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WHSmith is a UK brand-name with instant recognition and a network of excellent locations.
WHSmith is a UK brand-name with instant recognition and a network of excellent locations. Yet, it has seen its turnover stagnate and operating profits fall almost 40% from 1995 to 2004. And if you include the 103 Million restructuring costs in its 2004 P&L Account, it is clear that they have problems. In this essay we are going to look at the causes of their difficulties.
A good place to start is the 2004 Annual Report which in many ways was a corporate mea culpa. It revealed a company which had gotten lost in recent years and had now decided to “ focus on our core strengths” and who were “returning to our roots”. The trigger for this mea culpa was a particularly bad trading year and very weak Christmas figures. However, as the CEO Kate Swann said in the report, this was “symptomatic of longer-term issues” .
The reasons for WHSmith’s difficulties are for the most part, explained by competitive forces it was subjected to and how they responded. During this period, relatively new entrants to the market like dedicated stationery stores, specialist card shops and Internet retailing of books CDs/DVDs and computer-games were threatening core elements of WHSmith’s business. Furthermore, supermarkets like Tescos were selling practically everything that WHSmith did. This was compounded by the continuing trend of shoppers moving away from the High Street to these suburban supermarkets.
The ideal strategy for WHSmith in the last decade would have been to focus on its core activities and increase efficiencies with new technologies, improve buying power, sell more higher margin items and ‘follow’ their customers habits with sales of newer lines. How do we know this? We know this because WHSmith’s CEO, with the benefit of hindsight, told us this in the 2004 Annual Report. However, WHSmith did not follow this path but instead decided to try to leverage its brand, “stretching the brand” as WHSmith described it , and expand vertically , horizontally and diagonally searching for new revenue. It now seems apparent from WHSmith’s decisions between 1995-2004, which we will discuss in a moment, that they misinterpreted normal competitive forces for the beginning of some longer term decline in a mature market and tried to utilize their brand to buttress their core business. This was clearly a mistake as the WHSmith brand did not necessarily have the ability to be stretched and it was more likely what and how WHSmith were selling that needed attention. We shall now look at some of the key decisions made in this period.
Sale of Waterstones
I believe this was a flawed decision. Waterstones was created in 1989 by WHSmith and was clearly differentiated from the WHSmith brand in targeting the academic and serious reader. It was therefore a logical fit with the main WHSmith brand in much the same way that VW and Audi brands are owned by the same German car group but targeted at different consumers. Branches of WHSmith and Waterstones were complimentary High Street brands with obvious synergies and economies of scale. The same mistake was, I believe, also made with Virgin Our Price when it was sold in 1998. WHSmith lost two strong brands in the space of a couple of years.
Purchase Of Menzies
The purchase of Menzies in 1998 was probably one of WHSmith’s best moves during this period. For a company wishing to expand easily into some choice locations and possibly remove some competition, it was the natural step. WHSmith obviously still had part of its focus on its core business.
Purchase of Hodder Headline.
The strategic fit between Hodder and WHSmith was questionable. Vertical integration is often practical but in this case all Hodder and WHSmith had in common were that they both were in the book trade. Hodder did publish some WHSmith own-brand series of books – but this could have been achieved independently. There was little real strategic fit between the two. It appeared to be a not well thought out diversification and Hodder was sold in 2003/2004.
Foreign Expansion
WHSmith’s foray into the US newsagent/bookseller business was equally suspect. The stated strategy was leveraging the brand and emulating the success of its UK airport business. However, with no brand recognition in the US and a totally separate distribution chain for publication, there seemed few synergies and this cost the company dearly. This and the Asia Pacific wing were sold in 2003/2004. It is clear that large-scale geographic expansion does not work for WH Smith.
WHSmith News
The attempt to sell WHSmith News, the distribution wing of WHSmith, in 2001 demonstrated that WHSmith was not willing to devote the time and energy to solve the problems they were having with a business they did not see as ‘sexy’. The fact that it failed to sell was a blessing in disguise because once they focused their energies on solving the problems of the firm and invested in new technology, WHSmith News started to produce very healthy revenue and profit growth. It clearly shows where WH Smith’s core competencies are.
New Distribution Channels
Between 1995 and 2002, WHSmith pursued a policy of opening new channels of distribution. It has been a constant theme in their annual reports at that time. However they had little success. The early foray into the internet through the purchase of bookshop.co.uk failed. Equally their own website is just being used as an attempt to sell what they already sell in their High Street locations to the same people. A classic ecommerce trap which just shifts revenues. The site has never made money. Earlier forays into cable and digital TV in search of more revenue and new markets also produced little fruit.
In the final analysis, WHSmith is a company which in the face of falling profits began to expand in all directions and unsuccessfully squeeze their brand. Their return to their “roots” as described in the 2004 Annual Report, now appears to be bearing fruit, early forecasts for 2005 numbers appear promising. The old maxim for business obviously still applies – stick with what you are best at.
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