‘After years of erosion, it’s time to reclaim retail’s lost profit pool’

Retailers are understandably feeling bruised by the latest Budget, the most recent blow in a series of challenges that have chipped away at their profit margins over recent years.

But looking beyond these headline events, the UK retail industry has been grappling with a steadily shrinking profit pool for more than a decade.

It is not a universal truth, there are strong retailers that have bucked the trend, but the industry at large has felt the squeeze.

In 2012, UK retailers collectively enjoyed a profit margin of 6.9%. Fast-forward to 2023 and that figure had gradually eroded to 4.9%, driven by a storm of rising consumer expectations, razor-sharp competition, swelling operating costs, and an ever-growing cast of intermediaries extracting their cut.

But here’s the kicker: while traditional retail models have been squeezed, the profit pool of the broader value chain – the brands, logistics providers, affiliates, media agencies and more – has actually grown.

It’s not that it has become less profitable to trade in products, it’s that retail’s slice of the pie is getting smaller.

A changing game

Let’s look at the relationship between brands and retailers. Back in 2012, the top 150 grocery manufacturers captured 5.4% of retail sales in profits while the established grocery chains took home 5.2%. While the total pie in 2023 was equivalent, retailers’ share has shrunk dramatically to approximately 3%.

This shift is hard to swallow when you consider how critical retailers are to the success of those brands, not just in grocery but across retail categories. Many manufacturers have experimented with direct-to-consumer models, only to find themselves doubling back on third-party retail, acknowledging that retailers offer something unique; scale, convenience, experience, and now – thanks to digital tools – unprecedented insight into consumer behaviour.

Yet, despite all these advantages, retailers’ value doesn’t seem to be translating into profits. While some are starting to push back against these trends, few have gone far enough.

The path to reclaiming value

So, how do retailers fight back? The answers likely lie in a mix of bold reinvention and a renewed impetus on operational savvy.

• Rethink the commercial partnership with brands. Retailers need to start acting more consistently as equal partners to their brands. Working differently to create shared efficiencies and even collaborating on new product lines or retail formats. While perhaps a bit of a leap, imagine an electricals category or beauty store where the retailers are actually paid by their brands rather than their consumers.
• Broaden the reach of the value chain. Over the last few years industry disruption has happened more significantly away from the frontline as technology and innovation have reshaped commercial and operating models. 
  This has opened the door to a host of new profit pools, most prominently plundered by businesses like Amazon Web Services. But even for retailers without the firepower of Amazon, they need to think proactively about how they monetise upstream and take back control of more of the system profit. What value lies in their sourcing, or CRM, or logistics assets that others would value?
• Monetise data smarter. Retailers sit on a goldmine of consumer insights. Used strategically, these insights carry real value. The topic du jour is launching a retail media arm, which is one route to accessing new income streams and monetising the access and influence retail holds. But what are the other opportunities? Can retailers act as an R&D hub, or the predictive analytics brain that helps the whole system run more effectively?
• Automate and streamline. It is not an original thought, but rising costs are here to stay and current retail operating models need to be modernised to offset them. Automation, process reinvention and upstream consolidation are all essential ingredients of retailers building a model capable of retaining more profitability.

No time like the present

The retail industry has proven time and again that it’s capable of reinvention. But to secure its future, retailers must act now to reclaim their share of the profit pool and embrace the great position of strength they hold as a window to the consumer.

This isn’t just about survival, it’s about ensuring that retail remains a vital part of the economy, a cornerstone of communities and a secure employer, given one in 10 workers in the UK is reliant on it.

The good news? Retailers have the tools, the insights, and the opportunities to change momentum. But the clock is ticking. The next few years will determine whether they merely survive – or thrive.