(JJB.L) JJB Sports PLC Buy/Sell

Settled down with the wife and children to watch x factor so i,m bored. Had a wee look through investors chronicle to see what info they had on potential investment for me.

This sporting life
Created: 14 October 2009

And nowhere is the absence of common sense better illustrated than in the stampede of institutional investors to put £100m of new equity into JJB Sports, the longest established of the trio of sportswear companies that dominates the UK's high street. To put that sum into context, before this week's share offer from JJB became a firm fixture, the market value of its equity was about £85m. Now institutions are willing to double that and more.

That looks about as sensible as the decision by Mike Ashley - a key player on the sportswear scene - to buy Newcastle United football club last year. Not just because JJB was close to going bust until a few weeks ago; not just because its sales volumes still look horrible; and not just because it has lacked a chief executive since it suspended its previous one in January then refused to accept his resignation. The chief reason why common sense is missing can be summed up in three words: the long tail.

Let's stop being Delphic and explain. The long tail in question is the tail of a distribution curve. Specifically, in its application to retailing, this curve shows how, for any major category of merchandise, just a small proportion of total sales will be derived from a big proportion of the merchandise available. Put another way, it's the inverse of the famous Pareto principle, which has a wide range of applications but in this instance would say that 80 per cent of sales would come from 20 per cent of the range of merchandise. In the past, the other 80 per cent of the range - the long tail - was rarely worth exploiting. That's because it tied up too much capital; both fixed capital via bigger stores and more warehouse space, and working capital through higher levels of inventory.

However, the internet changed all that. Suddenly - and to exaggerate and simplify - shopping on the web meant that retailers divided into two camps: those at one end of the curve who sold a lot of a little, and those at the other end who sold a little of a lot. The ones that sold a lot of a little were the ones with a major presence on the high street, generating high sales volumes from a comparatively narrow range of products. Not just the obvious ones, such as Marks & Spencer, B&Q, or Next; but the likes of PC World (in computers), Ernest Jones (in jewellery) or Halfords (in auto parts and cycles). Success stories all of them.

The ones that sold a little of a lot were the exploiters of this long tail; the real specialists who could offer a range of merchandise with which bricks-and-mortar retailers could not compete and, if they were sensible, would not want to. The definitive long-tail retailers would be Amazon followed by the iTunes Store, but there are scores of others, known chiefly to their committed customers. However, the point - and don't forget I'm simplifying - is that, to be successful, a retailer had to belong firmly in one category or the other. Being somewhere in between spelt - not necessarily demise - but occupation of a corporate twilight zone where the struggles are many and the rewards are few. The sort of life being experienced by, say, Waterstone 's, HMV or Jessops. Specialists all of them, but not special enough.

So where does JJB fit on this spectrum? Sadly, it has little choice. To sell a lot of a little, it has to pile it high and sell it cheap, or it has to be a fashion retailer masquerading as a sports retailer. The trouble is that both of these slots are taken - by Mike Ashley 's Sports Direct at the cheap-and-cheerful end and by John David at the fashion end. That means JJB has to sell little of lots or - to use its marketing slogan - has to be "Serious about Sport".

In an oblique reference to the stranglehold that Sports Direct and John David have over the parts of the sportswear market where JJB can't compete, the company says its plan is to create a chain focused on "sport rather than fashion and good value rather than discounting". And it adds that the aim is to become "the destination store for everyone buying sports-related products". That, of course, would be in the way that Jessops is the destination store for everyone who is serious about photography or Waterstone's is the one for serious readers.

Still, what's really amazing is not that JJB's bosses are trying this on, but that investing institutions are buying it. Memo to Shed Media - don't forget to write in a role for a City slicker in your pilot for Sports Retailers; he's as smooth as Vaseline cocoa butter, but, boy, is he gullible.