NCSI-UK Commentary Fourth Quarter 2009
NCSI-UK Results for Retail Trade: Department Stores, Supermarkets, Electrical Retailers, Petrol Stations, E-Commerce
Customer Satisfaction Rebounds for Retailers
Waitrose, John Lewis and Play.com Remain on Top;
Most Retailers Strengthen Customer Relationships
February 23, 2010
After three straight quarters of small declines, the National Customer Satisfaction Index (NCSI-UK) inches up very slightly for the first time, in the fourth quarter of 2009. The Index improves 0.1% to a score of 72.9 on the NCSI’s 0-100 point index scale. This coincides with a 0.1% fourth quarter growth in GDP, which though rather anaemic by absolute standards, nevertheless represents the first positive growth for the economy since the first quarter of 2008. Retail was among the categories behind the small uptick in GDP, with improving customer satisfaction driving stronger sales - overall, retail sales were up 3.3% compared with the fourth quarter of 2008. Still, consumers have remained cautious amid an uncertain economy. While nearly one quarter planned to spend more during the 2009 holiday shopping season, an equal number indicated they were scaling back their spending, and nearly half of all shoppers planned to put little to none of their holiday purchases on their credit cards.
Of the five measured retail categories, e-commerce continues to lead by a wide margin with an NCSI score of 83, up 1.2% from a year ago. The volume of purchases made online has continued to grow annually, and one third of all shoppers indicated they planned to do more of their holiday shopping online than a year ago. The ability to browse and shop for a wide array of merchandise from the comfort of one’s own home has made the online retail experience highly attractive. Department stores are also strong, improving 2.6% to 78. Petrol stations also improve, up 1.3% to 76. After the cost of petrol fell sharply toward the end of 2008, prices climbed throughout 2009 and are now at an all-time high, suggesting that the rise in customer satisfaction may be short-lived for this price-sensitive industry. Customer satisfaction with electrical retailers improves 1.4% to an NCSI score of 75, while supermarkets remain the weakest performer among retailers and the only category to decline this year, down 1.4% to a score of 73.
Among the individual retailers measured in the NCSI, gainers outnumber decliners by a strong margin: 78% of the companies improve their customer satisfaction compared with a year ago, while 11% are unchanged and 11% decline.&
NCSI-UK is produced by the American Customer Satisfaction Index (ACSI), which was developed by Professor Claes Fornell at the University of Michigan. Extensive research has shown a strong correlation between changes in customer satisfaction and changes in consumer spending growth and, since consumer spending is such a large part of the economy, changes in the growth of GDP.
The U.S. has also shown overall improvement for retail trade, with e-commerce, department stores, and gasoline all gaining and supermarkets holding steady from a year ago. However, the improvement in American customer satisfaction with retailers has been more pronounced than the UK, and the related growth in GDP has been stronger.
Department Stores: John Lewis Increases Lead Over Competition
The department store category gains 2.6% to an NCSI score of 78, highest among the brick-and-mortar retailers and the biggest improvement of the five measured categories. Better quality, particularly quality of service, is creating higher customer satisfaction with department stores. Complaints are very low - only 5% of customers have complained about some aspect of their experience in the past year - and department stores rate the best in retail at handling customer complaints, consistent with their superior level of service quality. Value for money is about average, a consequence of the higher prices of typical department store merchandise. While holiday discounting has remained an industry tradition, department stores have tended to differentiate themselves more with a focus on providing a high quality shopping experience through good customer service.
John Lewis tops the industry again, and the upmarket retailer’s 4% improvement to an NCSI score of 83 widens the gap from second-place Marks & Spencer, which gains 1% to 77 to tie the aggregate of all smaller department stores. John Lewis boasts the best quality merchandise and the best service in the business - customers typically have much higher expectations of John Lewis relative to competition, but the department store chain has performed better at meeting those expectations. The higher level of customer satisfaction has translated into stronger business performance. Sales across John Lewis’s 29 stores were up 13% during the holidays compared with a year ago.
Trailing closely behind Marks & Spencer is House of Fraser, up 4% to 76. House of Fraser has found success by combining designer labels with its own house brands, including Linea and Untold. While sales for the holiday shopping period were up 7% on a like-for-like basis, sales of House of Fraser’s house brands were up 33% over the same period. The boost in customer satisfaction pushes House of Fraser ahead of Debenhams, which remains unchanged at 74, anchoring the bottom of the industry. In sharp contrast to its major competitors, Debenhams’ rather low and stagnant customer satisfaction left its 2009 holiday sales flat.
Electrical Retailers: Currys Still Last Despite Improvement
Customer satisfaction with retailers specialising in consumer electronics gains 1.4% to an NCSI score of 75. Like department stores, the improvement is driven more by better quality than prices, with both merchandise and service scoring higher than a year ago. A year ago NCSI predicted that the industry trend of deep discounting in the midst of the recession would not be sustainable and that service quality must improve to strengthen electrical retailers for the long term. While quality of service still lags the department store category by a significant margin, it is no longer below the average for retail. Sales have improved for most electrical retailers from a year ago, and the improvement in service and the resulting boost to customer satisfaction should better prepare the homegrown retailers for the expected challenge from Best Buy entering the UK market, which now appears to be delayed until the spring of 2010.
Smaller electrical retail chains continue to lead the category, down slightly by 1% to an NCSI score of 79. All three of the largest chains improve, with Argos on top with a 3% improvement to 75, matching the average for all electrical retailers, followed closely by Comet, up 1% to 74. Argos has made some changes to its home delivery that have had a positive effect on service, while Comet has likewise enhanced its delivery processes and expanded its installation services. Electrical sales for both retailers are stronger than a year ago. Currys still lags the industry, but a 4% surge to an NCSI score of 72 has closed the gap somewhat. Currys’ low position in the industry makes it especially sensitive to the looming appearance of Best Buy, and the retailer appears to have taken steps to better compete, refurbishing some stores and upgrading others to “megastores”, while at the same time tackling its long-perceived problems with customer service with a more focused approach to staff training and improvements to its home delivery. Investors have responded positively as well - the share price of Currys’ parent corporation, DSG International, surged 109% in calendar year 2009, five times the growth in the FTSE 100.
Supermarkets: Big Improvements for Waitrose, Asda
It appears that the high cost of food has finally caught up with supermarket chains. The lone exception among retail categories included in the NCSI, customer satisfaction with supermarkets declines for the fourth quarter of 2009, falling 1.4% to an NCSI score of 73, the lowest among the five measured retail categories. Both service quality and price rank last in retail. Customer complaints are the highest at 13%, and supermarkets experienced a sharp drop in the success with which complaints are resolved - just a year ago supermarkets ranked first among retailers for successful complaint handling. Grocery chains engaged in the most aggressive discounting in a decade, but this was not enough to offset the effects of the weak pound on food prices, particularly in the latter months of 2009.
Just as John Lewis is leaving its department store competition well behind, so too its Waitrose supermarket brand is outdistancing its closest rivals. Customer satisfaction with Waitrose surges 4% to an NCSI score of 85, the highest score for any retailer outside of the e-commerce category. Although still small relative to its major competitors, Waitrose has parlayed its high level of shopper satisfaction into the fastest growth among UK supermarket chains. Customers may typically pay more to shop at Waitrose, but in addition to a strong commitment to quality merchandise and good customer service, enhancements such as the Waitrose “essentials” line of products and home delivery have maintained customer perceptions of value for money the highest in the industry.
Discounters Asda and Morrisons lead the rest of the supermarkets, with Asda improving 4% to 79 and Morrisons gaining 1% to 77. Asda entered the holiday shopping season promising the most aggressive discounting in a decade. There is a big gap between these two and the next tier of chains. Sainsbury’s is unchanged at 73, while Tesco, despite investments in its Clubcard loyalty programme, dips by 1% to 72, one of only two market-leading retailers measured in NCSI to see any erosion in customer satisfaction in the fourth quarter. Tesco’s decline coupled with Asda’s big gain means that the customer satisfaction gap between the two has doubled from a year ago. The aggregate of all other smaller supermarkets falls 5% to 70, contributing most to the drop in satisfaction for the industry as a whole. It is more difficult for smaller chains to compete by offering discounts as deep and sustained as their larger competitors and so these smaller supermarkets have more keenly felt the effects of runaway food prices.
In March 2009, the Co-operative Group completed its acquisition of Somerfield, making the combined retailer the fifth largest supermarket chain in the UK. Customer satisfaction often suffers in the immediate wake of a large merger or acquisition during reorganisation, but this has not happened in the case of Somerfield. In 2008 the chain had an NCSI score of 61, an all-time low not only for the supermarket category but for retail as a whole. A year later, the new, larger chain is still at the bottom of the industry but rebounds slightly, up 2% to 63.
E-Commerce: Play.com, Amazon UK Head-and-Shoulders above the Rest
E-commerce continues its dominance over brick-and-mortar business. Customer satisfaction with online retail improves 1.2% to an NCSI score of 83, well above the next highest category of department stores at 78. Consumers are turning to online shopping in greater numbers and greater volume on the strength of the superior quality of the experience. In December 2009, online shopping in the UK rose 17% compared to the previous December, and sales were up 14% for the year. NCSI measures only the pure Internet companies like Amazon and eBay by name, but captures satisfaction with the online retail business of brick-and-mortar companies, including that of the retailers measured in other categories like department stores and supermarkets, in the aggregate of “all other” online retailers.
Among the measured companies, rivals Play.com and Amazon UK lead the category, up 1% to 88 and 2% to 87 respectively, the two highest scoring companies in any industry of the NCSI. In the next tier, eBay’s UK business improves 1%, while Apple’s iTunes store falls 2% to tie eBay at 80. At the bottom of the category is Ticketmaster, up 2.7% to 76. Both iTunes and Ticketmaster score low for price relative to the industry. For Ticketmaster the problem remains surcharges and delivery fees on events ticketing, which add substantially to the final cost. The remainder of the category, reflected in the “all others,” declines 2% to 82, just below the average for e-commerce. As more consumers shop the Internet, the challenge increases for retailers of all types to expand their online offerings and provide high quality websites to drive sales. Those companies with the best designed, most comprehensive websites are best positioned to dominate.