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Interesting times for the retail sector

Things are destined to get pretty tough.

Photograph: Getty Images

The expression “may you live in interesting times” is seen by the Chinese as a curse; interesting is not seen as a positive but, rather, is equated with disorder, problems and trouble. Such a sentiment will probably ring true with retailers next year: as fascinating as the market is from an analytical point of view, there is no denying that things are set to get pretty tough.

This view reflects several a numbers of current and upcoming challenges which are stacked against the retail sector.

Foremost among them will be a complete absence of overall real sales growth. While official headline figures may continue to profess to a market that is growing, albeit anaemically, all of that growth will likely be driven by inflation; by the time this is removed, retail volumes will shrink strongly. In other words, we will all be buying less which means the spoils of consumer spending will be spread more thinly.

In many ways retail sales will be a symptom of the underlying issues, they will reflect the fact that the whole economy will remain in stasis, that consumers will continue to lack the confidence to go out and spend, and that unemployment and poor wage growth will have left many household budgets more squeezed than they have been in decades.

In addition to the above, more specific factors like fuel prices - which have come down from their record high but are likely to remain elevated – will unhelpfully change the way we shop: reducing visit frequency and deterring some from driving long distances to out-of-town centres. Equally, it is difficult to foresee an uptick in the housing market which will likely continue to remain depressed, dampening demand for DIY, furnishings and floorcoverings.  As transient as these things may yet prove to be, they will remain decidedly unhelpful to a struggling retail sector in 2012.

As demand slows, the room retailers have for manoeuvre becomes narrower. For example, many would like to increase prices to make up for hikes in the cost of doing business, but most simply won’t for fear of losing custom and share in a market that will remain increasingly price sensitive.  As a result, quite a number of players will continue to report squeezed margins and profits.

While all of this makes for gloomy reading, the truth is that these austere circumstances will reshape the retail sector and the process of reconfiguration is a painful one. The current shape of the sector – the number of shops, the amount of space, the way retailers do business – is one that was created to reflect the demands and needs of the last ten years. Things have now changed and a more muted demand environment means a new shape is required. Some of the things retailers need to be thinking about, include:

  • Rebalancing and optimising their store portfolios for the multichannel world; thinking about how many stores are really needed to reach customer and what those stores are there to do (inspire, act as a point of transaction or collection, etc.) is critical.
  • Adding value to the retail offer to ensure that customers are given compelling reasons to buy; lacklustre offers will increasingly be forced to compete on price, which is a poor differentiator and will serve only to erode margins.
  • Keeping close to customers in order to engage them and win their loyalty; with many shoppers buying less frequently, it is important for retailers to keep themselves foremost of mind.
  • Marketing through emotion and excitement; it is increasingly important for retailers to connect with consumers on an emotional and not just a functional level – consumers need to be cajoled and convinced into buying things, and emotion sells.
  • Personalising the offer and the experience; this means that retailers really need to understand consumers’ needs and desires and then translate this into all aspects of their proposition, especially within the online selling environment.

So in many ways 2012 will be a year of evolution. And just like evolution, the process of change will create casualties – some retailers have already died out, others will follow – but, longer term, it creates winners too. Those that adapt will survive and could even come out of the process stronger as a result. Some retailers have already started on this journey which is why, among the gloomy trading updates, there are occasionally chinks of light.

What do these players do to stand out? Quite simply they think, they innovate and they respond. In other words, they have interesting responses to our interesting times.

Neil Saunders is Retail Director for Canadean and Managing Director of Conlumino.