Profitability challenges in Retail

For years, the retail industry has been challenged to keep up with rapidly changing consumer expectations. Prior to the Covid-19 pandemic, retailers were already struggling with profitability. Covid-19 has accelerated consumer trends, such as online shopping, and increased competition, exposing brands that have failed to innovate in the fast-paced retail environment.

As of August 26, 2020, US retail has seen 28 bankruptcies year-to-date (of which 23 were filed after lockdowns began)—the highest number of retail bankruptcies in a decade. Coresight Research came up with a report that explores the impact of the Covid-19 crisis on retailers’ profitability and opportunities to combat those declines, with a focus on not-for-resale goods and services (NFR), or goods and services that are not sold to the end consumer.

100% of respondents had experienced at least some negative impact to their organization’s profitability; not a single organization surveyed reported that they were unaffected by Covid-19. Some 88% of respondents stated that Covid-19 has had at least a “moderately” negative impact on the profitability of their business. 47% stated that Covid-19 has been at least “extremely” impactful on profitability.

When asked about how critical their financial situation is, 51% of respondents said more than “moderately critical” and 11% stated that their business may not survive. “Issues with suppliers” was the option most selected by CPG firms and retailers (41% of respondents) as the top negative drivers impacting profitability. Covid-19 caused disruption along the supply chain as supplier factories and warehouses were forced to shut due to state mandates and as shifts in capacity and demand pressured logistics.

Some retail companies have already turned to cutting costs not related to goods or services for sale. The largest proportion of respondents (30%) stated that they are making changes to their travel and expenses policies. Around one-quarter of respondents each reported that they are purchasing inventory on an as-needed basis, searching for less expensive suppliers, decreasing their budget for vendors and contractors, decreasing their marketing and advertising budget and renegotiating supplier contracts. Fewer than 20% of respondents are turning to options such as staff furloughs and layoffs, cutting benefits or selling through current inventory.

Retailers’ selection of several investment opportunities indicates that they are not only cutting costs to improve profitability in the short term but are also thinking about the long-term longevity of their business. Almost one-third of retail and CPG organizations said they were planning to invest in digital technology. Another 27% of respondents stated that they are investing in supply chain & logistics. 21% are investing in the IT department and 20% are investing in a more diverse organization.

NFR refers to all goods and services purchased by an organization outside of the merchandise it sells to its customers. In retail, this is spending and organization costs associated with marketing, real estate, facilities, IT, professional services, packaging and distribution/logistics. NFR goods and services are often overlooked and can represent a substantial opportunity for retailers, particularly during these unprecedented times. In particular, NFR represents an opportunity for organizations to avoid cost-cutting measures that negatively impact their company culture or employee engagement.

According to benchmarks and data from LogicSource, NFR typically equates to about 20% of a company’s revenue. NFR cost reductions can improve an organization’s financial situation in the short term, as well as provide a long-term solution for improving operational efficiency.

There are three primary avenues for evaluating NFR expenses and driving profit improvement opportunities according to Coresight Research:

  1. Reevaluating supplier partnerships can result in substantial savings through sourcing events, contract renegotiations, rate changes, adjustments to payment terms and evaluation of overall needs.
  2. Improving efficiency within the organization can include anything from restructuring and outsourcing non-core business functions to automating manual processes. Internal opportunities abound, but finding and valuing them is key.
  3. Incremental unit cost reductions at scale can result in large savings. Small adjustments to packaging and supplies items, and elimination of over ordering and waste in general services and consumables can produce substantial profit gains.

Opportunities to cut NFR expenses are meaningful and require different approaches depending on the individual organization. In order to take advantage of the opportunities, retail companies must be committed to overcoming internal barriers and challenging the status quo within the organization.