Christmas and the period that immediately follows highlights the choice retailers are wrestling with. Which has priority – revenue or margin. Consumer demand was weak all last year, whatever the increasingly dodgy ONS data says. There is some inflation, more in food than non-food, but underlying demand is flat. Meanwhile, operating costs are rising by c4% annualised. Then there is sterling’s devaluation – only a small proportion has been passed on to shoppers via higher prices – the result of a weak market.
Over Christmas, many retailers have “bought” sales by discounting heavily. They sacrificed margin hoping to avoid issuing a weak trading statement. Full audited annual results will begin percolating through end April, beginning May. The key is that unlike Christmas trading statements, they will a) be audited and b) will include profits and margins.
We are already getting early instalments of the turmoil to come. Numerous profits warnings and many more warnings around onerous leases, mandatory (often retrospective) discounts on suppliers and planned job cuts. Not surprisingly, this frightens financial stakeholders like credit insurers and banks.
Some of those retailers who sacrificed margins to prop up weak sales are now praying Q1 2018 helps repair battered P&Ls. History shows that January-March in the retail calendar is by far the weakest quarter. Moreover, our Promotional Tracker shows that even beyond the January sales, February and March saw 58% of non-food retailers on sale. So those looking for help from the market can forget it.
The answer to all this is costly and painful. Businesses must invest in defending their top lines through more relevant product, better quality, better service and a better shopping experience. Only this can defend and then enhance margins. Retailers need to show more confidence in their brands before they can expect anyone else (customers or stakeholders) to.
** We provide strategic advice to retailers and the financial community – get in touch for details email@example.com