Diversification – the pandemic lifeline

With the outbreak of covid-19 forcing businesses across all industries to focus on innovation, diversification became one of the most attractive solutions to recoup and even profit off potential footfall. Two years on, we are seeing more firms partnering with new brands and transitioning wholly into novel markets

Business diversification is not a novel notion. Renowned e-commerce website Amazon is said to be one of the early companies that diversified its offerings, transitioning from a marketplace of reading material to the commercial giant it is now. The eruption of coronavirus demanded more innovation from businesses. Many firms across a number of industries were forced to make “considerable changes to their product offerings” to recoup and even profit off potential footfall, according to UK accountancy firm Menzies. It also presented a range of ways declining businesses were able to momentarily pivot during this testing time, underlining the potential of transitioning into other markets. For instance, home deliveries were capitalised on by foodservice companies, 3D printing manufactures were able to provide essential PPE, and gin distilleries set in motion the mass production of sanitising products – yet not all companies accredited the pandemic for their diversification.

At the beginning of 2021, British outdoor clothing brand Joules acquired Garden Trading, a digitally led retailer of home and gardening products. The retailer disclosed its motivation for this partnership was to “grow its customer base, broaden its product offering and strengthen its digital platform”. At this particular time, Garden Trading said it was seeing “rapid growth” from its e-commerce offering, with trading revenue for end-of-year 2020 sitting at £16.8m, up more than 40% on the previous year, and it published a profit before tax of £2m – a trading period attractive to any business. So did Joules’ diversification strategy work? Yes – and quite effectively the brand demonstrates.

At the end-of-year 2021, its e-commerce offering increased 14% and 54% on a two-year basis, with the firm attributing this performance to the acquisition of Garden Trading. Revenue was also up 35%, 11% of which was solely due to the new acquisition. When commenting on its end-of-year results, Nick Jones, CEO confirms the group “continues to benefit from its increased diversification through Garden Trading” and suggests the acquisition gives customers “even more reasons” to shop with the retailer – which is precisely the reason businesses diversify, according to the Corporate Finance Institute (CFI).

In the words of the CFI, “diversification is one of the four main growth strategies,” not only does it ‘mitigate risks’, as evident from business movements during the pandemic, it implements a “tremendous” boost to brand image and company profitability – put more simply, “business diversification increases footfall into the retailer because customers are shopping somewhere they wouldn’t have otherwise gone to,” describes Simon Underwood, business recovery and insolvency specialist at Menzies.

Underwood has 30 years of experience in the financial advising industry, aiding both struggling businesses and individuals. Where relevant, he also takes insolvency appointments to deal with companies under the insolvency legislation. According to Underwood, “diversification of the sales channels” is not only one of the chief areas that businesses can increase their footfall but also one of the “most prominent” in this current climate. The Office for National Statistics substantiates Underwood’s claim, displaying that online sales in 2020 exceeded the previous year across all industries.

“The challenges of a lockdown environment accelerated this diversification,” claims Underwood, yet he proposes “even pre-pandemic”, the diversification from “traditional highstreet selling” into “web-based internet channels” began to emerge. He also notes product and service offering has hastened, particularly within the distribution sector. “We are seeing partnerships between local newsagents and highstreet retailers facilitating returns,” proposing a more popular way that businesses have diversified. “The appetite for change” within businesses is greater than it ever has been before – but why?

International accountancy firm Deloitte gives a fresh perspective on the present business landscape in its latest survey. It revealed a record number (37%) of UK chief financial officers are prioritising investment in 2022, declaring that expansionary strategies such as, “new products and services”, “expanding into new markets” and “raising investment” are a greater focus now than “at any other time.” Prominent retailer Asda displays all three strategies, as it recently plunged into the draught beer market.

In November 2021, the retailer showcased its latest offering provisioning customers with the opportunity to shop 12 “regularly changing” draught beers in-store at its Milton Keynes site. The retailer partnered with Craft on Draft, giving the customer the option of filling a 1L or 2L specialist glass beer container that can then be taken home and either kept and used, brought back to store to be refilled again, or returned with the deposit fully refunded. Not only did Asda reveal it instigated the partnership to further its sustainability efforts, the retailer longed for a new offering ‘doubtful to be found anywhere else’. “As part of our partnership strategy we want to bring new and exciting concepts into stores that have never before been seen,” says Matt Harrison, senior director of business development and strategic partnerships at Asda. “The Craft on Draft team’s expertise in the hospitality industry will bring a range of drinks to our store that are unlikely to be found elsewhere.”

In correspondence with Asda, Selfridges recently unveiled its plans for the development of a luxury hotel at its flagship site in Oxford Street, London, which has remained vacant since 2008. According to Underwood, “the hotel development is quite exciting,” since the retailer is a popular destination and will ‘undoubtedly’ do well. In support of this claim, Signa’s executive chair, Dieter Berninghaus, said the creation of the hotel will create a “significant value upside potential”. Real Estate firm Signa Group is also reportedly developing Selfridges food hall alongside partners the The Central Group, after the latter recently acquired the retailer for a value of £4b. The group disclosed that it intends to “create a world-leading luxury, retail company,” underpinning its desire for expansion by diversifying into the hotel market.

From e-commerce giants Amazon, to independent highstreet retailers, it is apparent that business diversification is not restricted by the size of a business, nor its monetary value. In fact, being listed as one of the ‘four main business expansion strategies’, diversification is perhaps one of the most accessible ways of attracting footfall. Clothing brand Joules’ transition into the gardening market confirms just how lucrative varying a firm’s product and service offerings can be, as the retailer accredited its increase in financial revenue to its new offering. Similarly, trialling one of its novel ‘test and learn’ partnership strategies, Asda made its debut into the draught beer market, bringing something ‘new and different’ to its customers.

“The pandemic has driven innovation,” declares Underwood. “We are seeing two year changes that would have taken 10 years to happen in a non-pandemic environment.” Businesses were backed into a corner and simply had to diversify or dwindle and cease all operations. According to research firm Sifted, 31% of companies failed to innovate during the pandemic, underpinning that not all businesses were able to act quickly, yet those that did have unlocked new markets and can lead further businesses within the industry, take Selfridges expansion into the hotel sector for instance – but what if businesses are hesitant to diversify their offerings?

When looking at the future of business diversification, it may be sensible for firms to take a similar approach to Asda. The retailer’s ‘test and learn’ strategy intends to bring ‘relevant’ brands and services into stores to ‘complement’ the retailer’s existing food and George businesses. This strategy proposes a more secure way that businesses, perhaps uncertain about entering into a new partnership, service, product, or even entire market, are able to diversify their offerings – by trialling something novel, the business can assess whether it is a success or a failure. If more firms feel they can safely diversify their offerings, we may see more innovative leaps into different markets.

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