The business started in 1948 as a small lock-up shop in East London selling wool and ladies clothing. As the business increased shops were added under the name of “Lewis Separates” and the focus became ladies clothing. By 1968 there were some 70 stores in the UK and “Lewis Separates” introduced into a few of its stores a brand new concept and name. Innovative in design and format these stores used strong colours, bold fashion imagery and pop music to create “Chelsea Girl,” the first UK chain of fashion boutiques. With continuing expansion, menswear was introduced in 1983 under the “Concept Man” brand and from 1988 further evolution took the form of the development ofa new brand concept of a themed store offering fashion for men and women. The new brand was called “River Island” and today the product range includes men’s and women’s clothing and footwear, accessories and cosmetics.
A dedicated in-house design and sourcing team creates fashionable, stylish and quality clothing representing value for money, targeted at the fashion conscious 18-35 year old market. As at 28 December 2002 River Island had net capital resources of £85.5 million and achieved sales of £377.6 million for the 52 weeks. River Island is a wholly owned subsidiary of Lewis Trust Group Ltd, which is the parent of a diversified group engaged in the retailing, property, leisure and financial services sectors. As at 31 December 2002 Group consolidated net capital resources amounted to £408 million. Relevant Markets River Island designs and retails men’s and women’s clothing, footwear, accessories and cosmetics.
The majority of products are designed in-house and sold principally under the River Island brand, although other River Island owned brands are used. A small proportion of sales are attributable to thirdparty brands. River Island has shops in over 180 locations Great Britain and Northern Ireland, 9 shops in the Republic of Ireland and elsewhere in the world retails through franchise partners in Kuwait, Saudi Arabia, United Arab Emirates, Bahrain, Malta, Cyprus and Poland. In all territories the target market is the fashion aware 18-35 year old sector. In addition to its shops, River Island retails through mail order catalogue and website. RI/11427 (updated) 25/05/2004 1
Within the geographic markets mentioned above, the River Island store card is available only in Great Britain and Northern Ireland. In addition to its store card, River Island accepts a full range of payment methods from customers, including cash, cheque, credit and debit cards.
Competition within these markets. Our commentary relates only to the UK market. Within the retail clothing market there is not only significant competition in terms of the number and differing nature of retailers engaged in the sector (e.g. large department stores, small independent clothing shops, multipleoutlet clothing retailers, specialist footwear retailers, etc) but a substantial breadth of choice of product available to the public.
Unlike some other product sectors (which participate in store card issue) the retail clothing sector is not dominated by a limited number of retail providers and the public has an extensive portfolio of clothing retailers with which to place their custom. A large majority of consumers also have a wide choice of alternative payment methods and/or sources of deferred payment (e.g. store cards, credit cards, personal loans, debit cards linked to borrowing facilities). We see the provision of a store card as offering both an alternative payment method (where the customer has the immediate ability to pay by other means) and an additional payment method (where the customer does not have the immediate ability to pay by other means). We try to align the card to our brand, and to create benefits for our customers, by offering loyalty discounts and special offers. For a retailer such as River Island, the purpose of our store card is primarily to provide a convenient method of payment (whether alternative or additional). Whilst it makes no identifiable difference to us whatever means of payment a customer chooses, we do have the ability to communicate with card holders and to offer them benefits which we consider will assist loyalty. We offer such benefits as:• • • • RI/11427 (updated) 25/05/2004 Cardholder one-off discounts Invitations to special events Loyalty discounts and rewards Sale previews 2
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Discounts on third party services/products Third party offers Forthcoming new product information.
These benefits can be promoted generally, or more specifically targeted based on purchase behaviour demonstrated by card spending patterns A store card programme also provides the retailer with a significant channel of communication with customers, a facility not available through other payment mechanisms. The River Island store card, whilst it includes an optional credit facility (i.e. deferred payment) in common with all credit cards, is not intended or promoted as a vehicle for longer term borrowing. Neither is the card intended as a means of credit for those who find difficulty with other sources of finance. Firstly, the card is a means of payment. It may be that users choose to use the card because they do not have another means of payment at that moment. However, it does not then follow that they will use the card facilities since they will not incur interest if they pay off the balance within up to 54 days. We have no financial interest in the card operated for us by GE and we have no influence over our card provider’s statistical credit scoring criteria and mechanism. Nor do we have any contractual influence over the APR charged, or other terms.
We sell fashion products. It is our view that our customers base their purchasing decision on their desire for a specific product. We do not think that the availability of credit is a driver as it might be for furniture or larger household goods. Store cards are normally tied to a single brand owner or retailer and to that extent store cards do not directly compete with each other. They do compete with other forms of payment, particularly mechanisms which include the ability to defer payment. Any analysis of the benefits/costs associated with store cards and the competitive position of store cards in the marketplace, when compared with other means of payment, needs to take account of the totality of the store card offering and not just a single aspect of comparison. Barriers to Entry/Ease of Switching Only one or two retailers operate their store cards in-house. River Island uses the services of GE Capital Bank Ltd. In the context of River Island considering bringing its store card operation inhouse (which could potentially improve competition in the third party provider market) there are significant barriers to entry, including. (a) Set up costs for RI/11427 (updated) 25/05/2004 3
• • • • • • • (b) Ongoing costs • • • • • • •
Call centre operation Computer systems to manage card accounts Hardware costs for the above Development of credit scoring system Human resources recruitment Training Department Compliance Department
Credit scoring Human resources Occupancy costs for call centre Higher marketing costs covering design/print issue of store card documentation Card manufacturing costs Bad debts Fraudulent card applications and usage
Against these barriers the only significant advantage would be financial if we could generate more value. However, it has to be borne in mind – whether in relation to a self-operated card or an alternative to GE – that we need to offer our customers continuity and we need certainty that our card provider is able to perform. Store card operation is a very difficult business. GE have demonstrated that they can perform. To date few others have done this in the UK. There is a small number of third party store-card providers in the UK market and of those providers GE Capital Bank is reported to have over 50% of the market. Because of differing skills involved in the provision of store card and credit card services, providers (e.g. banks and finance houses) of other consumer cards and other forms of instalment credit are not in a position to readily offer store card services for retailers. Thus there is some inelasticity in the supply side of third party store-card providers.
In addition, ease of switching by a retailer can be influenced by • • • Exclusivity clauses in an existing contract Lengthy contract periods Existing provider has developed a data base of cardholder spending and borrowing behaviour that is not readily transferable to a new provider. Financial and time costs involved in switching. New cards have to be issued to all existing cardholders, presenting a potential disruption risk.
Customer Information The River Island store card can be applied for in person at any one of our shops or electronically through our Website www.Riverisland.com. The application procedure is that prescribed by our card provider. The card is promoted on the River Island Website, in our mail-order catalogue with application for the card being made through either method described above, but principally through our shops. Customer information about the store card is provided through • • • • In store posters A “please take one” leaflet available in our shops During account opening procedures when the customer is completing an application form with our sales adviser A “welcome” booklet issued at the time the store card is issued to the cardholder.
The leaflet and booklet in particular provide written information in nontechnical language about the benefits of the store card in addition to summarising key information about the financial aspects of the card. The full terms and conditions of the card credit agreement are provided to the customer on the reverse of the card application form, a copy of which is handed to the customer following its completion. The full terms and conditions are also repeated when the card and any renewal/replacement of it are despatched to the cardholder. Customers are entitled to take away a blank “voided” application form prior to making any application and successful applicants are also offered a “no quibble” guarantee that within 60 days of opening their account, they may pay off any outstanding balance, close their account and not be charged any fees or interest.