Challenging times present opportunity to embrace new practices

2022: a year in review

After two years of Covid-19 the pent-up demand for spending was unleashed in the first half of 2022 as consumers’ confidence led them to hit the high streets and spend on both goods and experiences, with holidays high on the agenda for many shoppers.

Despite this exuberance there was a nagging feeling that such a spending spree might not stack-up. Sadly, these worries were fully realised when consumer sentiment went into reverse mid-way through the year as the macro-economic environment soured and the county was hit by inflation on food costs, rising energy bills and mortgage rate jumps, creating a cost-of-living crisis. 

Moving into the crucial golden quarter there was a subdued feeling as consumers started to eat into their savings to fund their general living costs, denting the prospects for retailers. Barclaycard 2022 consumer spend data shows utilities spending increased a hefty 32.9% and the total amount spent in retail was down -0.8%. Interestingly, volumes of card transactions were up 5% indicating that shoppers were using smaller basket sizes as a way of keeping better track of their budget amid the cost-of-living squeeze. 

The pandemic had a lingering impact on the sector over the year. E-commerce pure-plays had traded strongly in 2021 on the back of physical stores being locked down during Covid-19 but post-pandemic they not only suffered from the high street reopening but also from many physical retailers having created strong online operations during the pandemic. Their omni-channel models have proved increasingly popular with consumers who want the flexibility to purchase goods when, where & how they want. Options such as click & collect have increased rapidly and this trend looks set to be a major feature in 2023.

Research shows as much as 50% of overall sales involve an online interaction at some point in the shopper’s journey. This embrace of hybrid shopping journeys has seen physical stores very much take centre stage and has been helped  by some specific factors including: the perception that there is potentially a bargain to be had on the high street; the ability to avoid charges for deliveries and returns; the return to the office by many people, enabling them to pop into stores for click & collect orders; and the ability to use cash in stores helping people to better manage their budgets compared with using payment cards.

There are still positives to take from a difficult year. Early indications suggest that the sector had a more positive Q4 and Christmas period than predicted. Additionally, it is encouraging to see the continued agility with which retailers have been able to adapt their business models. The experience they gained during Covid-19 certainly stands them in good stead for 2023 and beyond.

Looking to 2023 

There are some glimmers of hope as we start 2023. December sales were generally better than expected and confidence in household finances rose slightly to 61% in December (from 57% in November), and whilst confidence in the strength of the UK economy remains low it remains steady at 18%. Whilst the capping of energy bills for households until 2024 and the Energy Bills Support Scheme, will help confidence, consumers will be looking for signs that costs such as mortgage rates, food inflation and fuel have peaked to commit to increasing their discretionary spending power. 

One cost retailers can’t afford to ignore is energy prices. The latest Government energy support package for UK businesses will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. All businesses are likely to see a rise in costs although energy-heavy sectors will see higher discounts available. In the short term, cash and profits could be impacted and some businesses may look to increase prices or reduce costs to try and maintain margins. 

Whilst investment in longer term solutions comes at a cost, for many retailers this will already form part of a key strategic priority to look at how they can future-proof their running costs by developing a more sustainable/renewable approach to their energy consumption. 

Energy prices aren’t the only rising cost retailers are seeing. Wage inflation is an area that has needed careful management. Headcount is being right sized to meet consumer demand and automation is improving efficiency which is pushing down the demand for labour and may reduce the pressure on employee costs.

Another feature right now is the continuation of the work retailers had been undertaking on their supply chains during last year, which has seen them move towards more on-shoring, shorter product runs, and a more careful focus on where products are sourced. The opportunity here for retailers is that such actions not only help them deliver improved efficiency but again, are also closely aligned with sustainability agendas.

There is also an opportunity for retailers to transition to more integrated omni-channel models with data running seamlessly around their businesses. Our recent report, What’s in store for retail found that only 32% of retailers believe their businesses are sophisticated when using data, which certainly suggests there is much upside to be had from being more data-centric.

Many retailers have physical stores, online platforms, and other touchpoints like click & collect but these are not tied together via a single stock management system with clear visibility of inventory across the various channels. The reality in 2023 is that retailers must deliver what customers want – how, when and where they want it – and this increasingly demands an integrated organisation operating across multiple channels. While there are clearly challenges ahead there are also many opportunities for those retailers that embrace the changing marketplace.

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