‘Longstanding assumptions are being challenged as retailers navigate new reality’

Retailers are having a difficult start to 2025. Across the industry, costs are spiralling as changes to employers’ national insurance contributions and living wages kick in this month. Businesses are at crunch time, forced to make tough choices to protect margins whether through job cuts or price hikes.

At the same time, the consumer mood remains brittle—GfK’s confidence barometer showed only a marginal improvement in March. Concerns over the cost of living and labour market conditions have kept spending subdued in the early months of the year. Trade and geopolitical tensions under the new US administration have created more unease about the macroeconomic picture, and retailers with a US presence are beginning to work through the complexity of the new tariff environment.

Investors are also turning up the heat on results. With capital costs higher, they are intensifying their scrutiny of capital allocation and questioning whether existing assets are truly delivering maximum shareholder value. Shares in listed retailers have underperformed so far this year, opening the door for activists to push for more decisive value-creation actions. This has put executive teams on high alert to demonstrate results and create a premium on operational improvement.

“Many retailers are recognising the need to strike a better balance between product/services breadth and profitability”

As businesses rethink their strategies in response to these pressures, one longstanding assumption is being challenged—the idea that a broad and diverse proposition is the only answer to attracting customers and boosting growth. For years, retailers have expanded their offerings and ranges based on this belief, often at the expense of operational efficiency and profitability.

Now, many retailers are recognising the need to strike a better balance between product/services breadth and profitability. In most cases, this means pivoting to a more focused strategy, doubling down on the core products and competencies that drive profitable growth and brand value the most while avoiding non-core distractions.

This shift has accelerated in recent years as businesses navigated the inflation spiral in the aftermath of the pandemic. It has created a clear divide in the sector—forward-thinking companies that are maintaining healthy growth and margins by prioritising their most profitable and strategically aligned offerings, and those that are faltering in their attempt to play in too many spaces or be all things to all people.

Take Next, for example. Originally rooted in bricks-and-mortar retail, the company has successfully transformed into an online powerhouse by leveraging its strength in ecommerce and logistics. Today, its marketplace supports not only its own extensive product range but over 1,000 complementary third-party brands, making the brand’s wide assortment strategy economically viable. However, this can be a challenge for single-branded retailers where the viability of the ‘long tail’ diminishes.

“The shift from distractions to a more focused proposition will inevitably drive changes to businesses’ operating models”

Another case in point is M&S Food, which has carved out a niche in premium offerings, appealing to customers willing to pay more for quality and innovation. At the other end of the spectrum, discounters such as Aldi and Lidl have deliberately dodged ecommerce, steering clear of the overhead costs associated with online delivery. This has allowed them to remain focused on their core proposition of streamlined operations, low prices and no-frills shopping experiences.

The shift from distractions to a more focused proposition will inevitably drive changes to businesses’ operating models.

A reset of the go-to-market strategy—where underperforming product portfolios, outdated channels and low-growth regions are sidelined in favour of more profitable opportunities—will often require a reconfiguration of the business footprint to ensure production and logistics are fully aligned with the new priorities.

Companies excelling in product creation and innovation may opt to explore alternative routes to market to avoid the complexities of distribution and retail operations. For instance, retailers with a strong brand and unique product offerings might choose to franchise their stores in international markets rather than managing them directly, reducing operational risk and enabling rapid scale-up.

Similarly, businesses that implemented SKU rationalisation have the opportunity to simplify supply chains, consolidate facilities and repurpose underutilised assets, delivering greater resilience, agility and cost-efficiency.

In many cases, these realignments will result in strategic portfolio divestments or the sale of underperforming international divisions. Far from being a sign of failure, such actions are a bold way to unlock balance sheet value and refocus on more value-accretive propositions.