How retailers can boost resilience and returns in another hard going year ahead

With inflation easing and more money in shoppers’ pockets, consumer sentiment is on the rise after stalling over the summer. But consumers aren’t yet ready to loosen the purse strings and some retailers are better equipped than others at attracting this cautious spending. What are the reasons to be cheerful and fearful in the year ahead? What does it take to be a winner in this era of ‘considered consumption’?

By Mark Anderson, Forensic Services Partner, Supply Chain Resilience Leader,
Zelf Hussain, Restructuring and Insolvency Partner and Jane Steer, Mid-Market Partner, specialising in restructuring

The January headlines were dominated by the dismal close to 2023’s Golden Quarter as monthly sales volumes saw their largest fall since the height of lockdown^[1] in January 2021. February brought better news as sales rebounded at the start of the year^[2]. But look behind these see-sawing results and a more nuanced story emerges. Some retailers are struggling, but others are doing well, with performance varying markedly across different retail segments and the companies within them.

Food has fared better than non-food. Within grocery, some high-end food retailers stood out during the Christmas season as they tapped into the demand for centrepiece treats. Hospitality lost out as many people chose to spend their money on entertaining at home rather than in a bar or restaurant.

Avoiding temptation

If we look at non-food, it’s been an especially tough winter for companies selling furniture, jewellery and other expensive items. Some people do have a lot of surplus cash, especially older consumers who’ve paid off their mortgages and aren’t facing the same cost-of-living strains as others. But many are opting for holidays over homeware now that the confines of lockdown are behind us. They’re also spending more on food, health and beauty products rather than being tempted by the costlier allure of big-ticket luxury goods.

Reasons to be cheerful and fearful

Looking to the year ahead, there are optimistic signs, though some of the good news in areas such as wages and inflation could prove to be a double-edged sword.

Inflation is much lower than a year ago and interest rates could begin to come down as a result. But price rises have buoyed retail revenues and masked the dips in sales volumes. Retailers won’t have this inflationary prop in 2024.

With wages rising faster than prices, and wallets swelled by the cut in National Insurance, people have more money to spend. The boost is reflected in the bounce back in confidence in our January Consumer Sentiment Survey. At –4, sentiment is just above the long-term average.

But with the economy in recession and concerns over job security rising, discretionary spending will continue to be squeezed. Consumers want to know they’re getting value for money. It’s telling that a leading grocer decided to forgo the usual Christmas advertising and pass the savings on in lower prices. But the move would appear to have backfired as this was one of the companies to suffer a disappointing Golden Quarter.

In another instance of how the trends ahead can cut both ways, higher than inflation pay rises are depleting the already thin margins within many retail businesses. In April the national living wage will go up by nearly 10%^[3], adding to the pressure to strengthen productivity and cut costs.

Insolvencies on the rise

The fragility in the retail sector is reflected in the rise in insolvencies in 2023^[4]. Most of the retailers that have run into trouble are small and mid-size enterprises (SMEs) with less than £1 million in turnover. But the collapse of Wilko in 2023 and Body Shop’s move into administration in 2024 show that larger chains aren’t immune to the impacts of today’s tough trading environment.

Expect the unexpected

The threat of supply chain disruption continues to hang over the retail sector. As geopolitical instability mounts, emerging concerns include a potential shortage of black tea following the diversion of shipping away from hostilities in the Red Sea.

With more than four billion people going to the polls around the world in 2024^[5], the risks of divisive campaigns or contested results are adding to this uncertainty. The possibilities of a hung Parliament in the UK or another challenged result in the US are likely to be high on the list of potentially destabilising outcomes. But problems in any of the 60+ countries holding elections^[6] in 2024 could affect supplies within today’s highly interdependent global economy.

Even greater threats come from the largely unexpected Hamas attack on Israel in 2023 and its continuing fallout.

Moving out in front

So there is a fine balance between the reasons to be cheerful and reasons to be fearful in 2024. But some retailers are delivering much better results than others. What’s the winning formula? Five priorities stand out:

Stimulate demand

The cash is there. But it’s harder than ever to extract.

The most successful retailers have been able to stimulate demand by keeping customers close, running effective advertising campaigns and encouraging people to prioritise (and spend on) quality.

Looking ahead, it’s important to target pockets of consumer resilience such as older and wealthier consumers, anticipate changes in demand and explore new routes to market across multiple channels.

Embrace partnerships

You don’t have to do it all yourself. Joint ventures and acquisitions can help you to broaden your offering and bridge capabilities gaps.

While the big names have been able to leverage their scale and reach, partnerships could help smaller competitors to reach out to new customers and close the gap. The openings include establishing a presence on the multi company platforms being hosted by companies such as Next and Marks & Spencer.

Harness tech to take out costs

Digital transformation offers opportunities to offset rising pay costs and compete more keenly on price without eroding margins.

As the findings from PwC UK’s CEO Survey^[7] highlights, retail leaders are looking to generative artificial intelligence (GenAI) to take productivity to the next level – nearly two-thirds believe it will improve the efficiency of their workforce over the next 12 months.

Don’t get burned

With global instability heightening supply chain vulnerability and consumers quick to punish ethical and environmental lapses, effective due diligence, market intelligence and scenario planning are more critical than ever.

The obvious pinch points are well documented and planned for. What’s often lacking is a clear and comprehensive map of less visible risks – unacceptable labour practices in a supplier’s supplier or breakdowns in supply following political turmoil in one of the countries holding elections this year, for example.

Ultimately, you can’t foresee every threat, so resilience in the face of shocks is critical. By scanning multiple sources of data and feeding back in real-time, the latest advances in AI allow you to pick up on potential threats much faster than conventional techniques.

Respond early and consider restructuring tools

With finances under strain, it’s important to understand the vulnerabilities facing your company in areas such as working capital demands and how to respond before it’s too late.

This proactive approach will not only strengthen resilience, but if required also put you in a stronger position to negotiate with creditors and secure refinancing.

The accumulation of case law and practical experience is helping to create a playbook for restructuring plans making them more accessible to SMEs. Company voluntary arrangements (CVAs) also continue to be a powerful tool for retailers. To make the most of the potential, it pays to act early and road test options with stakeholders, and as the recent Adler judgement highlighted, the courts won’t look favourably on companies that come late with their restructuring plans and don’t allow sufficient time.

Find out more

While 2024 looks set to be another subdued year, retailers that can seek out and stimulate demand while bolstering planning and resilience will be in the strongest position to succeed.