Harnessing retail resilience
Friday November 10, 2023
How can UK retailers remain resilient and flexible in such challenging conditions?
The global shopping phenomenon of Black Friday and Cyber Monday have transfixed consumers across the globe in recent years. With headline-grabbing promises of discounted goods and product-specific deals, the herculean retail events have grown to fulfil the needs of the most discerning shopper.
However, with the retail sector’s golden quarter now in full swing, a new annual event has been added to the calendar in the UK.
Singles Day, held on 11th November, is a celebration of people who aren’t in a romantic relationship and has quickly evolved to be one of the world’s biggest shopping events. Launched in 2009 by Chinese e-commerce platform Alibaba, it encourages single people to treat themselves to a much-wanted gift. Last year, UK sales on the day were forecast to reach £1.97 billion – a 15% increase on the prior year.
Unsurprisingly, it’s now caught the attention of UK retailers – many of whom will be hoping that this relatively new tradition could help to alleviate pressures resulting from one of the toughest trading periods in recent history. Indeed, while it has the potential to take attention and vital marketing and promotional spend away from Christmas initiatives, like Black Friday it also has the clear potential to kickstart sluggish sales.
Latest ONS figures show UK retail volumes fell by a further 0.9 per cent in September compared with the previous month, as consumers continue to cut back on spending because of escalating cost of living and consecutive interest rate rises. And, while retailers are known for their ability to adapt to overly challenging conditions, the demise of another high-profile casualty like discount retailer Wilko, only serves as a stark reminder that no one is immune.
So, against this dynamic backdrop and strong headwinds, what steps should retail businesses be taking to remain resilient and best position themselves to capitalise on seasonal trading?
Passing on costs
For many, the best and most clear way to improve or grow their cash position includes price rises for customers (both direct and via wholesale/distributor channels). However, as the cost-of-living crisis continues to bite, there is only so much that some customers will pay for certain goods, and so far that household budgets will realistically stretch.
That said, we are now seeing consumers prioritising perceived or actual value for money in their purchasing decisions. Many are willing to pay more if it means getting more in return. Where brands can’t add this in terms of the physical quality of the products being sold, they may have success by adding value to their product in new ways – for example, combining a clothing range with a virtual styling service. This can help justify price increases and even contribute to a product’s competitiveness in the long-term.
Some retailers will also be looking to extend suppliers’ payment terms or to switch suppliers completely. But switching suppliers won’t just be a decision taken on price – in clothing retail, for example, we’ve seen a clear trend in brands onshoring and nearshoring suppliers to improve their supply chain’s resilience, and to help become more responsive to changes in the market.
Likewise, when it comes to contract negotiations, it is essential that retailers have a clear understanding of suppliers’ terms – which can be complex and take a variety of different formats – and that they strike a deal that meets the needs of both parties. A healthy supply chain is essential, as a failure of a key supplier can be incredibly costly and no retailer wants empty space in their stores. In terms of supplier relationships, there are a limited number of situations where it may be beneficial for businesses to absorb short-term costs in exchange for better future terms or conditions. For example, when agreeing to a price rise with a new supplier, brands could make it contingent on receiving privileged service levels going forward.
R&R: Rents and returns
And finally, two of the biggest challenges for retail this Christmas will be rents and returns. Both these factors are strategic focuses as they represent significant cost challenges and are symptomatic of tectonic shifts in the retail landscape – driven by consumer habits.
In an increasingly digital retail landscape – and faced with soaring costs in areas like energy – many brands have taken steps to consolidate or adapt their bricks and mortar presence, and there will be more consolidation of physical premises – including retailers’ back offices – ahead. But for those for whom the high street remains a core part of their plan, it needs to be as cost-effective as possible and managing rents will be a critical part of this.
Some tenants will resist turnover based rents as they seek to protect detailed financial information, as well as avoid it costing them more in the long run, but there’s also an administrative burden that landlords would rather avoid. Indeed, many landlords will have bundled their portfolio and used it as a securitised loan package, for example, where they have a set yield to pay. Having a fixed income is therefore more attractive to them than a variable one.
For any retailer looking to negotiate rents, there are some essential principles to keep in mind. When it comes to negotiation, being open and transparent is key. Tenants’ requests for concessions need to be realistic, grounded in facts and not threaten the landlord’s solvency. It is important for tenants to give landlords options where possible. Offering a menu of acceptable potential solutions such as downsizing or extended leases rather than trying to second-guess the landlords’ intentions is fertile ground for sustainable compromises.
Having a robust cashflow forecast and detailed analysis of financials is also important. If a brand is needing to reduce rents due to financial distress, these will evidence why concessions should be made by the landlord. If a new deal is being negotiated, they demonstrate that a brand can meet its commitments. Restructuring Plans in the retail space can be used effectively as a super-charged alternative to the well-used Company Voluntary Arrangement as retailers seek to reshape their store portfolios quickly and with more certainty.
But above all, where there are signs of distress, it is essential that retail management teams seek advice and support early. Those that do will be in the best position to take any corrective action and safeguard their future.
Many retailers will be hoping that this relatively new tradition could help alleviate one of the toughest trading periods in recent history.Phil Reynolds Restructuring Advisory