Focusing on non-retail activities can bolster revenues

UK retailers put a lot of time and effort developing and investing in their core business. But nowadays, consumers spend a growing portion of their disposable income on non-shopping activities such as eating out and other leisure pursuits. In such a climate, retailers who dare to branch out into non-traditional areas and leverage their existing relationship with consumers can win big. That’s one of the key findings in Webloyalty’s most recent report, The Unfaithful Consumer.

Continued focus on experiences

According to data collected in July this year by Barclaycard and Visa, who process a large portion of credit and debit card transactions in the UK, consumers continue to shift their spending toward experiences rather than purchasing products. “The hotels, restaurants and bars sector saw the steepest year-on-year rise in spending, at 8.9%.” Consumer spending on other types of entertainment options such cinema visits and theme parks also saw an increase at 5.4%.

More specifically, spending “in pubs was up by 12.2%, restaurants enjoyed a 12.8% rise and cinema spending increased by 10.1%,” according to the latest British Retail Consortium figures. In comparison, spending on clothing and footwear only rose by 3.9%.

UK retailers must heed this continuing shift toward the experience economy as the average “household weekly spending on clothes and food has fallen since 2010 while spending on recreation and culture has risen, according to the Office for National Statistics.”

Going outside to strengthen the core

It may seem counter intuitive for a business to venture into new territory in order to strengthen its core activities. Not so says The Unfaithful Consumer report, which recommends retailers should “diversify into suitable non-traditional retail areas in order to supplement growth and bolster both loyalty and sales.”

This is supported by the 2015 McKinsey Global Survey that shows 60% of the respondents listed “strengthening their core business” as one of the most important factors justifying their efforts to expand outside of their main activity.

More than 60% also listed access to new profit areas as a main reason why they look for opportunities outside of their core activity.

But not all diversification ventures are created equal with experts agreeing that businesses should stick to what they know best.

Staying close to home

When it comes to diversification, it’s best to look for opportunities close to home. The McKinsey survey suggests companies should look for “ideas or opportunities where they can leverage existing capabilities and skills in their core business.”

One of the greatest advantages retailers have is the bond they have already created with their clientele. “Retailers already have relationships with consumers and these relationships can be leveraged to sell non-retail products, especially in areas where loyalty to existing providers is relatively weak,” says The Unfaithful Consumer.

With stores in more than 50 countries around the world and gross profits of £12.5 billion in 2015, Swedish furniture giant IKEA is a great example of close-to-home diversification. Its core activity is to sell affordable, functional, well-designed furniture, which it displays in stores set-up with realistic home settings.

But anyone familiar with the IKEA shopping experience knows it almost inevitably lasts several hours. Smartly located at about the mid-point in the shopping journey, you’ll find the IKEA cafeteria. Launched more than 30 years ago, it came about because the chain’s founder “was worried that too many shoppers were browsing the company’s shelves on empty stomachs.”

A staggering 150 million meatballs later, IKEA restaurants continue to embrace the retailers’ core principles of affordability, simplicity, and transportability, as customers can also visit the food shop located just before the exit to buy and take home what’s on offer at the restaurant.

Focusing on strengths, recipe for success

What the IKEA example shows is that retailers can successfully branch out in non-traditional areas, leveraging their existing service expertise and relationship with customers in the process. But for every success story there are many failures. So how can retailers avoid the pitfalls and make the transition seamlessly?

Ken Favaro from Strategyand, a management consulting firm, explains that IKEA succeeds by staying true to its core principles to sell functional and affordable home furnishings. When they decided to sell televisions, for example, they didn’t do it to enter the television market, Favaro says. They aimed “to solve a furniture challenge that many of its customers complain about: how to fit the TV–and all the components, gadgets, and tangles of wires that come with it–more seamlessly into the living room.”

Following the IKEA model, retailers should think about experiences and solutions they could offer their customers to enhance their existing products and services. A clothing boutique could treat its customers to quick manicures to go along their latest purchase, for example. A shoe retailer could offer foot massages while a trendy clothing shop could install music counters where shoppers can purchase and upload the latest hits played in the store.

Ready to take advantage of the experience economy? The key to success is to pursue avenues that enhance your core values “while leveraging and scaling your already-distinctive capabilities,” concludes Favaro. There is no one-size fits all approach. Retailers who want to take the plunge must first ensure they fully understand their core values and only entertain branching out into new areas that stay true to those values.