Retail: fine margins
Our latest report examines the current state of play in the retail sector and how retailers can survive critical challenges
These are incredibly turbulent times for retailers. Rising inflation is pushing up operating costs and dampening consumer-spend. A looming recession – shallow or otherwise – is set to keep consumer confidence depressed for some time to come.
However, against such a dynamic backdrop and strong headwinds, the retail sector has been working hard to adapt – demonstrating once again its resilience, ingenuity and flexibility. With conditions set to remain challenging, we commissioned this report to pinpoint where the sector’s likely biggest pressures lie in the months ahead – and, crucially, what steps businesses are planning to take in response.
The findings highlight just how the sector is adapting, and provide some food for thought as retailers consider their strategies for resilience and growth through 2023 and beyond. We hope you find them useful.
To better understand the outlook of the industry, we spoke to 250 senior decision makers working in retail businesses ranging from fashion, home and DIY, to grocery and electricals. While the economic picture continues to change, they paint a picture of an industry in flux.
%
Of retailers say energy costs have had the biggest impact on profits.
%
Almost three-quarters of retailers expect to come under pressure from creditors.
%
Of retailers have grown their margins in the last six months.
The state of play
Given the extraordinary pressures facing retailers, how are firms’ margins and cash positions holding up, and what steps have they taken to improve their position so far?
Our data indicates that firms are taking bold and robust action to protect their margins. This is vital at a time when two thirds (66%) of retailers tell us that their operating costs have increased over the past six months.
It’s no great surprise to learn that the biggest margin pressures from a cost perspective during the last six months have been energy (60%), wholesale costs (40%), labour (35%), shipping costs (35%), warehousing costs (22%) and foreign exchange (22%). They have also seen margins eroded by consumer demand (26%).
Have your margins increased or decreased, on average, over the past six months?
Steven Cook: Former CEO of Debenhams
“This is certainly the most volatile market I have experienced in my career to date.
“While some businesses at the upper end of the market are continuing to show a steady increase in sales, there remains a great deal of pressure on mid-sized businesses and the smaller end of the market.
The impact of inflation has significantly increased the price of food and packaged goods, while imported apparel and footwear have been less affected, for example.
“Alongside this, return rates are skyrocketing for digital businesses, fuelled by the growth in online shopping, and more consumers choosing to return goods shortly after purchase. It’s fair to assume that consumers will seek bargain deals and offers this year, but retailers are already incredibly promotion-focused and they can only go so far."
Steven Cook in discussion at the FRP Breakfast Club event in March 2022.
Challenges and opportunities
The financial pressures on consumers look set to continue through the year ahead, but it’s reassuring to hear most retailers say that margins are holding up and that they expect to weather this storm.
Overall, almost nine in ten (85%) of those we surveyed said they were confident of trading through the next six months. However, the only thing you can say for certain about a forecast is that it is not going to be absolutely correct. The key is to have a plan that is flexible and responsive, with multi-layered contingencies, so that retailers can move quickly to respond to further changes in the environment – both positive and adverse.
The coming months won’t be without their challenges. But we’re confident the sector will continue to identify and capitalise on the opportunities among them.
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Examining the future of retail: Q&A
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