The current Retail landscape & increasing cost pressures
It is currently impossible to escape the daily updates on the global economy. Despite some strong post-Christmas trading results, the effects of various political, economic and social constraints, many of which are sadly projected to persist into 2023 are continuing to impact retailers. GDP is set to decline by 1.4% in 2023 after growth of 4.2% in 2022 (Office for Budget Responsibility) and customer confidence has also declined, showing the worst results since the GfK Consumer Confidence Index began, falling to -44 in November 2022. So what does this mean for our retailers? Many are battling with increasing supply chain and logistics costs and challenges in recruitment and retention, plus the precarious balance between passing these costs on to customers and absorbing them. As consumers' discretionary spend has reduced, there has been a natural focus on essential items and a move to spend with those retailers where they perceive ‘value’. With reduced discretionary spending predicted to continue into 2023, many retailers are placing a greater focus on cost reduction.
What do Retailers need to do?
It is expected that retailers will need to look at reducing their cost base by ~20% to continue to remain competitive. Cost optimisation is a well-trodden landscape within retail, with many retailers having already realised benefits from tactical measures such as reviewing vacancies and pausing or stopping significant investment programmes. These retailers will now join others in switching their focus to optimising current operations. We typically see this across 4 key areas:
Products: Identifying how products – from range and assortment, through to pricing and promotion – affect the cost base and understanding the true profitability of the products which are sold
Channels & Customers: Understanding the customer base and the way in which they are interacted with and sold to – from the retail estate through to digital operations to identify how to make channels more efficient
Movement of Products: How logistics and supply chain drives cost into businesses, including the true cost of distribution and returns
Colleagues & Central Costs: Driving efficiency through the way in which colleagues manage the business
How do Retailers create successful change?
Retailers seeking to optimise their operations should focus on identifying opportunities across these four key areas. However, to be truly successful, they must not only consider these areas in isolation but must also understand the end-to-end value streams across the business. This includes understanding how decisions ( i.e. on products and SKUs) will impact everything from logistics through to back office ways of working (i.e. finance processing).
The organisations which are most mature in their thinking will strive for efficiency gains throughout the entire ecosystem of cost, whilst also looking at opportunities to transform how they work today. It is only through this end-to-end understanding of the value chain that retailers will truly be able to reach a sustainable 20% cost reduction.
Whilst the economy remains challenging, it does as ever present opportunities for those who are willing to change the status quo.
