UK retail industry outlook

Recovery from the great recession, coupled with improved retail technology and relentless growth in online shopping, present both an opportunity and challenge for retailers

The world of retail is a changeable place. Customers love the regular improvements to the services they enjoy, but for the businesses delivering these upgrades it can be a puzzling, even exhausting, experience.

In many ways the UK retail sector could not be in a better place. Month after month unemployment is falling and the number of people in work hits a fresh record high with each new bulletin from the Office for National Statistics.

Although wage inflation has been ominously absent in recent times, the money sifting into our pockets is actually starting to increase in real terms meaning that some of us are actually starting to feel wealthier than we used to – a nice change.

Interest rates are at their lowest level since William III, which has had a triple positive impact on consumer spending. It has encouraged house prices to soar, making homeowners feel better off, while borrowing is cheaper and saving is pointless; so for goodness sake go out and spend.

For the time being, inflation is history too with prices dropping in many parts of the economy. The most obvious sign is the recently halved price of crude oil, which translates to cheaper petrol, utilities and, through the supply chain, cut-price products and services.

Growth in UK retail sales

Businesses see this as a brilliant time to invest meaning even more employment, and more purchases of bits and pieces from the nation’s shopkeepers. Meanwhile the European Union is strengthening with “problem members”, such as Spain and Italy, dragging themselves back into the black. Greece, of course, remains a worry.

Technology is playing a role in all this happiness. Websites make everything easier, quicker and cheaper, putting products right under the noses of consumers and, once purchased, delivering them direct to their doors. The immediacy of the internet makes spontaneous purchases all the more so.

Completing this perfect picture, curious new ceremonies, such as Black Friday, Cyber Monday and Small Business Saturday, have conjoined to put a rocket under sales just as the Christmas period gets into full swing.

There is a host of other events dotted throughout the year, from Valentine’s Day to Father’s Day, which while providing less of a stimulus than Christmas, nevertheless remind us all to put our hands in our pockets for periodic gifts, treats and stays.

In general, things look very rosy indeed. Yet shop bosses reading this would be forgiven for screwing up their faces. They’d agree that the economy is OK and, barring any major hiccups, demand should remain high, but turning these factors into a profit is a convoluted process.

Low inflation means downward pressure on margins. High employment sounds good, but it needs consistent wage growth to make a real difference. Technology has invited new competition and is at worst a distraction, while the new shopping “events” have made it nearly impossible to balance supply with demand.

For food retailers, the invasion of mega-discounters Aldi and Lidl from Europe has blown their sector to pieces, and only a complete rebuild along entirely new pricing metrics will save operators who focus on price-aware shoppers.

The growth of online is a blessing and a curse. It has shed light on consumers like never before, giving retailers who crunch their numbers the chance to segment and target different demographics within their customer base. But, put simply, it can be hard to keep up with all the innovation.

“UK retailing is still recovering from the ‘great recession’ at the same time as it is adjusting to substantial structural reforms,” says David Stoddart, an analyst at Edison Investment Research.

The problem for many retailers is the sheer speed of advance – it’s not so much a march of technology as a gallop

“The major grocers face increased competition from the continental discounters that is resetting their margins and returns on capital. In addition, they are absorbing the additional costs of serving the online channel.

“Growth of online is also a game-changer for non-food retailers, hastening the demise of marginal shopping locations and providing a better means of addressing changing consumer attitudes than traditional stores ever could.”

The problem for many retailers is the sheer speed of advance – it’s not so much a march of technology as a gallop. You used to get time to adjust to new inventions, now a year might see multiple jerks forward.

Content marketing, omni-channel retail, the internet of things and contactless all have an influence on retail today, yet no one outside of the technology industries themselves had heard of these terms five years ago.

Digital is improving the customer experience, transforming the how, what, when and where of their shopping. But for retailers it’s enough to make your head spin. To make matters worse a bad investment in a service with no future could reverse a profit.

“Retailers are struggling to keep up with rapidly changing consumer demands,” says Andrew Long, head of IT strategy at Accenture UK. “The digital transformation has a long way to go and its impact will affect everyone and everything – businesses are going to have a major challenge keeping up with the pace.”

Technology is the problem, but it is also the solution. People shop online, and increasingly through smartphones and tablets, meaning that only technology can ensure they remain happy with the services retailers provide.

“Technology is a key enabler to providing customers with the experience and service that customers now expect through every touch-point a customer has with a retailer,” adds Mr Long.

“It drives personalisation of the interaction, a context of the customer and any previous interaction, as well as making the interaction more efficient and effective. Leading companies are seeing customers attracted and retained by the improved outcomes that technology can deliver.”

The digitisation of retail might lead to sleepless nights for some and the end of the road for others, but this is what retail looks like now – an endless reimagining of what is possible and how it can fuel the customer journey. Those uncomfortable with this notion should get out while they still can.