PMT’s Simon Gilson has a way out of the margin crisis, he tells Gary Cooper. But will anyone else in the industry agree with him?
Read part 1 of this interview here
Despite scoring a resounding success with the opening of its new Birmingham flagship store, PMT’s Simon Gilson admits the company is having trouble making money. This won’t come as a surprise in the MI industry as the squeeze on retail margins is today’s single hottest topic by a considerable margin. Some blame the big suppliers for squeezing margins, some the dead hand of the CMA’s investigation into alleged price fixing, some too much product chasing too few customers, others the competition from online retailers who seem to inhabit a world where making a profit doesn’t matter. But whatever the supposed cause, few have an answer as radical as Simon Gilson’s.
‘The problem now is not that you can’t sell the product – we’re all selling product – it’s that you can’t make any money out of it.’
While he agrees that over-supply has been a problem, he thinks that has lessened and he he doesn’t believe that losing even more stores, thus concentrating the remaining business, offers any way out of the industry’s woes: ‘There will be fewer shops – everyone realises that – but it won’t make it better – and anyone who believes it will is a fool’. Nor does he really blame the major suppliers: ‘What can they do? After the events of 18 months ago, what on earth can they do? When the big companies are facing the gravity of what they’re facing – a situation that in some cases could truly affect the future of their companies – what can they do?’
‘They could open stores and do it properly – but when have you ever seen a manufacturer do that? They don’t know how to retail, but they either do that or they come up with a completely different model’.
And that model, Simon believes, is to sell with no retail markup at all. ‘I’ve been screaming and shouting for it to be zero for at least two years. I would sell something for £1 and be charged £1 for it and there would be an agreement whereby you, the manufacturer, gives me my margin in a myriad of ways. In fact I don’t think they’ll have a choice’.
It’s not a completely unprecedented idea, as many will recognise. Yamaha tried a complicated scheme along these lines a few years back but it fell upon ground that was not so much stony as barren rock. What Simon Gilson is proposing is a legal way to prevent retailers being undercut by online discounters.
‘Whatever manufacturers and distributors do, there will always be someone with a bright idea of “making a fortune” by selling products online with a wafer thin profit margin, thus driving down everyone else’s chances of remaining in business until they, inevitably, run out of money and go broke. It’s just waiting for the next idiot, isn’t it? A game of seeing who wants to be the next to race to the bottom’.
Given the almost universal use of price chasing software among the major retailers, once one company decides it can live on thin air, everyone else automatically follows suit and the result is ruinous.
‘We’re a victim of markets and government not catching up with the reality of the web,’ he insists. ‘How can you have a situation where retailers promote a product, give service, offer a guarantee and do without a margin to pay for all those things? So how can it be that the market that is set up that way and yet one person somewhere in Europe decides to screw that? That’s not good for the market, not good for the manufacturer, not good for the consumer. Do we really want the world run by Amazon, which is the way it’s heading?’
As he sees it, a product that costs, say $3 million dollars for a manufacturer to bring it to market probably has only a three year life cycle. During the first year it needs to be sold quite close to the official price and is in fairly short supply, the price then drops, till at towards the end of its natural life cycle the remaining stocks are sold off to the trade to ready the market for its replacement. How, he asks, can the next $3 million be found unless the original product is sold? And it won’t be if there are no retailers left to sell it because they have been driven out of business by discounters which no one can control, however big a governmental stick they wield.
‘I don’t think they’ll have a choice. How much retail space has been lost in our industry in the past ten years? I’d say over 60 per cent and I’d say we’ll be at a critical point very, very soon’.
‘Frankly, I don’t think it would make any difference if we were out of the EU or not because our government seems intent on destroying retail altogether.
If his suggestion of some system of discounts to retailers doesn’t seem acceptable to the trade (and it isn’t hard to imagine a negative reaction to it) one alternative to the current retail dilemma which is sometimes advocated by retailers, manufacturers and distributors alike would be for the UK to adopt a Minimum Advertised Price policy, as used in the USA. It would be illegal under EU law but if the UK ever finally extricates itself from Brussels, it would be possible to implement if a government could be persuaded to do so. So how would PMT feel about a post-Brexit MAP?
‘The fact is that they don’t allow retailers to protect themselves from idiots who don’t invest in people and don’t invest in markets or good stores. All they’re interested in is this naive idea – which may have had credibility in the past but has none now – that whoever sells it the cheapest will sell the most. The problem now is that because of the web, nobody can ever be the cheapest because within four milliseconds we’ll all be the cheapest.’
‘MAP in no way shape or form controls price in the US market. The US market does what it wants to do and when a guy walks into the store there that’s the beginning of the negotiation, so it no way controls the price. Having said that, in the life cycle of the product I was talking abut earlier, MAP will protect the price for the first year of the cycle because when the guy goes into the store there are perhaps only three samples in the store and it’s in short supply, so if he doesn’t buy it, someone else will.’ All the same, MAP does not, he says, offer the answer some believe.
Even if one ignores the dire effects of business rates, unrealistic landlords and local councils who seem to go out of their ways to make life hard for shoppers and retailers, Simon sees another major threat to the survival of smaller shops.
‘Sadly, and I mean that genuinely, there are some very good little stores out there that unfortunately cannot survive because a good, small, well run business cannot have a good website because they cannot afford one.
Even to have a very badly maintained and run website costs you tens of thousands every year. To even have one that works is going to cost you £40-£60,000. The new shop window is the web and I don’t see how you can run a really small store these days – I’m sorry to say it but they have no future. The next tier up, the kind of music store with typically 1,500-2,000 sq ft and with say £150,000 worth of inventory can no longer generate the kind of income they need to maintain a website and without that they can’t generate enough business to sustain it. Then you’re down to us and the other big boys who, so far, haven’t really had to fight one another because we’ve all been too busy fighting Germans or Scandinavians online. The big stores, well financed, with a great website will survive.’
Though PMT is widely regarded as primarily a bricks and mortar chain, it has a considerable web presence and has made a major investment in its web operations having now comprehensively absorbed the former online champion Dolphin’s technical knowledge and competence, but that doesn’t mean it is inevitably heading down the online path because PMT’s owners still believe in traditional retail – but they insist that it has to be done fantastically well if it is to have any chance of survival.
‘We have a belief that the well run, brilliant looking fantastically stocked store still has a future because the one things that we gain over the online seller is that people want to walk in and walk out with the product. That was what we saw on our opening day. People don’t want to come to your store and order something, because if they did they might as well order it from home, They want to be able to buy it and take it home with them. This means there is no future in just being a really nice showroom for products. The customer wants to walk out with it.’
I ask what PMT’s ratio of online to physical retail is and he is reluctant to put a figure on it. ‘It’s definitely shifted in recent years but the fact that you’ve got to have a massive and fantastic online presence because that is your shop window. But we also have to take into account the customer that doesn’t want to go into a store, may never have gone into a store and may never in the future go into a store – it’s just not the way that customer wants to shop and you can’t turn your back on either type of buyer. What’s interesting to us is that many retailers seem to have turned their backs on one sort of customer or the other and that seems extremely dangerous to us’.
The history of MI retail chains in the UK hasn’t been a particularly happy one. Older readers will know the dire role call: MINS Music, Southern Organs and, most infamously of all, Sound Control. Is their a pattern in their expansion and collapse? Is it inevitable? Simon Gilson doesn’t seem to think so – at least, that there is no single mistake that everyone makes.
‘Events are what happened to them and what has happened over the last 18 months is an event too’ (he means the CMA’s investigation). ‘Sometime it’s a chain of events. Sound Control, as everyone now knows, was hugely over-leveraged. Terry and I knew that. We knew that the business was going to go bust and we actually spent three or four years preparing for it to happen so that when it did we could pick an choose the stores we wanted and obviously that gave us the springboard to launch a whole new version of what we were.
If we’d followed Sound Control’s model, we’d have thirty stores by now but what we did was wait for the opportunity – which as what we did with Dolphin too. We needed part of what they had as a retailing entity and we were able to buy it, Had we tried to grow that organically we’d have gone bust before we got there but we were able to buy it and it then took us at least three years to get that right.
Now we have a very, very strong company in a very, very weak industry – that’s lots of verys but that’s because it’s a fact. We have a lot of stock, no debts and money in the bank and yet we are finding it incredibly difficult to make any money, so how on earth is anybody else making any money? It’s a very worrying place for the industry to be. There are very few other retailers who haven’t got debt in the business of one kind or another.’
He reminds me of a conversation we had several years ago in which he asserted that most of the retail side of the industry was technically trading while insolvent. I had said I found that hard to believe and in return received a lesson in the retail economics that suggested he waas probably right. Simon feels it is even more true today: ‘Work out what they owe the trade, owe on credit cards and so on and they are insolvent. How can you finance £200-400k of stock when you’re making 10%? It costs you 22% just to pay the rent and keep the lights on. These are difficult times.’
Difficult times or not, the decision to power ahead with its new store in Birmingham and the opening of their own club in Palmanova Mallorca suggests that Simon Gilson and Terry Hope haven’t yet lost their taste for business. As the biggest in the UK they will no doubt remain the subject of endless rumour and speculation but while they retain their enthusiasm and commitment to bricks and mortar retail they are proving that there is still a role left for traditional MI retail.