Retailers should take encouragement from how they have transformed themselves in recent years as they adopt tactics to confront today’s difficult environment, says Alvarez & Marsal’s European head of retail and consumer practice Erin Brookes

UK retailers are poised for tough times as the spiralling cost-of-living crisis makes shoppers – once again – rethink their buying decisions.

Amid the country’s highest inflation in 40 years, our research shows price is now the most important driver of purchasing behaviour.  But there is an additional challenge – consumers are unwilling to compromise on quality or ethics either.

“An astonishing 83% of consumers do not want to sacrifice quality for lower prices and an even higher proportion – 85% – will not compromise on a brand’s ethical credentials”

In our recent report, Changing Consumer Values, the majority of shoppers said that the cost-of-living crisis would have the largest influence on their expectations of retailers and brands over the next 12 months. 

The study also showed that an astonishing 83% of consumers do not want to sacrifice quality for lower prices, and an even higher proportion – 85% – will not compromise on a brand’s ethical credentials.

These may include whether a company pays a fair wage to its employees, and the sustainable sourcing of materials.

Such demands – price, quality and ethics – are adding pressure to retailers as they deal with their own set of external challenges, from supply chain disruption to cost hikes on everything from merchandise to energy and wages.

The growth of online sales, with its negative effects on margins, and the returns headache are further complicating the outlook.

Many companies are already feeling the pinch and more will likely follow. Fashion specialist Asos and supermarket group Sainsbury’s are among the retailers recently warning of lower profits in the coming months. 

Our analysis showed that retail profit margins are set to slip to 5.1% in 2022, down from 8.3% in 2012. Excluding the initial impact of the pandemic, that will be the lowest profit level in the industry in 10 years.

The UK is already the most digitally advanced and competitive market in Europe, so there are no easy fixes for retailers and brands.

They will have to work even harder to drive efficiencies and appeal to an ever-changing and more demanding consumer, adopting several tactics such as:

  • Investing in price via value ranges.  There is no getting away from the need to expand value and offer consumers choices that best suit their desired price point. Asda’s recent pledge to make its lower-priced value range available in more supermarkets, doubling the number of stores that offer it, is one example. But beyond value ranges, there is an opportunity in exploring standard or premium private labels amid a wider shift from more expensive, branded goods. It will be important for businesses to invest in competitive pricing by working closely with suppliers, all while ensuring product quality is maintained and communication around promotions is sharp.
  • Responding creatively to ethical demands.  Although investment in sustainability will be required, ethics and sustainability can also create commercial opportunities. The growth of clothing and furniture rentals (M&S’ Hirestreet, Ikea rental), online marketplaces (Depop, Vinted) and the wider circular economy are prime examples. Offering products and services that help to address issues such as energy usage – for example, energy-efficient household appliances – is another way to address consumers’ growing commitment to ethical and sustainable practices.
  • Exploring new habits through innovation. Retailers must regularly reassess product portfolios to identify opportunities to provide genuine value for cash-strapped consumers. For example, grocers could focus on recipe plans using individual ingredients or premium ready meals to cater to consumers cutting back on eating out and takeaways. Customers may still want to treat themselves in difficult times, so there is also space to explore demand for certain ‘luxury’ products or services.
  • Harvesting data for insights and personalisation. Maximising opportunities from shifting consumer values requires advanced data analytics to convert big data into actionable insight. Data harvesting (such as social media ‘listening’ or AI-driven insights through customer data or message boards) will be critical for retailers to gain a competitive advantage. Developing a consumer-facing digital presence is also essential as shoppers increasingly use online channels to compare prices and find bargains.
  • Readdressing supply chain continuously. Supply chains must become simpler, more diverse and more flexible. For example, nimble procurement and agile inventory policies are essential to avoid being left with excessive stock if market conditions and consumer sentiment change dramatically. As operating costs keep rising, continuous review and risk assessment are required to ensure flexibility to switch suppliers and ensure supply chain resilience.
  • Aligning with consumers. Retailers must evolve their brands to show consumers that they are on their side through thick and thin. It’s certainly not the time to be slashing marketing budgets. Businesses must develop more tailored messaging, pulling value levers that really resonate with targeted customer segments. 

Retailers should take encouragement from the ways in which they have transformed themselves in the past few years to pursue these equally challenging actions.

In this environment, it’s not just profitability that’s at stake, but survival.

Consumer Week 2023 artwork

Consumer Week 2023: Your free pass for events and insight on combatting the cost-of-living crisis

As the cost of living continues to rise at an unprecedented pace, Retail Week is bringing together brands including Deliveroo and Pandora with industry experts such as Peter Williams and Natalie Berg to explore the driving factors behind customer spending in the current climate.

Comprising a free virtual morning masterclass on September 28 and a free in-person morning summit on September 29 at The Form Rooms, Covent Garden, come together with Retail Week to redefine your strategies for customer engagement and growth.

  • Find out more and register your interest in attending here