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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.

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 is forcing them to radically rethink what they need to do to remain profitable. Explore more.

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.

Tools available to help you optimise your retail performance

  • BenchMarque is the future of luxury pricing. Imagine having real-time access to the prices of over 100,000 fashion & luxury products, from 35+ global brands, every week - covering the world’s most important luxury markets.
  • Markdown optimisation helps retailers manage their end of season discounts (including price, timing and number of markdowns), which involves balancing margin and sell through to maximise product profitability. Contact Jamie Chen for more information
  • L3 - Deloitte’s revolutionary approach to helping high street brands maximise the value of their physical estate.

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 - Customer Loyalty: A relationship, not just a scheme
We believe traditional loyalty schemes need a rethink. Not only because of changing consumer expectations, but also because they have become expensive to run and difficult to unwind. So what can businesses do to improve the effectiveness of loyalty programmes?

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

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