Static or falling profits in 2009/10 more job losses loom
Downturn causing structural change
Study reveals lack of long-term strategic response
The UKs retail sector will not see recovery for another year according to senior industry managers, a study by Roland Berger reveals. Retail executives expect fundamental change to the industry landscape as a result of recession in three key areas: consolidation, structural shifts in the supply chain and the increasing prominence of value retailing.
Tim Manasseh, Consumer Goods & Retail Partner at Roland Berger, commented: The UK retail landscape has taken a big knock as a result of the recession what will emerge from the storm will look quite different.
Bill Upton, Performance Improvement & Restructuring Partner at Roland Berger, commented: With significant over-capacity in any market at the moment, the quickest firms to adapt their cost base to market changes will have the strongest chance of survival.
Yet the findings suggest a lack of long-term strategic response among the sectors largest firms.
The study, Retail and the Recession, released today, is the result of research conducted in April 2009 among 110 senior finance managers from UK retailers, wholesalers and manufacturers with a turnover over of at least 250m.
No respite for a year
Industry leaders expect the recession to affect the industry for another year, with little or no improvement in performance during 2009/10, and more job losses.
On average, firms expect another 12 months of difficulty, with a return to growth not forecast until May 2010.
Over four fifths (82%) forecast either no pick-up (45%) or a drop (37%) in turnover in 2009/10. Likewise, 82% forecast static (46%) or falling (36%) profits.
Nearly a third (31%) anticipate further job cuts, with suppliers more optimistic about job retention than retailers. While only 11% of suppliers are expecting to increase headcount in 2009/10, this compares to just 2% of retailers.
Tim Manasseh said: Despite some rallying of financial results in the sector around Easter, the retail industry is still predicting a difficult year ahead. Retail executives see light at the end of the tunnel this time next year.
More than half (57%) of retail leaders expect long-term, fundamental changes in the industry in response to the recession, in the form of consolidation, structural changes in the supply chain and a shift to value retailing.
1) Consolidation among retailers and suppliers
Sixty per cent of senior managers from both retailers and suppliers - agree that the recession will result in increased industry consolidation as big players get bigger.
A similar proportion (61%) believe that the supplier base will become more concentrated, with the exit of under-performing suppliers.
2) Structural shift in the supply chain
A majority of retail leaders also signal the need to reassess structural supply chain issues and supplier management: 57% point to the need to optimise supply chain structure, spanning actions such as rationalising supplier base and aligning sourcing more closely with end markets.
3) Discounters to gain market share
Almost two-thirds (64%) of senior retailers believe that discounters will continue to gain a larger market share during the recession.
This is being driven in part by a shift in consumer demand towards value products: two thirds (66%) of retailers believe that the recession is moving customers in droves from premium to value ranges.
Tim Manasseh commented: We are witnessing a change in the underlying structure of the industry across retailers and the supply chain. In the fight to survive, we will see more consolidation among major players, forcing out under-performing businesses.
The discount model has thrived in the recession, with low-cost chains grabbing market share and major supermarkets battling to slash prices and promote value brands.
Bill Upton commented: The shift in demand to low cost products will affect profit margins, forcing companies to assess their cost base accordingly.
Lack of long-term view
Despite identifying these underlying shifts, the industry lacks a long-term strategic response, according to Roland Berger.
For example, while almost two thirds of retail executives identify a trend towards consolidation, less than half (47%) are likely to implement any kind of M&A strategy.
Similarly, a majority (57%) of retailers flag the need to optimise supply chain structure, while some 70% will seek longer-term collaboration with suppliers. Yet priority is being given to short-term supplier selection levers such as price (according to 72% of respondents) and payment T&C (75%). There is less much focus on fundamental structural issues such as flexibility to adapt product lines to fluctuating demand (37%).
Also, while two-thirds (67%) feel threatened by the consumer shift to value retailing, far fewer are responding by addressing category mixes (42%) and repositioning brands to appeal to value-conscious consumers (40%).
Bill Upton commented: Successful adaptation to market changes entails more than simply restructuring short-term working capital and liquidity. A long-term, operational and strategic approach to restructuring is required.
Comment and analysis
Tim Manasseh said: Retailers and suppliers are taking actions to weather the storm, but do not appear to have a coherent game-plan to build sustainable competitive advantage.
As well taking a sufficiently long-term view of the economy and the sector, industry leaders need to look at their own financial strength and competitive position.
Firms with weak balance sheets or profitability must prioritise reducing working capital and rationalising stores, suppliers and products. Those in a stronger financial position should aim to secure market share, acquire competitors, optimise their channel mix and develop long-term supplier relationships. Only actions such as increasing efficiencies and reducing costs apply to all companies.
Restructuring to survive the downturn must be accompanied by a focus on gaining and maintaining market share, as scale players will be best positioned to thrive in the upturn.