Recovery is coming slowly but uncertainty is still nipping at the heels of growth and the latest rash of retail insolvencies and trading updates highlighting the very challenging environment have done little to boost confidence within the retail sector. Unlike previous recoveries, recovery in the wider economy certainly will not be consumer led this time around.
Aside from the consumer income squeeze and other external factors, there are two issues for retailers barricading the road from survival to stability to recovery – getting pricing right and controlling costs.
Setting pricing correctly is always a challenge, but never more so than now. For retailers, the price point must be high enough to sustain investment and profitability, but low enough to avoid damaging already fragile consumer confidence.
And pricing policy must be complemented and determined by a controlled costing strategy. This is vital if the business is to remain nourished and profit margins healthy. Recent research shows UK businesses, including retail companies, believe 95 per cent of cost reduction and streamlining completed during the recession could bounce back and that hard fought savings made are not sustainable.
To add insult to injury, there is serious external cost pressure across the supply chain that cannot simply flow through to the consumer in the current climate. Input costs such as fuel have soared, with no signs of abating anytime soon and, in turn, this impacts upon retail. The most recent Retail Health Index from the KPMG/Synovate Retail Think Tank found that although overall costs had a neutral impact on the health of the retail sector in the first quarter, pressures have been increasing since then.
Denied the luxury of time, many retailers underwent radical cost cutting programmes following the downturn. In a typical retail company 60-70 per cent of costs sit in the supply. However, the make-up of costs in that 60-70 per cent is not always fully understood. There is often a lack of visibility across the cost pipeline making it very difficult to identify where leaks need plugging. As a result, more apparent costs - such as people - tend to be targeted, with retailers now concerned about increasing headcount over the next few years.
Recession induced cost cutting has been dominated by budget squeezing, reducing headcount, pay cuts and freezes and the slashing of non-core spending. But none of these crash diets are sustainable or will ensure long time fitness. In many cases such savings were not delivered through a change in business culture or operations but through forced reactivity to the external market place.
This approach was not necessarily wrong in the first instance and ensured survival, but as the demand remains under pressure, core behavioural changes need embedding. I’ve observed in the past that retailers are good at cutting costs but that these have a tendency to creep back in: now is the time to develop longer term cost strategies. If not, as growth comes back, and headcount and investment increase to match demand - coupled with rising fuel costs - any profit could be eradicated. Or worse still, if demand remains weak, the ability to continually find savings through the ‘crash diet’ model will be become more difficult and erode the underlying foundations of the business.
Many retailers have invested heavily in systems to access quality management information to help them make smart cuts. However, often there is too much data to sift through to inform correct decisions on cost (and pricing).
UK businesses bought precious time through the measures taken in haste during the recession. They must now embed sustainable, lower cost bases – that have some flex and ability to cope with rising input costs – if nourished growth and healthy margins can still be achieved in the future.