In 2024, many realised that Australia’s economic conditions weren’t going to improve quickly, as inflation remained persistent and the cost-of-living crisis deepened. Many retailers tightened their belts to preserve cash flow and shareholder returns, and implemented cost-out campaigns to offset margin erosion from discounting activities.

Yet we still saw an appetite amongst retailers for investing in technology – such as artificial intelligence (AI) – to drive efficiencies across operations, finance and compliance obligations.

So how are retailers balancing the books through these lean times, and where is the smart money heading into 2025 and beyond? We sat down with leading retail finance experts from The Reject Shop, Forever New, Taking Shape and Vinomofo to find out.

Walking the margin

With consumer sentiment falling to new lows in 2024, the challenge on top of mind for many retail CFOs was preserving margin amidst conflicting business needs.

Clinton Cahn, CEO of The Reject Shop, noted that there has been a rise in demand for everyday essential items, whereas its discretionary range showed a drop-off in demand, which affected margins. That wasn’t helped by shrink in-store, particularly consumables, reaching an all-time high. “We underestimated both of those shifts and don’t expect the margin mix to improve in the near term, so that means we have been very focused on margin improvement,” Cahn said.

Margin pressure also presents an issue for wine retailer Vinomofo, which is trying to acquire new premium customers and elevate repeat purchases. “We have been balancing loss-leading high-profile products, [designed] to entice first-time purchases, with low-margin products,” Vinomofo CFO Kieran Donovan said.

Shifts in consumer behaviour towards big promotions presented challenges to margin integrity, as Krista Diez-Simson, CFO of Taking Shape, pointed out. During the Black Friday and Cyber Week sale events of 2023, Taking Shape noted that sales spikes were higher, and troughs were a bit deeper, than usual.

Though promotional cycles were a boon for sales, Diez-Simson said that “managing the tension between cashflow and margin” became her biggest challenge in 2024. “There is constant tension between certain pockets of the business focused on top line and those focused on margin line…especially when you are following on from strong years. The challenge has not dissipated, and it is still something that we are still experiencing now,” she said.

A promotion or two may be a necessary Hail Mary in tough times, but James Pavone, CFO of Forever New, warned that retailers must be clever about how to do that. “We never found that [a sitewide sale] is the right approach in the apparel space because that is giving away margin on good products that people pay good prices for,” Pavone explained.

“Putting older products through markdowns might not necessarily be the trigger [either], as customers want a quality product. In light of that, you may have to sacrifice a bit of top line to maintain margin integrity, which is quite important in light of rising costs.”

Pandemic ripple effects

While the disruptions from the pandemic have ebbed away, some of its after-effects continue to ripple through retailers and their balance sheets.

The Reject Shop’s Cahn highlighted that even though there was relief on the cost of international shipping rates over 2024, there is still some volatility in the rates. Diez-Simson also observed that the shipping rates of the pandemic have dissipated, but local and domestic rates for everything from warehouse-to-store and last-mile delivery remain elevated.

The higher fulfilment cost of last-mile delivery was also identified as a major challenge for Vinomofo in 2024, with the wine retailer having to “undertake a full exercise on what is the margin strategy… and come up with a way to grow the margins to absorb the fulfilment cost”.

Forever New’s Pavone raised another lingering pandemic-related cost increase – rental rates on commercial properties. “Landlords are not coming to reality with where the market is at the moment. A lot of retailers renewed their leases at the back end of Covid-19…but so far, landlords aren’t willing to take a cut – but that will change [over 2025],” he said.

Diez-Simson was also shocked that landlords are not reading the room of the retail landscape as well as they should, which will possibly come back to bite them, whereas Cahn was hopeful that landlords would partner with retailers over 2025-26 to ‘right-size’ rent.

Forecasting in the new normal

Costs aside, retailers said they are facing a new paradigm in customer behaviour coming out of the pandemic, which has presented challenges to their forecasts. Vinomofo’s Donovan said trying to figure out the new normal for demand post-pandemic is a real struggle for forecasting sales and margin performance.

“Covid was beneficial to our industry and our business, however, customer behaviour changed dramatically post-pandemic, so much so that we had to adjust the cost base, which lagged by a few months,” Donovan said. “Now we are trying to understand what our customer behaviour is, their purchasing patterns, and how to speak to them.”

Taking Shape’s Diez-Simson said the company has started to get comfortable with the changes in consumer behaviour – particularly the online consumer with big promotions. “It is about really trying to work the online consumer’s new way of buying into the new promotional calendar or cycle, along with the lull between big sales events,” Diez-Simson added. “Forecasting has been incredibly challenging in this environment, with a six-month lead time, and you don’t want to forecast a negative outcome and have inadequate stock.”

For Forever New, being careful not to participate in a big discounting cycle is important once the customer is trained not to buy into promotions all the time. “Planning and forecasting carefully is important – you don’t want to get into a stock position where cashflow demands a fire sale to fund the next round of purchasing,” Pavone said.

Bolstering the margin

Historically, when times got tough, retailers would slash the cost of doing business (CODB) by reducing headcount and rostering, range rationalisation, or closing underperforming stores.

The Reject Shop has been very cost-focused through the pandemic period, which has led to a reduction of its labour-to-sales ratio and its percentage-of-sales out of rent expenses. Cahn said the business is now focused on a merchandise-led turnaround and the opportunities are predominantly productivity initiatives, rather than cost-out initiatives, such as improving the flow of inventory around the supply chain to reduce costs.

On top of that, the big-box retailer is looking to lower the cost of goods by leveraging long-term relationships with strategic suppliers to get the best price, and by doing range reviews and right-sizing product mix to optimise the margin, maximise sell-through and minimise markdown and wastage on the back end.

Taking Shape’s Diez-Simson highlighted the importance of forging long-term relationships in keeping costs down, as the company has fostered and retained a single-carrier partnership. Taking Shape also operates a clearance store network for customers looking for a bargain, enabling it to offer products that appeal to a wider demographic, with the goal of delivering a blended margin that is higher without needing discounting.

Forever New’s Pavone said marketing costs have also risen over time, whether it is acquisition cost, bottom-funnel cost, or conversion costs and this is also an opportunity.

For Vinomofo, opportunities still abound with the recent oversupply of wine that Australian winemakers are facing.

“Wineries do need channels to market, which enables us to negotiate on price, and we have no long-term supply agreements with any wineries, allowing us to renegotiate new terms every time, and using it to grow margin,” Donovan said.

Tech stack optimisation

One area that CFOs and finance managers can also focus on is tech stack optimisation. “Software licensing or cloud computing costs are now [a] much bigger percentage of [a business] cost base structure than they used to be,” Forever New’s Pavone said.

Pavone stressed that it is critical for businesses to have their eye on their tech stack, as technology moves so quickly that premium market-leading systems five years ago could be outperformed by newer and more cost-effective competitors today. “Some that needed three systems to cover multiple functions previously might now get it done with one tool, so businesses have to consider if they can consolidate and get more cost efficiency or find better technology,” he said.

Vinomofo, as a pureplay online retailer, is more familiar with managing the tech stack and its associated cost by asking software vendors to prove why they are still the best in market and come to them on pricing, as well as putting a minimum 10 per cent reduction into annual renewals of software licensing contracts.

When it comes to the potential use cases for generative AI in financial operations for retailers, Donovan, Pavone, and Diez-Simson agreed that they are still developing. However, Pavone, Diez-Simson and Cahn said that generative AI can deliver big cost and process benefits outside of managing a business’s finances, such as marketing, same-time optimisation, stock allocation, and shrink mitigation.

Disrupting the discount culture

The prevalence of ‘discount culture’ – retailers jostling for customers as cash is tight and the typical shopper is very focused on value and is searching online and offline for the best price – has forced many retailers to rethink their discounting strategies in 2024.

“Discounting can get into a vicious cycle like an addictive drug: You can use it to keep the top line going but to then unwind it and get unhooked – that is the journey we are on at the moment,” Diez-Simson warned. “The approach we are taking is about forward planning, but also being agile and nimble enough to activate a change if [a promotion] is not working. It is adapting a longer-term and shorter-term view to deal with the uncertainty.”

Pavone said the solution lies in trying to move customers into a more personalised offering where loyalty programs can offer discounts or drive the right customer. He said brands should bring uniqueness so customers have a compelling reason to buy quickly to avoid missing out.

Being creative with promotions can help, Diez-Simson said, as customers can get bored of the same type of promotions. For Cahn, changing the product mix to a lower pricing range works better and is also truer to a discount variety strategy.

When asked about Black Friday, Pavone stressed the importance of maintaining agility in discounting decisions, as the ‘halo effect’ of everyone shopping will drive sales anyway, and businesses should be careful not to give away margin unnecessarily.

Diez-Simson is also of the opinion that retailers shouldn’t play their hand too early with strong discounts and should have the attitude of enacting stronger offers if things don’t pan out according to the forecasts.

A balancing act

Retailers were dealt a tough hand in 2024, but as any poker player knows, they can triumph if they play their cards right. In this case, there are plenty of cards retailers can use to bolster their bottom line, be it through margin management, product mix, supply-chain contracts or tech stack optimisation.

The question retailers should ask is: What changes will elevate the customer experience and also deliver on the bottom line?

This story is from Inside Retail’s 2025 Australian Retail Outlook, powered by KPMG. Download the full report here.