All the signs are that 2011 will be a tough year for retail, so how can businesses prepare? Charlotte Hardie and Rebecca Thomson report
Cash in on the royal wedding
Commemorative paraphernalia, copycat dresses, copycat rings, celebratory books, the marketing opportunities, the tourism uplift… the list goes on and on. What isn’t there to like about a wedding? Particularly when it’s a big fat royal one that promises to bring a lift to both the UK mood and economy.
Verdict tentatively estimates that William and Kate’s big day on April 29 could be worth as much as £620m to the economy, with about £400m of that going directly to the retail sector. But with only 16 weeks to go until the wedding day, time is of the essence. Every retailer needs to look at how it can maximise sale opportunities. The UK public has needed an excuse to celebrate for a while and this is the time when retailers should take advantage of a lift in spirits. Even those most hardened royal critics who would rather lock themselves in a cupboard than indulge in the nationwide celebrations are likely to be cheered by the extra bank holiday if nothing else.
Crass though it sounds, retailers, it’s time to cash in. Do it well and you too may have reason to pop those champagne corks.
Just as retailers start to get their heads around online, another channel comes along that provides a whole host of new challenges - and, crucially, opportunities. M-commerce is only going to grow in 2011, and companies that don’t act are likely to find themselves lacking a valuable growth opportunity once the mobile channel matures.
For most this means releasing mobile-optimised websites, so that the normal website can be viewed on a smaller mobile screen and product pictures are reformatted.
But there’s also the world of smartphone applications - Tesco has already released a transactional iPhone app and Asos allows customers to buy on its mobile site. If transactions aren’t the way to go, the social side of mobile needs considering - plenty of customers will want to use their mobiles to share pictures or get information about a product or store. Mobile Marketing Association chief marketing officer Paul Berney says: “Retailers should consider how to integrate mobile into each step of the customer journey.” A decent mobile offering, he adds, will not only help to drive footfall but will also help to engage with shoppers in stores and help customers keep in touch with the retailer post-purchase.
Acting on the m-commerce trend early will give retailers significant competitor advantage.
Prepare for higher unemployment
Typical, isn’t it? Harsh memories of the near collapse of the global economy in 2008 are fading, retailer administrations are no longer coming thick and fast, consumer spending has held up reasonably well during incredibly tough times, and then the coalition Government’s austerity measures come along and put a dampener on everything. Necessary though David Cameron et al say their spending cuts are, it’s nonetheless bound to have an impact on consumer spending.
The direct impact of the cuts will be felt largely in the public sector - which in some parts of the country is a massive employer. It ballooned under Labour to make up more than half of the economy, and before the election last year a record 6.09 million people worked for it. Aside from the direct job losses within the public sector itself, John Philpott, chief economic adviser to the CIPD, told the House of Commons Treasury Select Committee he expected the public spending cuts to result in the loss of 1.6 million jobs across the whole economy. December ONS figures showed unemployment is already rising - it increased by 35,000 in the three months to October to 2.5 million - and that’s before the effects of the coalition’s austerity measures have truly kicked in.
The general public are likely to yet again be thrown into a nervous state of uncertainty that retailers will have to contend with. How can they assure customers their stores are where they need to shop? How can they tempt shoppers to spend when budgets are stretched? Are they sufficiently in tune with how their shoppers are behaving?
As Bank of England governor Mervyn King said last year: “The next decade will not be nice. History suggests that after a financial crisis, the hangover lasts for a while.” The age-old questions that retailers have been contending with during the recession will continue to be just as relevant in 2011.
Manage VAT changes
Just after the busy Christmas period, and slap bang in the middle of the January Sales, retailers have the joyous task of contending with the VAT rise.
The logistics of pricing will be the first challenge. Will you absorb the increase or increase prices? If you absorb prices, will you market this to drive footfall? Will it vary on the particular product line in question? Because the increase commences in the middle of the Sales period, the price differences won’t become visible to consumers until the Sales are over - and the price shifts could provide a chance to introduce other competitive price changes.
But beyond that, Jason Gordon, principal at consultancy Booz and Co, says retailers must also focus on the longer-term consequences of the changes for consumers. Ultimately, retailers will need to collect data on how consumer spending habits have changed as a result of the 2.5 percentage point increase. Subsequent analysis of this data will then enable them to make the most of the opportunity that the VAT change presents, says Gordon.
For instance, if consumers start trading down - even subconsciously - it could present opportunities to introduce new product lines. “Data is now ubiquitous and cheap, but insight resource is scarce. Retailers that make best use of their data and people - whether through a loyalty card, primary research or other areas - to interact most effectively with their high value customers will be best positioned to succeed,” says Gordon.
A deeper understanding of how customers are reacting to the rise will be crucial, and those who act quickly are likely to weather the tax jump more successfully.
Investigate international expansion opportunities
During 2008 and 2009, international expansion wasn’t even on the backburner for most - it was practically put in the freezer. But the flame has since been reignited and it could be just what retailers need to bolster their businesses in 2011 - particularly when UK growth promises to be nothing spectacular. As George Wallace, chief executive of international retail consultancy MHE Retail, told Retail Week last year:
“For companies that are performing well, then international is becoming a priority.”
Catherine Tobiasinsky, head of retail at property adviser EC Harris, points out that while the end of 2008 and 2009 were tougher than expected, 2010 was overall in line with - if not better than - expectations. “Owing to costs and expenditure having been reined back, profits were largely better than planned and retailers are sitting on large cash reserves with much scaled-back debts,” she says. “The world has moved on and 2011 will be the year that retailers will actively have the means to do something about international expansion,” she says. Indeed, the summary of retailers’ individual plans on Retail Week Knowledge Bank shows just how many have international expansion on their agenda.
International is where it’s at for 2011, it’s just a case of working out how best to employ it. Dipping your toe in the water via an ecommerce site? Through franchising? Or even the wholesale market? And after that, there’s the added headache of which countries might work for you. It’s a logistical challenge that requires a leap of faith, but it could well be one that reaps rewards.
Tackle supply chain costs
The pessimistic phrase ‘it never rains but it pours’ certainly rings true when it comes to the cost pressures staring retailers in the face this year. VAT aside, rising labour costs, raw material costs - for instance cotton and oil-based materials such as nylon - and ever-volatile freight costs will all take their toll. Retailers will continue to move supply out of China in 2011 to escape its rising labour costs, but they will need to plan carefully. The trend to pile into Bangladesh is already causing problems with its inadequate logistics infrastructure, insufficient power supplies and factory delays.
And if those costs weren’t enough, there is the EU’s new and ominously-titled ‘entry summary declarations’ to add to the mix. These must be submitted before goods arrive in the EU and made within prescribed time limits - for sea freight shipments it’s at least 24 hours before the container is loaded at the port. PricewaterhouseCoopers senior manager for customs and international trade Emma Ormond says: “This is causing a great deal of anxiety, particularly for fashion retailers where production schedules are very tight and there is a very real risk that manufacturers will not get consignments to the port or consolidation centre on time.” Consequently, this could lead to an increase in air freight costs if demand is high, warns Ormond.
Despite already stripping much inefficiency out of their supply chains, retailers must dig deeper: “Many could still improve their management of customs duties, for instance,” says Ormond. So look hard for further cost reduction opportunities, but be wary of false economies.
Contend with retirement age changes
A victory against ageism for some, a logistical employment nightmare for others. Either way, the removal of the default retirement age (DRA) signifies a big change to employment law.
Some organisations - not least the CBI - have condemned the move. Deputy director-general John Cridland insists the rules around retirement will become less clear for employers and staff, and the resulting process “less dignified and more complicated”. And any attempt to prepare for it has been hampered by the fact the Government - at the time of going to press - has yet to produce any legal guidance. But prepare for it retailers must. A mere 12 weeks away, after April 6 - six months before the October change - no forced retirement notices will be issued.
Field Fisher Waterhouse employment and pensions team partner Nick Thorpe advises retailers to first decide if they will retain a suggested retirement age. He says: “This may involve, for example, establishing whether different retirement ages should apply to different groups of employees.” Changes will need to be reflected in employment documentation and communicated to the workforce.
Finally, retailers need to be wary about how they actually approach discussions about retirement plans, warns Thorpe. “Following the abolition of the DRA, there is a risk that such discussion may lead to age discrimination or unfair dismissal claims.” It’s all nitty gritty stuff, but overlook the retirement changes this year and retailers could find themselves in hot water.