Strategic adviser, Deloitte
As we know, the easy times in retail are over. The strength of sterling magnified the benefits of moving sourcing abroad, lifting gross profit margins and enhancing consumers’ spending power by lowering prices.
Consumers were also able to spend more because of the easy availability of credit, most notably through mortgage equity withdrawal, and they responded by buying more items.
These conditions underpinned retail growth for the past 10 years but have now disappeared. However, it’s worse than that. They will clearly not return once the recession is over. So where does that leave us?
The future beyond recovery from the recession is likely to involve slower economic growth. There will be a wide spectrum of performance by sector and by company, but retail spending growth will be slower.
In general, consumers will buy fewer goods too, changing the pattern of consumption.
This will produce polarisation: needs-driven spending will gravitate towards retailers able to tick the most important consumer boxes like price and convenience. Although it will remain the engine of retail growth, wants-driven spend will slow and consumers will be much more choosy.
Shoppers will not always opt for lower prices but instead buy fewer, more aspirational products. As a result retailers that are caught in the middle risk being more vulnerable.
More moderate demand will curtail the relentless capacity expansion we have seen
for 30 years and retailers will need to focus increasingly on getting more out of what they already have. Being clear about what you are and who you are aiming for are fundamental prerequisites of success.
In a growing market, it is possible to succeed even when what you are offering is similar to what else is out there. Not any more. Retailers need to differentiate from the competition and make their product distinctive and relevant. This is all about branding, something that we will see much greater focus on from retailers.
Branding creates added value for the customer – making them choose Product A over Product B. Ultimately, it is this that delivers profit. Strong branding is essential, whether retailers are in the needs segment, the wants segment or maybe straddling both.
However, all this does not mean an end to good returns from retail businesses. The future retail market will bring into ever sharper focus the differences between the strong and the weak. These differences are less marked in
a growth market but deficiencies are now
The opposite is equally true for the strong. While the margin for error is much narrower, the relative rewards of being focused on your target customers and having tight operational and financial management with decision-making informed by the top line will be significant and very visible