In a time of permacrisis, have retailers forgotten the art of trading?

That the retail sector is operating in a state of permanent crisis isn’t something that’s up for debate. What’s more, it seems that, with each passing year since 2020, that crisis only deepens, yet more headwinds emerge and then coalesce with what’s come before to exacerbate the problems further.

The list goes on: Covid-19, the lockdowns, the invasion of Ukraine, the cost-of-living crisis, and now another war in the Middle East. Fair to say, it’s been an unprecedented run of bad luck for the retail sector.

Yet there are several retailers across categories who have, despite all the headwinds, not only survived the last few years, but positively thrived. Tesco, Sainsbury’s, Next, to name just a few. The retailers who, quarter after quarter, are reporting growth – both on the bottom line and in terms of market share.

What about the rest, though? Has the permacrisis exposed a more systemic issue across the retail sector? To be blunt, have retailers forgotten the art of trading?

Value versus volume

EMA leader, retail partner, and managing director of AlixPartners, Matt Clark, believes the answer to that question is yes.

He points to AlixPartners data to show why. In the UK, retailers are more likely to be highly disrupted (55% vs 48%), expecting greater supply chain disruption (45% vs 35%), and less likely to accelerate technology adoption as part of a business transformation (47% vs 55%) compared to other industries.

But the data also shows that, while UK retailers are not only behind other business sectors in adapting to cope with the big issues of the day, they are also falling behind other sectors in addressing those deficiencies.

AlixPartners found that 40% of retailers worry they are not adapting fast enough, while 38% say they’re more likely to experience leadership team misalignment with the issues, while 21% say they are less likely to prioritise innovation and accelerate R&D.

While Clark doesn’t suggest that a return to what he calls “the fundamentals of retail” would be the silver bullet needed to turn around every single UK retailer currently struggling, he does believe that many have allowed themselves to become distracted by the turbulent environment.

“Following Covid, there was a surge in demand. But that demand didn’t last. The supply chain catastrophe was then followed by a wave of inflation. It all just meant that some retailers lost focus on core trading discipline,” he says.

“Many of them either thought the demand spikes seen post-Covid were going to continue, or they got confused that inflationary markups were actually winning market share, which of course it isn’t and weren’t, and that they could win by value rather than by volume.”

As a result, Clark says, many retailers tried to address the problem by throwing “enormous numbers of SKUs” at it, which in turn led many retailers into a “massive productivity issue” that many are now trying to extricate themselves from.

This bifurcating of the retail sectors between the strong traders and the rest is a phenomenon that Nicholas Found, head of commercial content at Retail Economics, is seeing as well.

Research conducted by Retail Economics with Barclays, based on a survey of over 100 senior UK retail executives, “shows a widening capability gap”, Found notes.

“Around three in five (58% of) retail leaders believe the divide between high and low performers is growing, as stronger operators invest through uncertainty while weaker ones retreat into defensive cost cutting,” he adds.

Art versus science

While no one doubts how complex and difficult the current trading environment for retailers is, it begs the question that if many businesses have taken their eyes off the fundamentals of retailing, is that down to the leadership?

Are retail leaders now not as good at the fundamentals of the business as their forebears?

For Clark, there’s a nuanced answer to that rather simple question.

“Back in the day, you would have a lot more personality-led retail chief executives, who were very successful. Individual intuition, nous, leadership capability, and understanding of a customer or category. There was a huge amount invested in those individuals.

“Some of that is still true today,” he adds. “But increasingly, retail chief executives have to be just as good at the art as they are at the science. And that requires a different lens, a different way of seeing things, and a broader set of capabilities across the team. No business can succeed now without people who can work with and make sense of the data”.

When asked how retailers can balance the old school fundamentals of retailing with the need to be across changing trends and ways of working, Clark says “that’s one of the main challenges at the moment”.

“Retail leaders need to be focused on the fundamentals, to make sure they stay clear, focused on those specific items that drive relevant differentiation in the market, their brand, and, if they’re able to do so or have access to capital, should stay focused on opportunities for inorganic growth.

“If you’re a retail chief executive, you’ve got to be doing those three things at once,” he adds. “And depending on where you are in the maturity curve, you’ve also got to be focused on different areas right”.

Heavy is the crown, after all. But that’s why retail leaders are being paid the big bucks.

“Ultimately, this period is a stress test,” Retail Economics’ Found concludes. “The retailers pulling ahead are combining old-school merchant discipline with targeted investment to build relevance and agility and better respond to adversity.

“In a volatile world, the winner is often the retailer with the fastest ability to reprice, reroute supply, and rebalance stock.”