10427 The Retailer Autumn 2018_Final Draft Pages

Retail Health Check: key warning signs to look out for


“IS YOUR RETAIL BUSINESS THRIVING OR SURVIVING? A CLOSER LOOK AT THE WARNING SIGNS AND OVERALL HEALTH WILL REVEAL ALL.” Over the past year alone, we’ve witnessed numerous retailers’ financial performance deteriorate rapidly. Indeed, even some established retailers which have been trading with no visible problems have encountered severe financial distress in as little as six months. Just a quick glance at the business headlines today will point to the fortunes – or lack thereof – within the industry, whilst the latest BRC-KPMG Retail Sales Monitor in September pointed to the weakest sales growth in five months, reinforcing the uphill struggle. In a departure from recent years though, some companies experiencing underperformance are simply running out of cash, as lenders and other providers of finance shy away from an industry facing such strong headwinds and ongoing structural change.  The reasons for this current round of underperformance are complex and varied.  Going beyond weak sales growth, some parts of retail are more exposed to economic headwinds as consumers tighten their belts. Meanwhile, others are simply feeling the effects of poor strategic decisions, or the poor execution of those decisions. There are countless examples of retailers having poured significant investment in improving and expanding their online presence. The outcome is frequently an impressive website with an enhanced range that offers customers a variety of delivery options (often with free returns) at competitive prices. Such focus online is obviously understandable, but it too presents challenges. For one, retailers must ensure profitability, but they also need to maintain enough focus on the legacy business so that it doesn’t become part of the problem.  If a company fails to balance these, a profitable business can quickly become a loss making one. From my experience with clients, the key commonality among those bucking the current downward trend, is those businesses that continue to be proactive in addressing upcoming issues head on  – whether fully visible or not.  We all know that sticking your head in the sand doesn’t make the issue disappear. Indeed, failure to act or underestimating the significant impact of change, is a high risk strategy in any industry. But in light of the rapid pace of change within retail specifically, staying one step ahead of change needs to be considered as the first move towards recovery. So what do retailers need to look out for and what options are available?

Disruption in any market is unavoidable and the retail sector is by no means immune. Technology is advancing, consumer trends are evolving and the competition from emerging businesses or brands continues to rise – it’s often hard for retailers to keep up, let alone lead the pack. All the while cost pressures have increased – in part the result of an adverse economic environment – taking their toll on cash flow and profit margins. It’s little surprise that even increased sales don’t always equate to healthier profits.  Being able to identify the early warning signs of financial distress is naturally crucial, but today this is equally as important for businesses trading profitably as it is for those facing imminent distress. There really is no room for complacency. Whilst no two retailers are ever the same, unavoidable cost increases often span all players in parallel, whether it be minimum wage increases, business rate changes or additional compliance costs. All of these cost increases will impact margins, but importantly can be seen coming down the tracks, allowing action to be taken. Meanwhile for others, lacklustre interest in products or services, or added competition in a specific market may tempt some to slash prices, thinning margins to perilously low levels. But this isn’t sustainable and may require retailers to reconsider their offering or business plan more broadly.  Whether it’s deteriorating sales, endless discounting, declining margins, or the general direction of the economy, there isn’t much room for manoeuvre these days, so retailers have to sit up, take note and most importantly take action. Prolonged poor performance could result in a loss of trust with key stakeholders, withdrawal of credit insurance, or issues with a key distributor – all sealing a retailer’s fate before options have even been explored. For some players in the market, remaining agile in these changing and challenging times might require a full review of the business model and customer offering. This is no easy task for a legacy player, but often a fresh look may unveil renewed thinking and an alternative way to target the market – whether that’s looking to ecommerce or joining forces with a disruptor. For others, action might entail looking more closely at costs with a view to carrying out a rapid cost reduction. As mentioned earlier, technology continues to evolve quickly, so often a business’ inability to compete on price is in part the result of inefficient technology holding them back. This is particularly true when you’re comparing yourself to the latest ‘tech’ newcomer on the block.

30 | autumn 2018 | the retailer

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