The Retail Profitability Challenge
A brave new world
The retail industry is going through a period of unprecedented change. You need to act quickly and decisively to remain relevant in today’s market.
Following a period of unprecedented change the retail industry is facing an environment where margins are increasingly under pressure from rising costs, lower pricing power due to increased transparency, and the need to invest in the digital transformation of their businesses. In this new environment traditional assets are potential liabilities and the value of product and service innovation has increased.
After a difficult 2016 for Belgian retailers and a tough start in 2017 there are early signs of improving conditions: confidence indicators are pointing higher and the level of unemployment is decreasing. It must be noted that in 2016, the pain was not evenly shared across the retail market, with online sales in Belgium growing to new record highs. The online channel continues to grow market share in 2017, driven by changing consumer behavior, with consumers choosing to shop more often via their smartphones. The costs of transforming a traditional bricks and mortar business into an omnichannel organisation have impacted profitability. The required investment in technology combined with the variable costs of marketing and order fulfilment are eroding margins with costs growing faster than sales.
Margins have remained under pressure as prices have fallen for most of the last five years. Deloitte analysis has shown for the UK that profitability is declining with three year average margins declining by two percentage points between 2010-11 and 2014-15. In Belgium, the profit margins during the period of 2011- 2016, dropped with 10%.
In 2017, the retail industry continues to face rising cost pressures including: higher property costs, increased staff costs, rising fuel and commodity prices and an increased cost in digitization to stay relevant in a competitive landscape. These pressures are combining to create a perfect storm for retailers that is forcing them to radically rethink what they need to do to remain profitable.
In summary, retailers need to focus on: customer engagement, greater differentiation and focus on innovation that can reduce costs and generate greater returns.