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What is happening in the Retail Sector?

06744 CC Trader Talk V2

Lately, a vast number of retailers have either downsized or filed for insolvency. These include major retailers such as, House of Fraser, Mothercare UK, Forever 21 and Debenhams, amongst others, with many other retailers reporting a lower than expected profitability during this year.

The retail industry is continuously changing and is facing rising costs, coupled with lower pricing power, which are negatively affecting profitability margins. Retailers are facing new competition with different cost and operating models, which is imposing structural changes in traditional retail business models. Those that are falling behind are facing the axe, with a substantial number of retailers closing down branches to save on costs.

What are the major challenges for retailers?

Market demand is continuously changing, not only due to traditional seasonal effects, but also due to constant changes in customer expectations. Technology together with consumers’ habits are rapidly changing, as could be seen through the upward trend for online shopping.

Current global economic and political pressures are weighing down on consumer confidence and this in turn is affecting the market demand for retail shopping. Retailers face challenges in effectively managing this demand volatility and their cost base, to minimise the effects on the profitability margins.

With the increased competition and extremely low switching costs, customer retention is increasingly becoming more difficult. Apart from the mainstream advertising, consumers are progressively leaning towards retailers who are offering a personalised experience and information tailored to their needs.

Leasing costs are continuously rising for in-store retailers. This has been experienced locally, where in the last five years the local property market surged upwards and is currently continuing on its upward trajectory.

Major retailers have complex operations, and accordingly good internal communication is essential. This is combined with the challenge of retaining employees, with retail being one of the industries with the highest employee turnover rates. Replacing employees is both costly and timely, which further adds pressures to the retail business model.

In today’s world, an effective and efficient technology platform, which enhances automation, is vital for the long term going concern of a retailer. Finding the best solution is no easy feat, and those falling behind are losing out to their competitors. Labour skill shortages add to the problem, which emphasises the importance of employee retention and the acquisition of the right skill set.

How the industry leaders are benefitting?

Those retailers who are offering product differentiation are benefitting from increased market interest. Smartphones apps became the new norm, and any major retailer not invested in this area is gradually being phased out. Retailers with differentiated product offerings such as Amazon Prime are profiting from increased customer base and loyalty.

The general trend in the retail industry is a focus on driving greater returns. These include, cutting store costs and overheads, and automating processes and improving the workforce. Those retailers heavily invested in these technological areas, such as the retail giants Amazon and Alibaba, are benefitting from economies of scale and making the retail market even more completive.

In today’s ever-changing marketplace, only those creative enough to outpace the market are benefitting from this industry shift. If retailers are to remain relevant in the fast moving world of modern retail, innovation is a key aspect.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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