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Independent Report: Key issues of Retailing into 2008

Retail managements face a period of tightened consumer spending and slower sales growth, against a background of rising cost, efficiency and competitive pressures, plus a return to supply chain inflation – all overlain by growing CSR commitments and costs.

Retail sales have been rising faster than expected recently, averaging 4-5% for most of 2007. However, growth is now expected to slow markedly from autumn 2007, remaining marginal for much of 2008. Moreover, inflation is now rising, whereas until recently there was an extended period of shop price deflation. Poor harvests and world price increases are pushing up food costs. Manufactured goods’ prices, even from low cost economies like China, are rising as their labour, raw material, energy and transport costs accelerate.
Disposable incomes have been growing for over a decade, encouraging accelerated replacement cycles not just of clothing, but also of home ‘fashion’ – kitchens and bathrooms as well as new technology TVs and three three-piece suites. This scenario has sustained retail growth –- until now, that is. Disposable incomes are now under strain as interest rate rises translate into higher mortgage repayments. Another effect is eroding confidence. Furniture – obvious big ticket purchases that can be postponed – and menswear sales are historically the first to suffer.

Meanwhile, retailers’ costs are rising faster than sales – at least twice as fast hitherto, before the looming slow down in growth –- and will continue to do so: staff costs, business rates and utility prices; fuel and other distribution costs, too. Fuel prices were expected to fall in 2007 but instead have reached new highs. The only respite may be rents, as retailers rationalise underperforming outlets, thereby increasing vacancies.
Previously retail managements have more than offset these rising costs with sourcing savings, by shifting to lower cost suppliers, resulting in lower prices. However, such savings are commonly no longer available. Indeed, the reverse.

There are now additional costs from growing corporate social responsibility commitments. These cover many areas of consumers’ expectations of higher ethical standards etc, for which they are increasingly prepared and able to pay - while reserving the right to recidivism if the extra costs become burdensome in a short term spending squeeze. Elements include: fair trade; healthier foods; labour issues; renewable energy and other green issues; farmers’ payments; and less packaging. Most share a common denominator: higher costs in implementation - and monitoring.

Not only are managements under pressure to deliver greater cost efficiencies in this tightened operating equation, but they face an on-going profitability squeeze. No longer can they offset higher costs by lower sourcing prices and elevated sales growth. So managements will be looking to further efficiencies – office systems, logistics, energy, sourcing, stock control –- alongside enhanced performance ratios like sales densities and staff cost ratios.

Raising market share will replace outright growth as the main management goal, implying improved marketing and greater emphasis on customer dialogue. A central component of all such initiatives, of course, is enhanced IT systems. Managements will be judged by their success or otherwise in deploying new skills and tools: winners and losers will be more starkly apparent, even within management teams. Retail has always been detail; now never more so.

In trading terms, Christmas 2007 will be tough, with lower like-for-like sales commonplace and more pre-Christmas discounting by underperformers. There is the spectre of more post-Christmas failures than usual, followed by a particularly challenging first half of 2008. Interest rates may well be falling by then, but with their impact delayed until reduced mortgage repayments cut in later. Only then will confidence and spending power for non-essentials begin to improve, from autumn 2008. Many retailers face enduring the best part of a year of difficult trading, accompanied by an intensified profitability squeeze.

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