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The Retail Profitability Challenge

A brave new world

How can retailers remain profitable?

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 and the need to invest in digital transformation. Retailers are still competing with each other but also face new competitors who have different operating models and cost bases and this rate of change is showing little sign of slowing. Retailers are already responding to a number of structural and operational changes in the market but are they moving fast enough?

The challenge ahead

Retailers enjoyed a strong year of growth in 2016 driven by rising consumer incomes, lower unemployment and falling inflation.

Sales rose by 3.3% in value terms more than double the rate in 2015.

However growth was not shared equally across the industry, with physical stores increasing by just 1.1% and online sales climbing by 19.2%.

Strong growth in sales has not lead to a commensurate increase in profitability. Margins have remained under pressure as prices have fallen for most of the last five years.

Looking ahead, 2017 looks set to be more difficult for retailers, leaving many challenges to consider.

Key challenges for retailers

  1. Changing consumer behaviour
    Consumers are now choosing to shop more and more online, increasingly via their smartphones. In a recent Deloitte survey we found that in the previous three months more people had shopped online than instore across a range of non-food categories. Read our recent Deloitte Consumer Review for more data.
  2. New competition
    New competitors in the retail space have different operating models and cost bases. Many are either online or businesses that have only a small number of stores meaning they can avoid cost pressures like the rising cost of property
  3. Rising cost pressures
    Rising cost pressures are combining to create a perfect storm for retailers that it's forcing them to radically rethink what they need to do to remain profitable:
    1. Rising property costs: Rising rental costs and business rates. Learn more about our Real Estate practice
    2. Increased staff costs: Introduction of the national living wage and apprentice levy
    3. Devaluation of sterling: Following the result of the EU referendum. Discover more about our Brexit support team
    4. Rising fuel and commodity prices: Due to the increase in the price of oil. Read our latest Energy and Resources content
    5. Higher pension costs: Increasing pension liabilities due to falling gilt yields.

How to evolve the traditional retail model

There are three ways retail businesses can respond to the retail profitability challenge. Evolution and revolution are needed in equal measures.

  1. Real customer engagement
    A greater focus on understanding you customer base and managing them through the customer journey is required. Read more.
  2. Differentiation - the speciation of retail
    There is a clear need for greater speciation, specialisation and differentiation as retailers will struggle to generate adequate margins if they try to do all things to all people. We believe that five main species of retailer will emerge: The Entertainer, The Curator, The Deliverer, The Innovator and The Discounter. Read more.
  3. Innovation – focus on driving greater returns
    If retailers are to remain relevant in the fast moving world of modern retail, innovation needs to be focused on the current pain points:
    • Reducing store costs and overheads
    • Automating processes and augmenting the workforce
    • Creative a more immersive and differentiated experience

Each of these critical elements need to be considered in the context of continuing to deliver value to shareholders. Read more.

Further reading

Retail Trends
In 2017, retailers will need to focus on accelerating change in their businesses. We believe there are five key trends which will have significant impact over the next year.

Retail Showcase
What are the key forces driving change in the retail sector? Where does the opportunity with the consumer lie? In our Retail Showcase, we share with you our vision of what it takes to win in retail today.

Consumer Review: CX marks the spot: Rethinking the customer experience to win
Consumers now expect a bespoke, fluid experience when shopping. This experience is defining successful business models, but how can businesses predict what consumers want?

Deloitte Consumer Tracker
Quarterly review of consumer confidence and spending behaviour.

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