Inflation is at its lowest level in two years. But this isn’t necessarily a cause for celebration. Demand is so weak that vendors are desperate to generate revenue.

Inflation is at its lowest level in two years. But this isn’t necessarily a cause for celebration. Demand is so weak that vendors are desperate to generate revenue. They are discounting prices aggressively, and Sales have become the order of the day. For retailers, turning stock into cash is less a matter of choice and more a necessity.

Lower prices do make products more affordable, but consumers are still buying fewer items. For retailers, sales revenues are weak and margins reflect those lower prices. Deloitte’s latest Consumer Tracker shows that, while fewer consumers expect to spend more on items such as housing, transport, groceries and utilities, that isn’t translating into spending more on discretionary items like clothing and footwear.

Another potentially misleading trend is the casualty rate in retail, which is undoubtedly getting better. There have been fewer high-profile administrations recently, but one does not have to look too far to see the stresses and strains in the industry. A number of high-profile senior retail managers are going through the revolving door. Many have excellent track records and have delivered respectable returns for their stakeholders in the past.

Now, weak performance often needs to be blamed on someone. But sometimes it’s the model that’s bust. The value of past results in guiding future performance has been vastly reduced, and that goes for retailers and the management teams that run them.

Weak demand and a market dominated by promotional activity have changed the relationship between strategy and tactics.

The main driver of discounts and promotions is what the guy next door is doing. Unless your offer is unique, and few truly are, your destiny is less in your own hands than it was.

However, management must still somehow try to have a plan. There has to be enough cash to invest in driving the top line (supporting selling, marketing, the brand and service levels), and in changing these key factors that underpin your proposition. These elements are central to retailers’ models, and the vast majority need adjusting for this environment. By how much, and how easy it is to do, are the fundamentals that will determine who wins and who loses.

Some businesses are in no danger of running out of cash, for now, but their models don’t really work any more. Having persuaded stakeholders to support them, everyone has a vested interest in believing they have cracked it. They haven’t and they won’t.

Those retailers that are incapable of winning market share will eventually wither and die, or will need some serious re-engineering of their model in order to win business.

Emerging from all of this is an industry where the differences between the strong and the weak are far more marked, and the latter are being forced out. Cutting costs is a given, but investing in driving sales is the key to winning market share. Supporting the brand, strengthening customer service, maintaining as much price integrity as possible – these are the hallmarks of the winners in this market.

  • Richard Hyman, Strategic Retail Adviser, Deloitte