Thursday November 24, 2022
The UK’s retail sector continues to face strong headwinds. Inflation and supply chain issues are continuing to place pressure on growth, and against this backdrop, consumers are being increasingly selective in their discretionary spending, at what is a typically buoyant trading period in the run up to the festive season.
Here, in the second instalment of our retail sector Q&A, Phil Reynolds, Partner in our Restructuring Advisory team, continues his discussion with retail expert and former CEO of Debenhams Steven Cook, exploring the future of the sector.
Steven Cook: It’s fair to assume that consumers will seek bargain deals and offers this year, but retailers are already incredibly promotionally focused during these typically busy trading periods, and they can only go so far. If retailers funnel too much of their purchasing into certain windows like Black Friday, this can mean a trade-off for later, as it impacts their results over the long-term period.
The cadence of sales at this time of year is usually very prescribed, meaning retailers can adjust their level of promotion or activity to manage their margins through it. But in current markets, it’s very difficult for retailers to forecast for the next six weeks. In the past, retailers may have pushed sales a little harder earlier or lighter later, using historical methodology to help make these decisions. In the current climate, however, that’s not as achievable.
Many retailers saw sales fall sharply at the start of Autumn, and they’ve not recovered since. Retailers need to stay nimble and respond quickly to changes in the market. This includes being light on inventory to avoid becoming stuck with too much stock. In such an unpredictable market, this is a very tricky path for retailers to navigate successfully.
But conversely, a lot of retailers have left the market, so there are more sales going into fewer players than there were a few years ago. This helps existing retailers as it reduces overcapacity in the market, and concentrates consumer spend. Whether this is enough to give the ones that remain an uplift though, remains to be seen.
Steven Cook: Many retailers are struggling with high return rates and its particularly hard to run a digital business from a returns perspective. For example, one leading ecommerce brand currently has a 72 per cent return rate, which is difficult to manage. On the other hand, some omnichannel stores have the upper hand. Some retailers charge a fee to return an item online but offer free returns if the consumer brings the item into store. Encouraging consumers into store to return goods in this way drives footfall and gives the consumer the opportunity to exchange the purchase, rather than just return it.
Phil Reynolds: Retailers undoubtedly need to do something to stem the tide of increasing returns, but it’s very hard for them to move away from the ‘free postage, free returns’ model that’s been in place for so long. Driving footfall into stores where returns are lower is key.
Phil Reynolds: There still remains a lot of capital in the market, with lots of investors looking for sound investment opportunities in the retail sector. A well-performing business that has continued to trade well in a downturn, and has a defensible proposition, will continue to attract investment interest, the strength of the brand will be key.
Steven Cook: For an investor with a medium-term view and time to spare, there are lots of opportunities in the current market. Ultimately, if a retailer is performing reasonably well during this challenging period, their resilience is likely to attract attention. Demand will inevitably return, and the investment landscape will evolve to match.
Phil Reynolds: Unfortunately, we expect ongoing challenges in the retail sector to continue. Heightened uncertainty makes it very difficult for retailers to plan and make an investment case for injections of capital, which will have a knock-on impact on cashflow.
Phil Reynolds: The dip in consumer sentiment after arguably defying gravity for a number of months and ongoing market challenges unfortunately look set to continue.
Against these headwinds, retailers should map out potential risks, put in place multi-layered contingency plans and explore options to streamline their businesses. With consumer spending set to remain subdued for a prolonged period, it’s important that retailers focus on conserving cash and find ways to reduce costs, whilst also being as competitive on pricing as possible.
There’s a heightened possibility that we could see a rise in insolvencies in the sector in Spring, so it’s important that retailers consult their advisers to explore every possible scenario – whether through solvent rescue financing or a strategic and rationalised use of restructuring tools. As a collective, the UK retail industry is renowned for its innovation and success, and with the right support and strategic planning, retailers can weather the storm and bounce-back to deliver sustainable growth.