much so that retailers are having to ‘think outside the box’ more than ever to find alternative ways to drive their revenues.

Whilst it is proving difficult to continue growing sales from their existing core businesses, I think there is evidence of some good examples of retailers broadening their horizons beyond their traditional markets and areas of expertise.

Expansion into new business areas is hardly a new phenomenon but as the market has toughened it has become more of an imperative for many companies. The search for new revenue streams has led more retailers into the area of ‘venturing’, which can take a variety of forms: from the setting up of a formal joint venture company with a third-party, through to the simple creation of a revenue-sharing arrangement where a retailer sells products in their store or on their website using another company’s recognised brand name.

As with many initiatives in the retail sector, it is the supermarkets that have led the way, setting up joint venture businesses that have taken them into new areas, such as financial services.

Tesco and Sainsbury’s were the front runners into this sector when they teamed up with big banking names to provide their own services just over a decade ago. The former linked with the Royal Bank of Scotland to set up Tesco Personal Finance, and the launch of a combined debit and loyalty card was swiftly followed by credit cards and insurance policies. RBS recently agreed to sell its 50 per cent stake in the venture to Tesco for £1 billion.

The key to success with such ventures is ensuring that each partner’s skills are complementary and that they have the same objectives for their businesses and for their brands. There are plenty of learning points, such as making sure that the culture of both organisations are aligned, and it crucial that control of the joint venture entity is shared, with a clear understanding of who is the dominant party.

As well as joint-ownership venture arrangements, some retailers have taken stakes in other businesses to extend their reach. A good example is Ocado, in which the John Lewis Partnership, Waitrose’s parent company, has a share. Again, the objectives of the parties involved are firmly aligned, which in this case centres on the fundamental aim of delivering food with a high level of customer service.

Joint venture deals are also being used to drive revenue growth through entry into emerging markets. Over the past year or so, we’ve seen UK retailers announce a series of joint ventures in India. Earlier this year, Hamleys announced a joint venture with Reliance Retail, one of India’s largest industrial conglomerates and this has followed the likes of Marks & Spencer, which currently has 14 stores in India with Planet Retail; Wal-Mart, set to open its first cash-and-carry with India-based Bharti by December 2008; and Giorgio Armani, which has entered into a joint venture with real estate developer DLF to open stores which will sell and distribute various Armani brands.

And it’s not just UK companies looking overseas for new opportunities – businesses here have plenty to offer in terms of market knowledge and expertise. Carphone Warehouse recently announced a joint venture worth £1.1 billion with American electrical giant Best Buy, which will see the two businesses open ‘electricals supermarkets’ in the UK and across Europe from next year.

As times become ever-tougher for high street retailers the need to look outside their core businesses for new opportunities will become stronger, so we may well see more innovation through venture type activities in the future.

Article by Helen Dickinson


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