This year will be the toughest year yet for retailers according to a variety of insiders and experts, off the back of apparently strong Christmas trading this may surprise some people. An executive role I’m currently working on has given me unique access to leading retailers across the UK and as such I am able to introduce some of the complexities the industry is facing.
A variety of macro and micro economic factors have created what some are terming the ‘perfect storm’, this will see opportunities created for some and crippling problems for others. The cause of these factors cannot be attributed solely to Brexit but the vote has definitely had an impact.
Most businesses were hedged on foreign currency and as such knew their position and exposure to fluctuations was minimal, however, nearly 9 months later the shifting pound is beginning to bite. Much is being made of the Eurozone but in reality that is not affecting UK trade (if anything it supports an exporting economy), those being hardest hit have a Far East supply chain that deals in dollars. The pound has dropped 15% in value which in real terms means anything sourced overseas and paid for in dollars is now 15% more expensive. Rate levies are not enforceable in the long run and as such the only option available is to work with suppliers to manage the cost base.
National Living Wage
Complex Supply Chains
Interestingly three Government policies are placing increasing pressure on wage costs and unfortunately redundancies; those working in front line retail may receive better pay but there are fewer of them.
National Living Wage
An increase in the minimum wage in theory creates a fairer wealth distribution but comes at a cost; fixed overheads increase and retailers with extensive high street operations are hit hardest. The challenge to compete with e-commerce only specialist retailers is well known but this cuts into margin further (yes e-tailers have distribution facilities with hundreds of staff but so do brick and mortar operations).
The Apprenticeship Levy
A third of companies are unaware that as of April this year businesses with a wage bill of over £3m+ will be required to contribute 0.5% of this to the levy (£15k) although there is a £15k allowance to be offset. The levy is designed to increase the number of apprenticeships available, in particular helping SMEs to provide them. This is great news in some areas but a blanket policy adds 0.5% to your wage cost base if you qualify.
Coming into force in April again is the first business rate shake up in nearly 10 years; taking into account property value increases since 2008 rates will change (up and down) accordingly. In some areas of the UK this will see a shop’s rate increase by 150% (an average increase from £7,567 to £9,140). Interestingly the e-commerce retailers such as Amazon and ASOS are seeing their rates fall as a result of the shakeup due to the location of their operations.
According to the CBI these 3 factors will cost companies £29bn over the next 5 years (approximately 0.14% of UK GDP).
Increasingly Complex Supply Chains
Cheap imports and low shipping costs have created a dependence on foreign trade within retail; margins were good and shipping was simple. However, the unpredictability of weather and fast changing fashion trends means long lead times can quickly leave you exposed to unsold out of date stock. This requires you to consider the supplier base to ensure you can meet seasonal demand but also react quickly to adapt to market requirements.
Omni-channel trading saw many traditional retailers rush to meet the growing e-commerce market; often with legacy systems that could only just cope. As this market continues to boom those retailers geared to serving only that market create a competitive advantage through their specialist systems and infrastructure. The high-street retailers have been caught out by the sheer scale of e-commerce and fulfilment complications along with the high cost of processing returns.
It is worth noting that many retailers have increased their ranges with stock being managed as a single inventory that can be moved quickly between channels. With stores holding more ranges but fewer items this increases the complexity of pick operations, creates more packaging and increases road miles. Those offering click and collect are then running additional deliveries to support the offering.
Lack of a Defined Proposition
Traditionally a retailer would focus on a core product range and target market, however, in a tough market businesses try to capitalise on every potential customer with impulse purchases and product range extensions. Look at the discount supermarkets who offer pairs of glasses and flash sales on air compressors as an example.
In a landscape where the majority are considering Amazon as a key competitor it is little wonder that companies are looking to diversify. However, the repeat success stories are brands that define their proposition and appeal to their target consumers with consistent messages. Those who stray away from their core values get caught out and find themselves in no mans land.
Consumer Confidence and Changing Shopping Habits
Confidence is back to pre 2008 recession levels but took a severe knock in the wake of Brexit and has yet to recover. In theory this should be good news for retailers but a combination of the factors above is pushing inflation towards a 2 year high and is forecast to hit 2.5% by Q3. Consumers have become hyper price sensitive in a world where price comparison adverts flood our daily lives, and as such are always on the look out for the best deals.
This has led to a shift in spending habits, the January sales are no longer the attraction they used to be with retailers discounting across the year. Not helping themselves here with flash sales and constant ‘discounting’ against inflated prices. This means people buy out of season when they spot a deal causing demand forecasters a headache.
In my opinion strong retail performance in 2017 will be driven by:
- Working with suppliers to manage cost base;
- Planning ahead to ensure the impact of levies and rates is budgeted and mitigated where possible;
- Investment in technology that supports operations; if you are running a multi-channel platform make sure you have distribution order management systems in place that are fit to support and drive growth;
- Focussing on the core customer, this could mean going back to basics and analysing product ranges and target demographic;
- Engage with customers and utilise data to analyse shopping habits creating targeted offers that encourage greater spend.
It is no surprise that the fastest growing retailers at present have built their businesses around these principles, it is far of course far more difficult to redevelop a house you already live in.