When I sat down to write this quarterly review, I found myself struggling to find anything positive to report, and frankly, that’s a depressing prospect. But as we’ll see, amongst all the unprecedented (yes, they really are) challenges the retail sector is facing right now, there is a faint glimpse of hope. But more of that later.
Because first, the context of all of this as we enjoy the holiday season and winter seems an age away.
Inflation across the world continues to rise. In the US it currently sits at 9.1%, amping up pressure on the Fed to go big on its interest rate hikes. In the UK the situation is similar, inflation hitting a forty year high of 9.4% and now forecast to exceed 13% by the winter, driven primarily by the ever spiralling energy prices which currently seem out of control.
Some analysts now predicting that by January, a typical UK household will be facing an annual bill of nearly £4,000 for their gas and electricity. The war in Ukraine may have slipped off the front pages, but its impact around the world continues to be felt.
And it is against this increasingly challenging backdrop that retailers must find new ways in order to survive. So, my four trends for this quarter, in no particular order.
According to EY, in Q2 of 2022, there were seven profit warnings from UK retailers, leading to a -25% move in their share price. According to their analysis, “At the start of 2022, profit warnings were primarily triggered by cost and supply issues, hitting exposed companies hard, whilst leaving others unharmed. But demand headwinds and falling confidence are having a much blunter impact, and will expose underlying operational and balance sheet stresses”.
However, perhaps the biggest news came in July when US retail giant Walmart announced its second profit warning since May, attributing this to the soaring cost of food and fuel impacting consumer spending. Going on to say that it expects profits to decline by as much as 13% this year. As I commented in a post earlier this week, if it can happen to Walmart, it can happen to anyone.
eCommerce levelling down
One of the interesting, not to say, surprising things I’ve observed recently, are the number of retail businesses who appear to have thought that the boom in online sales, driven by the pandemic, would continue apace. According to the Office for National Statistics, in January 2021, in the UK, the percentage of online sales hit 37.8%, however, by June this year it had dropped to 24.8%, still above the pre-pandemic levels where it hit 21.6%.
Nevertheless, this trend back to shopping in stores, appears to have caught even the likes of Canadian eCommerce platform provider Shopify off-guard, the company announcing that it was laying off 10% of its workforce owing to a downturn in consumer demand. Shopify’s primary customer base being the US market. CEO Tobi Lütke moved to admit in a company blog post that, “this was my call to make and I got this wrong”.
So we like to shop in shops – who’d have thought?
War on waste
Waste, or rather, reducing it, has suddenly become a hot topic. Now, of course, it was always there but it seems that retailers, especially grocers trying to reduce food waste, have embraced this with renewed vigour.
In the UK, supermarket chains Waitrose and Marks & Spencer announced that they are to scrap ‘best before’ dates on fresh produce in an attempt to reduce the amount of food thrown away in homes across the country. It will be interesting to see if this is successful because without best before labelling, perhaps it will have quite the opposite effect?
Another UK grocer, the Co-op, said that it is to simplify its ranging in an attempt to reduce waste, citing changing consumer behaviour in response to the cost of living crisis. In a letter seen by The Grocer, the convenience chain said that it wants to, “drive more accurate replenishment and reduce waste while continuing to deliver key needs in a convenient way to our customers”.
Retailers and grocers especially, realise that whilst some of their rising costs will need to be passed on to their customers, equally, this means that they must shoulder some of that cost burden. And increasingly, they are turning to driving operational efficiencies in order to reduce their overheads.
In that same article relating to the Co-op, the grocer said that, “In order to meet our targets we are reviewing where efficiencies can be made across many of our categories”.
From connected infrastructure to smart stores to the workforce, retailers are applying technology to solve the myriad of problems that stand in the way of sustainable, efficient operations. Implementing the right Operational Efficiency strategy will be crucial to not only maintaining a competitive advantage, but remaining in business.
Andrew Busby is Global Senior Director Retail at Software AG and Founder of Retail Reflections.