Retailers that put all their eggs in the basket of defying the gravity of industry volume decline will find the going tough and likely put their balance sheets under significant pressure, maintains OC&C’s Matt Coode

As the dust settles on peak trading, the column inches will be devoted to the retail industry’s top-line trading performance. 

Indeed, the winners and losers will be defined to the outside world by market share and sales growth over the golden quarter. 

Early indications suggest that, for many, sales performance will have proven resilient relative to expectations.

But do not be surprised if Christmas trading is not a perfect barometer for retailer health as we enter a sobering trading period through the first half of 2023. 

The British Retail Consortium has indicated that retail sales in the first half of the year will grow between 1% and 2%, while the latest consumer price index forecasts appear to be converging on 6% to 8% inflation – leading to a 5%+ real decline in sales and pronounced volume compression. 

The Confederation of British Industry reported in late December that forward-looking supplier orders are falling approximately 20% per month as the industry prepares for this challenge and continues to grapple with high stock levels.

“The retailers that most adeptly weather the storm will have a clear sense of their cost to serve and how to best insulate, and even grow, their margins through unpredictable and volatile conditions”

While not disputing that maintaining a focus on resilient top-line performance is a valid obsession for retail leaders as we navigate 2023, it will not be anywhere near enough. 

The retailers that put all their eggs in the basket of defying the gravity of industry volume decline will find the going tough and likely put their profits and balance sheets under significant short-term pressure.

The 2023 profit fight will in fact be won on the less visible and – to some – less sexy battlegrounds of operating model resilience and agility. 

The retailers that most adeptly weather the storm will have a clear sense of their cost to serve and how to best insulate, and even grow, their margins through unpredictable and volatile conditions – right-sizing on the down swing and being fast to seize the opportunity from the anticipated volume recovery that follows as we enter the autumn.

The winning operating models will strike the right balance on four key dimensions:

Deliver agility without margin compression

Winning retailers are organising themselves to react faster and in a more agile way through their end-to-end operating model without this leading to inefficiency and margin sacrifice.

This may be through shortening critical path processes, having better volume forecasting, shifting to smaller-batch, higher-frequency ‘drops’ through their supply chains or having the ability to responsibly manage markdown and clearance at the shelf edge.

Zara has historically been the poster child for delivering on this but we have seen rapidly growing sophistication across a broad set of mass and discount retailers over recent years.

Lean harder on tech without being at mercy of ‘blackbox’ decision-making

Over the last five years, we have seen unparalleled investment in the technology infrastructure of the retail industry.

But we have also seen only a fraction of the value realised from these foundations as retailers continue to learn to drive their new ‘high-performance’ vehicles. 

Now is a critical moment for retailers to lean on automation and technology to make the pace of decision-making more accurate, faster and cheaper by re-evaluating the role of in-store technology, 3D fit and design tools, and harnessing RFID, product lifecycle management, allocation and replenishment tools.

We’ve seen progressive thinking in this area from businesses such as Sephora, Lidl and Media Markt.

Shift fixed costs to variable without losing tight business ownership 

Retailers are choosing to lean more on third parties to bear the strain on key elements of their operating model – be it empowering suppliers, integrating third-party technology solutions or outsourcing elements of their supply chain and distribution. 

It is, however, critical that these decisions are taken carefully and not at the expense of control over the consistency of quality of the offer – and therefore are pursued strategically rather than as a knee-jerk reaction to cost pressure.

We’ve seen significant advances here, particularly in grocery, as illustrated by Carrefour’s strategic partnership with Google.

Invest in a secure supply base without creating inflexibility

Rather than ‘trading’ their supply base, winning retailers will be proactively managing and investing in their suppliers to ensure continuity and security of supply, while providing suppliers with the security to invest in the technology and capability that will make them more agile and effective. 

We particularly see diligent and deliberate supplier management as a critical enabler of supporting rebound growth and maintaining momentum against ESG agendas, while weathering near-term volume pressures. We’ve seen businesses such as Starbucks and H&M innovate in this field.

None of these changes are trivial and, indeed, can’t be switched on overnight. But robust and fit-for-future operating models will not just be an essential ingredient of resilient performance through the tough times of the next six months – they also set secure foundations for long-term success. 

Consumers will remain fickle and expect ever faster retailer reaction times, sustainability agendas will continue to mature and place the spotlight on traceability, and the industry faces an increasingly acute need to compensate for a chronic shortage of good quality talent in critical functions like merchandising. 

So it may be that while we will not look back on H1 2023 fondly, we will remember it for being the catalyst to an enhanced level of retail efficiency and agility that sets the industry up for a more robust and profitable future.

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