House of Fraser and Sports Direct- match made in heaven?
In August 2018 Sports Direct agreed to buy the 169 year old House of Fraser high street chain for £90 million, just before it went over the precipice of administration. Sports Direct already held an 11% stake in the troubled department store chain but even so it seemed a bold and interesting tie-up for a sports brand known for piling it high and selling it cheap and a department store steeped in history that had once been part of the same retail group as Harrods.
So, what might the future hold for these two companies now they’re linked together? How will they support and strengthen each other’s market position? Are they a match made in heaven or will it all end in tears before bedtime and be nothing more than a temporary reprieve for the troubled high street chain?
Sports Direct - pile it high and sell it cheap concept looking to go more upmarket
Sports Direct was started in 1982 by Mike Ashley and has grown around a concept of stores akin to market stalls holding permanent sales and crammed full of sports and other merchandise at low prices. Customers of Sports Direct don’t visit the stores for the pleasurable shopping experience but because they know they’ll get a good deal and value that more.
Over the years Sports Direct has acquired brands such as Donnay, Kangol, Everlast, Slazenger and Lillywhites which retain some value and heritage in their own right. Sports Direct offers a captive route to market for these brands and they in turn provide names that customers recognise when they visit the stores.
More recently Sports Direct has frequently been in the news because of its poor employment practices. It was heavily criticised in a report by the Business, Innovation and Skills committee in 2016 for not treating employees like humans. Many are on zero contract hours and staff turnover has been high. Over the last three years the company has invested more in staff training and introduced a share scheme for full time employees which has helped to reduce staff turnover.
The reason for this change may be due to Mike Ashley’s stated ambition to make ‘Sports Direct the Selfridges of sport.’ To go more upmarket, as well as significant improvements to the store concept, Sports Direct needs more experienced sales staff who are able to advise customers. They know they won’t recruit or retain individuals like this who may also be experienced sports people, with zero hour contracts and other poor employment practices.
Alongside this, Sports Direct has invested in more luxury brands with a partial stake in the upmarket lingerie retailer Agent Provocateur and majority ownership of Flannels Group, a chain of high-end designer stores. The latter stocks high end brands like Gucci and Michael Kors and may be part of a bid to help Sports Direct persuade brands like Nike and Adidas, that the Group has previously fallen out with, that it respects and is capable of promoting better quality brands. The Group will surely need these to deliver its Selfridges of sport strategy.
House of Fraser- upmarket with everything under one roof but failing to keep pace with change
Whilst Sports Direct’s sales trajectory has been firmly upward, House of Fraser has had a more chequered journey in recent years. It started in 1849 as Arthur and Fraser and built up a national presence over the next 150 years through acquisition of store groups like Dickins and Jones, Harrods, Barkers and Howells. During most of this time their branding was a mix of House of Fraser stores and most acquisitions retaining their original identity, with discrete House of Fraser brand support. From 2006 onwards, all stores were rebranded under the single House of Fraser name.
At its peak in 1985, it was bought for £615million by the Al Fayed family who later relisted it on the stock exchange and only retained the Harrods store within their private ownership. From then on, the retail chain’s changed hands frequently, gradually declining in both value and relevance to the high street.
Its core customer base is middle aged, female and relatively affluent, purchasing on behalf of the family for home and person. House of Fraser’s proposition of offering everything under one roof chimed well with this group and they were traditionally brand loyal. Despite this specific customer base, House of Fraser has spent the last decade chasing the mid to high end fashion market and trying to unsuccessfully attract younger customers. This has likely alienated their core customer base who haven’t seen themselves in any of their promotion.
Today’s shoppers have more choice than ever, and retailers have to work hard to provide a unique and memorable experience to create any sort of ongoing loyalty. House of Fraser has struggled to keep pace with changing consumer needs and not invested enough in creating a digital platform or a memorable in-store experience for either its core customers base or the younger segment it was trying to attract.
In August 2018 it paid the price for this by almost going into administration before being saved at the last minute by Sports Direct. Whilst it was purchased for £90million, Sports Direct did not take on any of House of Fraser’s debts, leaving many suppliers unpaid and unlikely to receive anything back.
So what does the future hold for these two brands of the high street and will they be stronger together?
It’s interesting that whilst many investors and analysts remain gloomy about the high street’s long-term prospects, Mike Ashley and his Sports Direct group see opportunities. As well as now owning House of Fraser, Sports Direct also has a 29.7% investment in Debenhams and there are rumours it may look to increase this further in the future, despite being hit by an £85 million write down on the value of this stake in 2018.
Will House of Fraser help Sports Direct with its stated intention to become the ‘Selfridges of sport?’
To achieve this Sports Direct needs to move itself out of bargain basement and offer higher quality brands and a much better in store customer experience. House of Fraser may add kudos and help Sports Direct in its relationships with leading sports brands like Nike and Adidas and attract other high value brands although there are still many unpaid House of Fraser suppliers who will be wary to expose themselves further.
There is also the potential for House of Fraser stores to be used to stock Sports Direct products and appeal to its more upmarket customer base. This would require significant investment in House of Fraser stores to provide a positive customer experience.
Sports Direct has already started a move upmarket from its pile it high beginnings, by restyling its online presence and opening 19 new generation ‘life style’ stores, designed to create the ultimate shopping destination for the lifestyle consumer. The latest of these in Thurrock opened in July 2018, combining a Sports Direct, fashion retailer USC and Everlast gym in one store with a Flannels branch alongside it. It features brands like Champion, Tommy Hilfiger and Diesel and an offers an interactive shopping experience including a facility to record a 360°GIF when trying on outfits and selfie mirrors. This concept will no doubt appeal to a younger, style conscious audience but doesn’t fit with House of Fraser’s customer base and it’s difficult to see it might directly benefit from this.
Sports Direct needs to ensure it can expand its customer base without alienating or driving away its core customers who will continue to want low prices and value for money. Whilst it is quick with the soundbites in its strategy, it refrains from explaining how it will achieve this in detail, and it remains to be seen how Sports Direct can pursue its desire to move more upmarket whilst retaining its original customer base.
Will Sports Direct and House of Fraser remain separate and distinct brands externally whilst internally sharing costs and best practice?
It’s very difficult for upmarket and cheap brands to successfully co-exist in customers’ minds through a single purchasing experience. Customers buying expensive brands do so in part for the exclusivity and perceived luxury associated with them. A typical House of Fraser customer is not the same as a Sports Direct one and they have different perceptions of value.
Indeed, on acquiring House of Fraser, Sports Direct stated that it wanted to turn it into the ‘Harrods of the high street’ taking its customer base further away rather than closer to the Sports Direct customer base. It’s more likely that Sports Direct will look to link House of Fraser more closely with its upmarket brand Flannels and possibly add concession outlets for Agent Provocateur rather than align it too closely with Sports Direct.
But might there be synergies to pursue internally?
Automotive companies like Ford when they owned Jaguar/Landrover and Toyota with their Lexus range, kept their external identities and market positions separate whilst internally looking to rationalise operations and gain efficiencies. For example, both shared parts, platforms and design elements across models to lower costs and streamline development time and number of suppliers. There’s an opportunity for Sports Direct and House of Fraser to do the same, for example with their digital platform. This is one of House of Fraser’s areas of weakness whereas Sports direct has already made significant investments here that could be beneficial to House of Fraser.
So far, Sports Direct hasn’t commented on whether this is being considered or how far it might take this sharing so it remains to be seen what’s possible.
Will analysts be right in predicting it’s too late for House of Fraser and Sports Direct‘s purchase of them is just a temporary stay of execution?
There seems to be widespread agreement that House of Fraser needs a significant amount of investment to change both its product position and store environment if it wants to entice shoppers back. Although Mike Ashley from Sports Direct has indicated a commitment to turning it into the ‘Harrods of the high street’ it remains unclear whether he’ll be willing to invest the cash to achieve this or can get agreement from his board to do so.
Analysts predict that Sports Direct will most likely take House of Fraser downmarket in line with its own market position and that existing House of Fraser customers won’t recognise its offer in the future. Other speculate that Sports Direct will sell off House of Fraser’s best stores to rivals like John Lewis and Selfridges and close down the least profitable stores, possibly retaining a few to maintain the brand as an ‘upmarket trophy’ to impress suppliers. If this happens it will be a big blow for House of Fraser and its employees and likely lead to it being erased from the high street in the long term.
Whatever happens, and only Sports Direct knows at the moment what they've got planned or if indeed they have one, only time will tell whether Sports Direct’s vision of making Sports Direct ‘The Selfridges of sport’ and House of Fraser ‘Harrods of the high street’ are anything more than soundbites.
And whether their link up is a match made in heaven or just a temporary reprieve for House of Fraser.
What do you think of the Sports Direct and House of Fraser pairing?
Are they an unlikely match made in heaven?
Are you hopeful or cynical about where it might lead?
Will House of Fraser survive this match?
Let me know in the comments below