The imperatives for retail leaders trading through uncertain times

Thursday 15 November 2018

Article

Although there is much uncertainty surrounding the UK macro-economy, it is clear that for the retail industry, the next year will see some of the toughest trading conditions for a decade. In the face of cost inflation and revenue pressure, our conversations with retail CEOs have been increasingly focused on how they best plot a path to cost savings to alleviate some of the near term pressure.

At OC&C we see a number of shortcomings of many of these plans, and some consistently missed opportunities to balance both efficiency and effectiveness – instead relying on relatively blunt instruments to engineer cost savings.

In particular we would urge retailers to carefully consider 4 areas as they craft their plans for the next year…

1. Realise the full benefits of range optimisation. To extract every ounce of margin from cost of goods requires retailers to think not just about where to have tough conversations with suppliers, but where to target simplification and rationalisation of their range. Even for specialist retailers winning on range authority, we have seen material benefits (5%+ cash margin improvement) from choiceful simplification of ranges. This will not be a universal solution across all parts of the range, so establishing early where you have permission to simplify, and how to realise the benefits rapidly is critical.
2. Target marketing effectiveness. The retail industry lags many others in its sophisticated use of digital marketing channels. In the face of inflating marketing costs and pressured marketing budgets, the risk is that retailers will bank short term savings that compromise their medium term ability to grow. Learning from how sophisticated operators in other digital media channels (e.g. travel, gambling) are optimising spend across direct acquisition versus brand will help retailers realise rapid benefits of efficiency, whilst maintaining momentum and effectiveness. If successful, the spoils are significant – we have seen 10%+ marketing savings and improvements in ROI.
3. Think carefully about the supply chain as a source of cost savings. The retail industry has been characterised by increasing cost to serve in recent years, as digital, and fast delivery has been the major growth battlefield. For many retailers, now is an opportune time to critically assess what they have built, and where through improvements and the targeted use of third party partnerships, greater efficiency and effectiveness can be delivered.
4. Resist the urge to freeze investment. There is a natural temptation to put an embargo on investment, but if deployed confidently and in the right areas of the business, we see it as critical for supporting efficiency and ensuring the business is ‘fit for growth’. Retailers will need to be more choiceful about investment projects, challenge the rules on payback horizon and consider creative partnerships to unlock access, and accelerate internal capabilities.

Those who emerge most successfully from the choppy waters of the next year will not be the retailers who simply cut closest to the bone, but those who have used tough trading as the catalyst to build a more effective and efficient model, capable of alleviating margin pressure through a tough landscape, whilst also retaining the capability to spring rapidly into growth on the other side.

We would be delighted to share more on how we see this balance being a very realistic ambition for retail leaders to strike.