Hosiery billionaire Sandro Veronesi opened his first shop in 1986. He had been inspired on a visit to the UK by the Body Shop and Sock Shop. “I saw these new kinds of stores and I thought to myself I can do that,” he told the FT last week.
He opened one shop, then another, then a third. “I didn’t know anything about retail. But I began to understand that a good location was very important, even though it cost more.”
All retailers understand the need to have the correct location. I have a friend whose fashion business failed in part because he went for an off-Kings Road shop, where the cheaper rent became very expensive because there was zero footfall. From his front door he could see a river of cash flowing past and not visiting his store.
This fear of shoppers never stopping is what makes the PayPoint dispute so difficult for local shopkeepers. Ask Mark Fletcher, who spoke at the Local Shop Summit, what to do and he would be clear: if it is not paying its way, do something else.
Retailers have been unhappy with PayPoint almost since it started. PayPoint was not the first organisation to group together a network of retailers to take bill payments from local consumers. However, it was the most ambitious and it offered its customers two benefits: a sensible national network and low prices.
What makes this painful for retailers who have been in business for more than 10 years is they can remember bountiful margins on phone cards and similar products. But just like those who can recall 33% margins on newspapers, it is unlikely that they will see these margins anytime soon.
What drives this is network power. Before, retailers could be gatekeepers to information. People wanting to get a car or a new flat would need to buy a paper from a local shop to find out what was available. Today, the internet has destroyed that network power and the margins that it protected.
But the facts do not mean that retailers are wrong to protest to PayPoint about commission caps. As suppliers to PayPoint, retailers deserve a good deal. PayPoint’s customers (the Government, giant electricity companies) do not want to create sweatshops in the UK.
Where lies the problem? Seth Godin, the US marketing thinker, says that a problem of free markets is that while they encourage organisations to take leaps and improve products, they also allow networks to drift after lock in. “When the cost of switching gets high enough, the goals of the business start to drift.”
“For example, Google doesn’t need to make search more effective, they seek to make each search more profitable instead,” he says.
Is this what has happened with PayPoint? Which brings me back to footfall. Footfall is expensive. When rents get too high, local shops need to change their mix. Most margins are under pressure in convenience stores as most shoppers are price savvy.
PayPoint needs to think about life after the “footfall” dividend. Its senior team should be thinking about how to build its suppliers’ businesses in partnership. The correlation between people wanting a local place to pay bills and people buying extra stuff is much looser than PayPoint makes out.
Retailers have three options: switch the service off; maintain it as part of the expense of making their store a good location; or keep it running out of fear of what the competition may do. PayPoint has a chance to become the good guy again. Who knows if they will take it?