The retail industry is on the brink of the first sharp slowdown in consumer spending for years, accompanied by an acceleration of fundamental changes to consumer shopping habits and the cost structure of the industry.
Consumers are shopping more on the internet, more for organic foods, more for fashion and more for value. As costs increase, exchange rates fluctuate and the best global suppliers change, while the impact of competition and regulatory authorities’ actions adds uncertainty and complexity.
With both consumer purchasing power and confidence in decline, the high operational gearing of many retailers will magnify the impact on profit and cash flow dramatically.
Retailers are adopting different approaches to protect and enhance their profitability, from a short-term focus on customer value enhancement to additional focus on the potential of their international operations. Some are facing up to the need to restructure their business and others will be tested to destruction.
Understanding what is happening in the industry can be difficult. Nor is it helped by management and commentators who, in seeking to explain events, confuse short-term tactics with medium-term strategy. Some do not seem to clearly understand what is happening. Management can damage the business further by inappropriate cost-cutting (reducing service) or counterproductive margin enhancement (putting up prices).
The right strategic positioning and effective execution will be the ultimate test of a retailer’s success or failure. Those that have the best understanding of consumer and economic trends and take the necessary action early will be the winners. Pressure on profits means survival is dependent on a very clear understanding of retail levers and the courage to make decisions, sometimes flying in the face of popular opinion and having a negative impact on short-term profitability.
It is important for decision-makers, whether they be government, financial or competition authorities, management or investors, to have a clear view of retailers’ health. It is not difficult if they leave their desks and go and shop – not only in their home markets, but abroad. It becomes apparent rapidly who is succeeding and who is not.
Do not be confused by Christmas hype. Consumers almost always spend at Christmas and play chicken with retailers. For those retailers that keep their nerve, the season will be profitable. For those that don’t, it can prove deadly. But the real issue is what happens over the next year or so, in a less benign environment.
Beware those retailers that claim they need to spend lots of money on repositioning, with the results not becoming evident for some time. Remember, few have succeeded in sustaining a profitable international retail business.
Above all, back those retail managements that demonstrate a good understanding of their customers and provide them with better choice, better service and better prices.
Sir Geoff Mulcahy, chairman, British Retail Consortium
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