More dark clouds on the horizon bring challenges for retailers

More warnings about the prospects for the economy and its effect on retail in 2010 emerged last week, with indications from one retailer that the sector is not out of the woods yet.

By Helen Dickinson

A couple of press articles I have seen quoted John Lewis Partnership chairman Charlie Mayfield as saying "I think we're in a bit of a false dawn and I do think we are in for a more difficult time" due to certain economic factors looming on the horizon which could affect consumers later this year.
These sentiments were echoed in the latest white paper by the KPMG/Synovate Retail Think Tank (RTT) which warned of dark clouds gathering, which could create more turbulence for the sector and cause what we called a "retail relapse".

While the retail sector has responded well to the economic turbulence so far, many of the problems which emerged when the downturn began have not gone away, but merely been postponed while the economic situation plays itself out. 

The RTT believes the current situation is more of a "bumping along the bottom" of the recession cycle than real recovery from it and the delicate confidence that has recently returned could very easily be shattered.

With many "unknowns" lying ahead, including renewed falls in house prices, further rises in unemployment and tax rises once the general election is over, these could bring to an end the resilience we have seen in retail spending and the start of a period of retrenchment.

And because retail is so heavily dependent on consumer sentiment and individual consumers' personal financial situations, which, in turn, rely on the economy, the sector is affected very quickly by economic events. So with such an unpredictable backdrop to contend with, there are major challenges ahead for the sector and its overall state of health.

So, against this backdrop, what should retailers be doing to tackle this renewed challenge?

To succeed this year, I believe retailers need three things: flexibility; visibility; and sustainability.  The latter two attributes relate to retailers' oversight and integration of costs, cash, and forecasts across the business.  The focus on cash over profit will continue and many will revisit the cost saving initiatives implemented last year as costs will have started to creep back up - something which is particularly prevalent in retail.  I expect there will be a decline in the number of product ranges available within stronger retailers' stores as they target their customers' wants and needs more accurately.

At the same time, consumers are becoming more multi-faceted – and therefore difficult to understand - by trading down to outlets that offer better value and up to other brands that truly deliver premium quality.  They will regularly be crossing channels (which are no longer seen as separate), making fewer shopping trips and sharing experiences with others as the power of social networking increases.  Flexibility will be the key here.

Each post-war recession has had a considerable impact on retailing best practices, efficiency gains and depth of customer understanding and this one will be no different.  As always, those that get these things right during the tough times will be ready to capitalise on the upturn when it finally arrives.

Helen Dickinson is Head of Retail at KPMG