Three challenges retailers must balance
In today’s trading environment, retailers need to balance three tough challenges:
Unlock growth in mature and competing markets (market share) and find new sources of growth (share of wallet). This comes at a time of convergence across industries, for example consumer health and retail technology
Protect margins while investing in new technology, business models and partnerships to be fit for the future
Ensure compliance with complex regulations and enhance reputation among stakeholders – where being a responsible business is as much about what you should do as it is about what you must do
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Optimisation of the core business requires a focus on the basics – value, quality and convenience – to enhance the customer proposition and drive operational efficiencies. For some, that will mean serving the most valuable customer segments with a better range, pricing and experience. For others, it will be a focus on rebalancing marketing and sales channels, and managing supply chain risks and volatility. However, for all businesses, identifying and embedding cost-out to defend margin and fund new investments will be a priority.
But unlocking profitable growth is also likely to require finding new sources and opportunities. Those able to establish a pipeline of innovations will be able to create a reason for customers to buy (and buy again). That might be diversifying into new product markets, service offering or geographies to capture share of wallet. It also might be exploring vertical integration to capture profit pools across the value chain. Or it could be monetising new business models to create new profit streams or rebalancing corporate portfolios to double-down on differentiation.
Whatever that innovation looks like, it must be informed by deep consumer insights and data analytics. And in an effort to continually innovate, retailers will need to embrace the emerging technologies that promise to revolutionise the sector. Given the competing demands on technology spend, retailers need to explore how to design the right technology strategy to solve pain points for consumers and the business in a way that ensures a return on investment.
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Retail technology
Retail technology has the potential to unlock profitable growth across the value chain, while serving as a source of differentiation for retailers and brands.
Global spend on retail technology is forecast to grow 10% each year between 2024 and 2028, that’s up from 4% across the previous four year period. But what does that investment look like?
Across commercial functions, retailers are investing in marketing and customer engagement platforms, point-of-sale payment solutions, and omnichannel commerce platforms. This all delivers greater customer reach, higher conversion rates, and a more unified experience.
In addition, retailers are using technology within their operational functions to increase profitability during a period of suppressed margins. For example, security solutions to reduce shrinkage, inventory management and demand planning to optimise supply chains, and finance and resource planning to ensure operational efficiency.
With the proliferation of emerging technology (such as AI) and solutions (including enterprise vs. best-in-class), choosing the right technology can be complex, particularly at a time where retailers are choosing where to invest to gain the most value.
“Retail technology is critical to mitigate headwinds in the short-term, and create sources of differentiation and value in the longer-term. There are opportunities right across the value chain, with technology giving retailers the ability to revolutionise their approach, adding simplification and efficiency to cut-out cost while improving the customer experience.”
Sam Farnfield, Director, Strategy& UK, PwC United Kingdom
Cost-out for growth
Tight margins and a need to find funding for investment means cost reduction has been front-of-mind for retailers for some time. With the Autumn Budget further exacerbating cost challenges through increases to the national living wage and NIC contributions and changes to the Employment Rights Bill, it has become an area of even greater focus.
However, when done right, cost management will support long-term growth.
The stumbling block for many is a focus on short-term cost reduction, which doesn’t then allow for the continued investment needed to drive revenue generation opportunities. A more effective approach is pinpointing resources where they can deliver the most value (‘good costs’), while cutting out effort and less valuable resources (‘bad costs’).
This requires a rethink of what areas of the business are primed for revenue generation and growth and the associated costs and capabilities needed to support this. The costs from non-core areas can be taken out and reallocated to where they can create value.
Think carefully about how your business might change over the next 6-12 months: Will there be a change in business size? A change of channel approach? Will the business look to pursue growth or consolidation?
Ongoing cost management requires continuous reallocation of the right resources to the right places, so retailers can use this opportunity to focus on their strategic imperatives and make cost savings in areas that they may have previously thought untouchable.
“The retail sector already operates on an exceptionally lean basis, so the risk is that those businesses who cut too dramatically – particularly in areas such as technology – find themselves left behind when it comes to capitalising on future growth. Retailers are therefore increasingly turning to technology to create efficiencies for the long-term, while ensuring their customers receive the same – or an enhanced – customer experience.”
Claire Fox, Partner, UK Transport and Logistics Lead, PwC UK
Balancing priorities across the supply chain
Supply chains are most successful when they enable retailers to respond to consumer behaviours accurately. But with competing priorities: balancing cost, building resilience and meeting sustainability targets, what should retailers prioritise?
Taking a holistic approach can reframe the once-competing priorities of cost, resilience and sustainability into complementary considerations. By putting data at the heart of decision making, retailers can build these priorities into their broader business strategy and pivot from cost to growth.
While any strategic evolution of the supply chain may prove more expensive in the short-term, it will avoid an operational breakdown in the event of a future disruption, creating greater security, providing long-term savings and avoiding reputational damage.
“Early planning and flexibility are key to adapting to unforeseen challenges and ensuring supply chain resilience and reliability. A focus on accurate demand forecasting, diversifying suppliers to mitigate risks, and implementing real-time inventory tracking will remain essential. As will building strong relationships with logistics partners and optimising warehouse operations to help maintain efficiency and certainty of supply.”
Richard Pugh, Director - Deal strategy and operations, PwC UK
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