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Retail Outlook 2021: Cost Transformation

Improve resilience through cost consciousness and the right strategy

For years, tight margins and a need to find funding for investment means cost reduction has long been at the forefront of retailers’ minds. But couple those tight margins with a global pandemic and the results are predictably bleak, with an unfortunate number of retailers falling victim in the last 12 months. While for the majority of these, COVID-19 simply accelerated existing issues, it doesn’t hide the fact that others are likely to struggle in the coming months.

However, as we’ve witnessed time and again, retail is resilient. Coupled with a consumer desire to return to the store and forced savings in the consumer pocket - notable after the lifting of lockdowns and restriction - and those retailers that can drive share and balance costs should find themselves in good stead for 2021.

What have we learned in 2020?

1. Government support essential for many

With non-essential retailers closed for much of last year, most welcomed some form of government support. The introduction of initiatives such as business rates relief or the furlough scheme were a lifeline for many. For others, it even created a ‘forced opportunity’, giving the option to revise operations and free up much-needed cash. With retailers likely needing support at least in the mid-term, it’ll be interesting to see if this is a catalyst for a long-awaited business rates review.  

However, as relief begins to taper off this year, retailers should plan for the worst and should make sure they have any support captured as unwinding in their forecasts. With tight margins and fixed costs, retail businesses are not typically set up to be able to just absorb these costs. Retailers might take this opportunity to relook and reassess their “must-dos”, and find cost savings in alternative approaches, where possible. 

2. Cash remains king

In a trend that’s accelerated over recent years, many retailers are increasingly having to operate on tight margins and are struggling to convert to cash. The pandemic has highlighted that some retailers must stop repetitive ways of short-term savings that ultimately leak away.

We saw overly optimistic medium- and long-term projections lead to cash flow problems further for those that didn’t fully consider how to repay support. That affected operations as retailers looked to claw back cash elsewhere. After the first lockdown, for example, some opened with reduced supply chains to try to claw back cash, which only led to stock shortages and a need to re-inject cash to get them back running at full capacity.

3. Partnerships increasingly key to survival and success

Early in the pandemic, we saw businesses in the retail and consumer markets industries support each other. Some loaned equipment to supermarkets and others used supply chains to deliver personal protective equipment or emergency supplies nationwide. Partnerships became critical. 

Retailers have continued collaborating to leverage costs and access new markets - for example, where they struggled to upgrade their online presence in time. There’s now a buzz around partnerships in-store and online as retailers collaborate to create mini-department stores, find different distribution channels for their products, unlock potential increased economies of scale and even move fixed-costs to variables (in rents and supply chain for instance).

Actions to take in 2021

Think about ‘good cost v bad cost’

Retailers should look to ‘cost consciousness’ into the business culture: removing some costs entirely from the process and then right-sizing the cost base to match the new organisation. That requires balancing those costs that give the consumer the most value with those that business thinks it needs.

For some, that might be investing in online, improving supply chain or embracing technology. Digital transformation, for example, is crucial for competitive advantage as well as survival: giving access to more customers and revenue, and reducing costs. Others might reduce store portfolios, put less into marketing or rationalise SKUs.

Elsewhere, those with constrained cash and CAPEX will need to prioritise investments and opportunities. Can those with small store footprints scale back even further?

Right-sizing

Think about how your business might change over the next 6-12 months and react appropriately. Your cost base needs to match your strategy, particularly after any restructure or process change to make sure it matches the new organisation. Will there be a change in business size? Will there be fewer stores? Will the business look to pursue growth or consolidation?

The correct right-sizing strategies will bring huge benefits. And a flexible approach to right-sizing can be a cost-effective alternative to other more drastic measures, introducing the right technology, reducing ranges or improving supply chain efficiency.

Zero-based budgeting

Retailers will need to challenge themselves hard on what they want to bring back. Zero-based budgeting - a method in which all costs must be justified and approved - will show the project’s scale. It’s not about cutting indiscriminately but a chance to focus on the strategic priorities that will help drive recovery and growth. It’s then possible to reorganise the business to best deliver on its strategic objectives and justify existing costs baseline. 

Retailers should use this opportunity to focus on their strategic imperatives and make cost savings in areas that they may have previously thought untouchable.

Contact us

Claire Fox

Claire Fox

Partner, PwC United Kingdom

Tel: +44 (0)7525 282685

Zelf Hussain

Zelf Hussain

Partner, PwC United Kingdom

Tel: +44 (0)7801 976521

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