Five action points for retailers to take as the UK economy faces recession
The Bank of England has warned the UK economy faces recession; it is set to shrink in the last three months of this year and keep shrinking until the end of 2023. At the same time the central bank has raised interest rates by the most in 27 years, to 1.75%, in an attempt to stem soaring prices but inflation is still set to hit over 13%.
This will perhaps be unsurprising but certainly unwelcome news for a retail industry that has been battered by the pandemic, the ensuing supply chain crisis and crumbling consumer confidence. But instead of throwing their hands up in despair, there are practical steps retailers can take to help them weather the upcoming storm, as Siobhan Gehin, senior partner at global retail and consumer goods strategists Roland Berger points out.
“Retailers will need to take a good look at their customer data and make sure they are continually researching what consumers want and working even more closely with suppliers so that they can react fast to counter the effects of the turbulent months ahead,” says Siobhan Gehin, senior partner at global retail and consumer goods strategists Roland Berger.
“Retailers will need to strike a balance between protecting margins and retaining customer loyalty, while ensuring that they do not repeat mistakes from past recessions," Gehin says.
“It will require deep customer insights and strong operational discipline. Apart from pricing, retailers will be competing on value, meaning that they will need to review their promotions, adjust their assortments and introduce technology wherever possible to ensure efficient operations.
“Retailers need to have open conversations with their customers and suppliers to ensure that they correctly address issues in a collaborative manner. Companies that innovate and flex to respond to changing conditions will be the ones most likely to emerge as winners," she adds.
Here are the 5 Action Points
Get smart about optimising pricing and promotions
Retailers should tailor price increases carefully for each product, and shopper recommendations should be based on analytics, examining their willingness to pay and margin performance.
Key value lines should be carefully monitored against competition and kept competitive to reduce the risk of losing customers.
Product offering and portfolio optimisation
Retailers should analyse consumer data to understand their shifting purchase behaviour i.e. where are customers are cutting back and where they are prepared to splurge - and work with suppliers to adjust product ranges accordingly.
Manage the cost of goods sold (COGS)
It is important that retailers have a comprehensive understanding of the underlying costs of the products they buy. In this inflationary environment, it is critical to track the price of raw materials and carefully prepare negotiating position with suppliers.
Stock is a critical issue: retailers have moved from needing to keep buffer stocks during Covid-19 to being very careful in balancing availability with less excess stock.
The example of US retailer Target, which issued a profit warning in May 2022 citing "lower-than-expected sales in discretionary categories" and high inventory markdowns, will be a chilling reminder to fashion and general merchandise retailers that it can devalue quickly. Excess stock levels should be carefully monitored and optimal exit or markdown strategies should be quickly adopted.
Cost efficiency and control
With the rise in energy costs, sustainability initiatives may take on a new lease of life.
As customers and employees become increasingly concerned about sustainability, levers that reduce waste have a dual benefit: reducing cost and supporting a more environmentally sustainable business.
One example is solar panels on stores and distribution centres, which in many cases can have a very attractive return on investment.
Store format optimisation
Recessions and crises do not happen in a vacuum. We still have underlying consumer demands and developments, including growing sustainability concerns, increased online sales, a desire for more convenient retail formats, and a growing need for healthy eating and healthy living options.
Retailers should be constantly monitoring and assessing their store estate, experimenting with new formats and evolving existing ones, to meet these changing demands and keep customers interested in visiting stores.
The store financial model should also be assessed and, if necessary, stores should be closed in order to ensure the ongoing health and viability of the business. Store closure decisions should always be informed by proper location analytics and not only by financial metrics.
Find out more about Roland Berger here.