Market Perspective

UK Retail Insights: How the Industry Is Adapting to Today’s Challenges

28 July 2022
The C2FO Team
Supply chain woes and higher costs are forcing some retailers to rethink operations and invest in new technology.

Supply chain woes and higher costs are forcing some retailers to rethink operations and invest in new technology.

Retailers in the UK are facing one of the most difficult business environments in years as higher inventory costs, rising inflation and other obstacles make it more expensive to operate. 

But retail experts tell C2FO that all these challenges also create opportunities for the organisations savvy enough to seize them. 

“This is the time when bravery and a long-term view will be handsomely rewarded,” said Matt Truman, executive chair and co-founder of True, a consumer and retail specialist investment firm. 

C2FO met with a series of decision-makers at large UK retailers recently to discuss the current environment to gain a better understanding of the problems facing the sector and how retailers are responding. Here are some of the key findings from those discussions.  

Retailers are being crunched by higher costs and lower spending 

As a result of larger economic forces, retailers are being squeezed on two fronts. On one side, almost every single aspect of their business is now more expensive, with rents, wages and inventory being of particular concern. But they’re not the only ones suffering — so are customers, who find themselves with less discretionary income as the costs of essential staples like food and energy rise. 

As a result, retail spending has experienced a “substantial slowdown,” the British Retail Consortium reported. In June 2022, retail sales were down 1% compared to the previous year, despite the celebrations around the Queen’s Platinum Jubilee. It was the third month in a row of declines, with discretionary items taking much of the hit. 

Other retailer insights into business threats included:

  • While everyone is aware of major forces impacting the economy — such as COVID-19, the Russia-Ukraine war and Brexit — some root causes might not be as apparent. For one, poor harvests this year — some of it related to the Russian-Ukraine war, some of it related to bad weather or a lack of workers — are also having an effect on the supply chain.

  • As inflation started to spike months ago, retailers were able to somewhat shield consumers from higher prices, though there is some question about how long that practice will last.

  • A similar question is being asked about environmentally friendly products and whether shoppers will still be willing to pay a premium during a time of high inflation.

  • Facebook’s value as a marketing channel has eroded, so retailers that lean on it are finding themselves in a more difficult position. (In recent years, fewer people in the UK have used Facebook, though that appears to be reversing.)
      

Innovation is the way forward

“In this environment, companies need to innovate, which is counterintuitive to current market conditions and tough to achieve, but ‘training at altitude’ is the best way forward currently,” Truman said. 

How are retailers adapting to these changes? According to the business leaders we interviewed: 

  • They’re changing how they operate, with a special focus on delivery and “rapid commerce,” where orders are available within 10 to 30 minutes after being placed. There was some question, however, of how rapid commerce will be affected if supply chain shortages continue over the coming months. 

  • They’re investing in robotics as the technology becomes more affordable, which could benefit retailers’ logistics as robots take over more of the duties of storing and packing inventory — especially when new hires are harder to come by.

  • They’re starting to explore strategic acquisitions of other brands. Over the last several years, Truman said, capital has practically flooded the market, allowing retail concepts that weren’t particularly strong to survive. As the money dries up, though, companies that are in a healthier cash position are looking to absorb them and potentially benefit from acquiring the strength of their brand. 

Another strategy: Optimise working capital for the supply chain 

In a period of higher inflation, it’s key for businesses to maintain healthy levels of working capital, so they have the resources to meet higher prices or make investments that help them preserve their margins. 

Retailers can support their suppliers by accelerating payment of their invoices, which can help provide those businesses with ready access to cash. And unlike traditional lending, this can be done without the supplier going to the trouble of applying for a line of credit and paying interest.  

Retailers should view this as self-interested benevolence: Faster payment ultimately ensures that those suppliers can endure over the long haul and will be there to serve retailers’ supply chains well into the future. In turn, it improves the retailers’ margins — capturing a large volume of small discounts can add up to a sizable improvement in EBITDA.

C2FO’s platform enables this kind of early payment with a system that lets suppliers choose which invoices they would like to accelerate, in exchange for a small discount. For their retailer customers — many of which have extremely healthy cash reserves — that discount represents a return much greater than if their reserves were placed in other short-term vehicles. 

The bottom line

Retailers face a complex landscape but one that also represents opportunities for those that are ready to pursue them. Building and nurturing a healthy supply chain will be an important part of that, and C2FO can equip retailers with early payment programs that can make this possible.

Working Capital. Working for Everyone.

C2FO provides working capital solutions for you, your suppliers and your customers.

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