Friday November 24, 2023

How will retailers fare in the final months of 2023?

Amid a tumultuous period for British retailers, many will be hoping that this year’s Black Friday shopping extravaganza will encourage consumers to loosen the purse strings and bring some much-needed relief for the sector.

Indeed, with inflation having now fallen below 5%, there is a cautious optimism that improved consumer confidence will contribute to a positive end to 2023. But, while pressures on household budgets are beginning to ease, costs for everyday essentials like food remain high – squeezing discretional spending. This outlook was reflected in last month’s figures from the British Retail Consortium, which showed that UK retail sales growth slowed to an annual rate of 2.5% last month, a further reduction from 2.7% in September, and well below the 12-month average of 4.2%.

As a sector, retail is well known for its resilience, ingenuity, and flexibility – characteristics it will need to draw on heading into 2024.

Some businesses have already taken active steps to pass on escalating costs to customers. For others though, price increases simply aren’t a viable option as there is only so much customers will pay for certain goods – particularly when household budgets are already stretched. However, customers are often willing to pay more for goods if it means they gain more in return.

Where retailers can’t add this in terms of the physical quality of the products being sold, they should look to add value through other experience or tech-led means, such as combining clothing ranges with virtual styling services. Not only can this help to justify price increases, but it can also help to improve a brand’s competitiveness over the longer-term.

Equally, steps such as interrogating supply chains, streamlining operations, enacting organisational change, and adjusting product suppliers or, at the least, extending terms with existing ones – can all bring benefits.

Switching suppliers isn’t a decision that’s typically taken on price alone, but in clothing for example, retailers may consider onshoring and nearshoring suppliers, both to help improve the resilience of their supply chain and to become more responsive to changes in the market. Likewise, with contract negotiations, it’s important to have a clear understanding of supplier terms and maintain a healthy supplier base, as the failure of just one key supplier can be incredibly damaging.

Input costs

One of the biggest concerns for retailers in the current market is their energy bills so it’s imperative that retailers review their existing arrangements ahead of the Government’s Energy Bill Relief Scheme tapering off next March. This, alongside wider measures such as lowering the temperature in stores and distribution centres, investing in more energy efficient heating options like electric heat pumps, and turning down the lights in store can all help too.

Some retailers of course, may also be considering reducing their footprint of physical premises, as less bricks and mortar means significant cost savings. But, if reducing a high-street presence isn’t feasible, the focus should be on ensuring that retail estate is aligned with the business’ long-term strategy, while being as cost-effective as possible.

And finally, retailers should also consider renegotiating revised terms for the repayment of debt. While for some, this will be strategically important, it may also pose future financial hurdles to overcome if the cost of serving debt rises as interest rates are reviewed. Some retailers may also find it prudent to defer their VAT and tax obligations, with time to pay arrangements something that HMRC will consider given the right circumstances.

Whether this year’s Black Friday event signals the start of a strong festive trading period remains to be seen. Looking beyond it, retailers will need to have a clear plan that is flexible and responsive, with multi-layered contingencies, to respond to further changes in the market in 2024.