Sector Insight

With an increase in consumer awareness and new competition from the dotcoms, the retail market is undergoing a period of change. Abigail Townsend and Claire Smith report on a sector which needs to trust its law firms.

The retail sector has undergone some dramatic changes in recent years. Consumers have become increasingly aware of the power they wield and are demanding more. The sector has therefore been party to some bitter and aggressive price battles as companies try to retain thier market position.

Customers not only expect a greater choice of products, but they are also demanding different ways to purchase them.

And the internet is giving them what they want. The traditional mechanisms of retail – people leaving their homes to go shopping – are being eroded by the dotcom culture. Nearly all major supermarkets, clothes stores and other high street outlets provide home shopping over the internet. And shops are competing not only against each other but against web-based companies such as Amazon, BOL, lastminute.com and a host of individual retailers providing everything from organic vegetables to specialty sausages delivered straight to your door.

These companies have lower cost bases – cheaper to start up, no need for expensive premises, minimal staff levels – as well as investors tripping over each other to get involved with the next lastminute.com.

Even law firms are riding the wave, with increasing numbers offering to take a small equity stake in lieu of fees for internet start-up clients.

But while the industry has been working on ways to fend off new rivals, behind the scenes there has been a glut of mergers, consolidations, takeovers, successes and failures.

The largest was Wal-Mart’s acquisition of Asda. In June 1999, US giant Wal-Mart paid £6.7bn for Asda, beating off rival bidder Kingfisher and creating one of the world’s largest retailers in the process.

But there have also been losers. Marks & Spencer has spent the last year struggling to stop falling profits and retain its dwindling market share.

The latest casualty is the Arcadia Group, owner of Dorothy Perkins, Evans, Top Shop and Top Man, among others. Last month, the group, which operates more than 2,600 stores, announced a £8m loss despite an increase in sales volume. As a consequence, 400 stores will close and the Principles for Men brand will be axed.

With all this going on, it is no surprise that there are two fundamental requirements in-house counsel keep in mind when choosing external firms – cost and competition.

Denise Jagger, company secretary and corporate counsel at Asda, explains that conflict is a major issue. “It is a highly competitive sector and we will not have solicitors working for us who do a lot of work for our competitors and others say the same. We would not use a firm which was working for Sainsbury’s or Tesco.”

She adds that this is particularly pertinent in work such as conveyancing. “We want somebody with retail experience but certainly in the property arena we would not use somebody who was working for our rivals,” she says.

Despite the dotcom craze, property work remains a major area for external advisers.

WHSmith is a typical example. Over the last two years it has bought publishing company Hodder Headline as well as the newsagent arm of distribution chain Menzies. It has also sold Waterstones and Virgin Our Price.

With 728 stores across the country and an on-going programme of selling and buying new companies and premises, it chooses to use formal means to select law firms.

Ian Houghton, director of legal services at WHSmith, says: “[Our firms] are mainly chosen by reputation. But we have two firms which do our property work. We had a beauty parade and they came out top.”

Susy Jepson, company solicitor at Sommerfield, agrees that property work merits a more formal selection process.

With 14,000 stores and 25 depots in the UK, it is imperative that there is a strong relationship with external advisers.

Despite a reluctance to over-formalise her selection methods, Jepson explains: “[For property work] we did interviews for panels. This needs to be tightly controlled because there are a lot of people giving instructions.

“We selected around 10 but there are now about five that are used consistently. They have shown they are people we can trust and work with as well as being good.”

The establishment of sound one-on-one relationships is integral to the way Jepson manages Sommerfield’s legal provision.

She says: “There has to be an element of trust that they understand the business, our needs and how to do it. We would choose a firm and then we would find the individual within the firm and work at the relationship. If one did not develop then that firm would probably be quietly dropped.”

Michael Oliver, head of legal at Boots, says that the interaction between people is often the most important element in working with external lawyers.

“Most law firms are a collection of lawyers. I am sure that initially we have a relationship with one person but as your needs spread so do your relationships. But the relationship is with the individual. It is about people and the people that make up firms.”

For this reason, many of the firms he instructs have been working with the group for several years – the company has used Slaughter and May for 13 years. “The people have changed over time, people retire and new partners have been appointed. But I find them very easy to work with,” Oliver says.

In keeping with this need to develop relationships, few in the sector resort to formal selection processes for every practice area.

Oliver says: “We have beauty parades, yes. There have been a number of times where I have been looking for a particular expertise or I have seen a number of people. On other occasions we directly invite a number of firms to present. But that is very formal and very rare.”

Houghton adds: “It is mainly reputation. If the work was failing then you might look at reviewing it but otherwise it is pretty stable.”

These views are echoed by Jepson. But she argues that each piece of work presents an opportunity to review who is being used and for what.

She adds: “If somebody left an appointed firm, the position of that firm would be reviewed. It would also be examined if their work started to fall off or if they did not get on with someone we had appointed. But it is not a formal review, it is an on-going process. Each job provides an opportunity for a review.”

Despite eschewing formal reviews, and hence regular billing discussions, the sector always attempts to keep one eye on cost.

But, as Oliver points out, cost is not about cheap services but added value. He keeps “the vast majority of core commercial work in-house. We think that in-house lawyers, being close to the business, add something above and beyond simple value for money”.

Jepson keeps costs low by refusing to use City firms. “I do not see the necessity to pay London prices when I get good service and work from outside London,” she says.

She employs a number of regional firms including Wiggin and Co, which was recently appointed to look after Sommerfield’s remote shopping needs, Masons’ Bristol office, Bullivant Jones and long-standing commercial adviser Dickson Minto.

Jepson says her firms must be able to provide a range of services including “value for money – not cheap but value – clear billing and common sense”.

But the most important element is understanding or, as Jepson puts it, “having an ability to look at what they are doing with a commercial eye rather than just a legal eye. I want someone to say ‘This is what I would do’. I do not want five pages of legal advice, rather I want people who are thinking in a way I respect”.

Ultimately, this is what will keep firms close to the ever-changing but lucrative retail sector.

There is a range of areas that external firms are used for – commercial, corporate, property, niche work such as heath and safety and trading stardards, and employment.

But what people really want from their firms is sound understanding of the business and sector. As Jagger says: “We need people who can really understand Asda and our approach and why we want to push for things.

“We need people who can embrace what we stand for. They have got to get under the skin of the organisation. At the end of the day, to fit with Asda is the priority.”

Companies in Sector

Asda

FTSE 100 ranking: not available

Following its sale to US discount store giant Wal-Mart last June, Asda has announced that it is to create 6,000 new jobs by opening new stores and expanding its online shopping service.

It is also entering the fixed line phone market with its Asda Call Time service for residential customers.

Market capitalisation: not available

Boots

FTSE 100 ranking: 69

After Boots sold its Do It All chain for £318.9m last year, profits did not pick up until the flu epidemic over the winter helped boost sales.

Plans to cut more than 100 jobs at the Boots Headquarters were announced in June last year after flat annual profits.

Sales at its accessory and bikes retailer Halfords jumped 10.5 per cent over the Christmas period.

Market capitalisation: £4.8bn

Great Universal Stores

FTSE 100 ranking: 79

GUS bought UK retailer Argos in 1998 and sales have done well since then, rising by 9.2 per cent in the financial year to 1999.

In June last year, Argos announced plans to launch an interactive TV service to allow customers to buy from home.

Market capitalisation: £3.8bn

Kingfisher Group

FTSE 100 ranking: 51

The owner of Woolworths, Comet, and Superdrug announced plans earlier this year to open another 120 shops over the next 12 months.

In January, it floated its French internet service provider Libertysurf.

Late last year rumours that it was in merger talks with German retail giant Metro were denied.

Market capitalisation: £7bn

Marks & Spencer

FTSE 100 ranking: 49

In March, after a couple of years of falling sales, the grande dame of the UK high street announced that it is dropping the St Michael brand name as well as getting rid of its familiar green bags.

In February, the share price fell when entrepreneur Philip Green dropped plans to buy the chain after allegations of insider share dealing.

Market capitalisation: £7.2bn

J Sainsbury

FTSE 100 ranking: 63

Since losing its number one supermarket position to Tesco a few years ago, Sainsbury’s has continued to lose ground to its rival.

It is pinning its hopes on its new chief executive Sir Peter Davis who started the job in March. Before joining Sainsbury’s, Davis turned the Prudential Bank from an institution hit by the pension mis-selling scandal to a stockmarket darling, thanks in part to the internet-based Egg bank.

Market capitalisation: £5.4bn

Tesco

FTSE 100 ranking: 20

Last month, Tesco’s sales went through the £20bn mark for the first time. In the future, it plans to separate off its internet operations as a prelude to floating the online shopping subsidiary, which has a turnover of £125m and more than 400,000 customers, as an independent company.

Market capitalisation: £14.2bn