Flailing high street has worse to come in the year ahead

AFTER holding their breath for the last few weeks, some retailers can at last allow themselves a cautious sigh of relief. Positive sales numbers from the likes of John Lewis and Next have given the sector a much-needed dose of optimism, resulting in a slight hike in share prices for some of the larger players.

But with relentless price discounting across UK high streets to compete with the “Primark-Tesco” effect, it remains to be seen if good-looking sales have come at the heavy price of margin erosion. The old adage of “sales is vanity, profit is sanity” has never held so true. Like-for-like sales growth can offer a rose-tinted view of a retailer’s underlying health.

There is no room for complacency. The recent news that two-thirds of the UK population are struggling to pay their housing costs offers cold comfort to the retail sector. In the face of hefty increases in costs for transport, energy, food prices, and petrol, UK consumers are starting to buckle under the pressure. They are increasingly gravitating towards value retailers such as Aldi, Lidl, Primark, and Poundland. When they can buy the kids’ school uniform and furnish the spare room all for under £20, traditional retailers are seeing huge numbers of their loyal customers migrating to the value players.

While larger shops are doing their best to compete on price in this “race to the bottom”, the hard fact is that they do not have the low cost supply chain that allows their cheaper competitors to charge such low prices and still make a profit.

As if this overwhelming price pressure was not enough for retail chief executives to contend with, they also have to work out how to respond to the relentless growth of online retail, click and collect, and mobile shopping. These present massive operational challenges to traditional retailers, which have spent decades optimising their businesses to deliver pallet loads of stock to their stores, not to deliver a cold pint of milk to someone’s house.

A further blow is the structural shift towards digital commerce. Traditional high street retailers selling books, CDs and DVDs must now be wondering when the end will finally come.

Bill Grimsey and other prominent retail commentators have recently talked about the inevitable demise of the high street. While some of this may be hyperbole, it is difficult to avoid the conclusion that the UK high street will look very different in three years’ time. So what can retailers do about it?

They have to figure out how to offer an attractive service to their customers that is not simply about the lowest price. They need to examine every aspect of their operating models, stock management, and supply chain, and make sure all the nuts and bolts are fully tightened. Operational efficiency used to be an optional extra, today it is a critical necessity. The uncomfortable truth is that far too many retailers are woefully inefficient. They will not survive unless they grasp this nettle, and fast.

Dan Murphy is a managing director at Alvarez & Marsal, and has held senior roles with retailers including River Island, Next and House of Fraser.