Industry and Economic Trends Impacting Retail Operations

16 Jan, 2023

1. Supply Chain Disruptions

Probably the biggest issue impacting Retail Operations this year is supply chain challenges.  To the public, they manifest themselves in empty shelves in store and products being out of stock online.  In some cases, they show up as products being limited to a maximum number of units per shopper.  This issue is likely to continue unabated throughout 2023.

The critical impact of out of stocks is twofold:

  • Greater lost sales, resulting in higher lost profits. This is painful, because the bulk of the gross margin on lost sales would have fallen to the bottom line.  This is because most of the fixed expenses like rents, property taxes, personnel costs, etc., have already been covered by the actual sales.
  • In the slightly longer term, a loss of customers. Surveys over a number of years have shown if a customer experiences out of stocks on lines they normally buy on average 2.7 times in a row, they switch to another store.  At that point, the retailer loses the rest of the lifetime value of that customer.

These losses need to be addressed and their impact minimised.

2. Labour Shortages

  • Employee churn in stores has always been a significant challenge for retailers, averaging 40% a year in the UK (and 50% to 60% a year in the USA).  Churn is expensive but in the past retailers could cope because, albeit costly, retailers could recruit and train replacements.  In the current environment, recruitment is much harder.  The Covid pandemic changed many people’s attitudes to working in retail and many companies now experience fewer applicants and sometimes no applicants for advertised vacancies.

3. Rising Costs

  • One impact of the labour shortages is the need to offer higher wages to get people to work in retail.  Payroll is the single biggest non-merchandise expense in running a retail business.  Hence keeping staff costs down is a focus for all retail management.

  • Rates (property taxes) are a significant burden to store-based retailers and create an unfair playing field verses online retailers.  Ever rising parking charges in towns and cities, while not a retailer cost, is a retailer issue, because it is deterring people from shopping in stores and a factor in encouraging the switch to online retailers.

  • Many retail products sold in stores are purchased overseas and much of this buying is in US dollars.  Adverse foreign exchange movements caused by a weakening pound have caused the cost of imported goods to rise.  Couple this with the rising cost of sea containers and it is contributing to UK inflation, which is 12% to 14%, higher than national average inflation.

  • Energy costs have risen rapidly, largely though the war in Ukraine.  These rises are tough for every business but even more so for grocers with fridges, freezers, and temperature-controlled warehousing.  In non-food retail, electricity costs are often in the range of 4% to 6% sales, though it has risen further in recent times.   Many retailers have been replacing lighting with lower cost LED options in recent years.  But the scale of increases being experienced will be a big challenge to manage.

4. Inventory Costs and Deployment

  • Given the supply chain problems referred to above, retailers are increasing their safety stock levels when they can get supply, to provide more resilience to out of stock situations.  This is reducing inventory turns and increasing inventory carrying costs.

  • Rising interest rates are making this worse.  Coupled with higher inventory levels, they are adding more cost and soaking up more free cash flow.

  • Online consumer returns have risen significantly and are now causing some retailers to stop offering free returns.

  • The disruption to retail over the two years of Covid lockdowns has caused historic data to be a much less useful baseline for planning and forecasting future years, making the business of placing inventory in the right place at the right time much harder.

Collectively, these issues require retailers to have a strong focus on improving their inventory management to cope with these issues.

Summary

Sad to say, more retailers are entering Administration because of the various challenges above. As most retailers know only too well, these issues need to be addressed and in many cases the solution is to improve key business processes by automating those parts of each process that can be improved or adapted to suit current challenges.  A major part of this is improving retailers’ systems.  The good news is that it does not require rocket science to make things better.

If you would like to have a deeper understanding of these challenges and gain insight into how best to address them, contact our team today.

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