Supply and freight costs
Retail supply chains continue to be challenged by capacity constraints at major global ports and airports, and record-high freight rates. This has affected Australian retailers’ ability to import stock. We are seeing some retailers stockpiling inventory when they can to mitigate re-stocking issues during critical trading periods. The uncertainty around inventory management and supply issues creates complexity for cashflow forecasting. The risk for some retailers now is inventory hangover following the festive season if sales targets were not achieved. This could mean clearing more stock than usual, with the associated margin impact, as we gather pace into 2022. According to the Australian Retailers Association, supply-chain issues are expected to continue for some time, likely through to 2023 and retailers need to be prepared for these. There will be increasing pressure on pricing and margins to reflect the increasing costs of doing business.
Back to business as usual
As we continue to respond to Covid-19, several relief measures that buoyed retailers through the worst of the storm will end (if not already), including government stimulus,
landlord rent relief, and deferred liabilities. Some retailers will have to adjust to this after losing market share or suffering a permanent reduction in sales.
While many retailers reduced their cost base in response to the pandemic, some lost market share or have seen permanent reductions in sales, placing pressure on profitability
as they return to business as usual. Retailers also have the challenge of managing deferred liabilities that may have built up during the pandemic and will need to be paid as normal trading conditions return.
ESG: retail’s new ticket to play
The importance of ESG started pre Covid-19 but the expectations of the consumer have risen exponentially. Purchasing decisions are increasingly being influenced by ESG considerations and we have seen a paradigm shift over recent years in response to these demands. Implementing ESG initiatives across the entirety of an organisation comes at a cost; the challenge for retailers is bearing the initial cost (knowing it’s one that needs to be made). Investment in ESG becomes a question of priority – do retailers allocate the money at a time of transformation and uncertainty? Given the upward shift in consumer expectations, this will often be a yes, because it’s simply a ticket to play.
The importance of ESG started pre Covid-19 but now the expectation dial of the consumer has shifted exponentially. Purchasing decisions are increasingly being influenced by ESG considerations and we have seen a paradigm shift over recent years in response to these demands. Implementing ESG initiatives across the entirety of an organisation comes at a cost; the challenge for retailers is bearing the initial cost (knowing it’s one that needs to be made). Investment in ESG becomes a question of priority – do retailers allocate the money at a time of transformation and uncertainty? Given the shifting dial of consumer expectation; this will often be a yes because it’s simply a ticket to play.
Turnaround or transformation
Retailers are taking the opportunity to transform their business model to adapt to the new normal. We are seeing retailers undertake store rationalisation programs and invest heavily in digital offerings and infrastructure. These transformative costs will often not be provisioned for on the balance sheet. The question retailers need to be asking is, ‘How do I unlock funds to transform my business while also meeting trading challenges, shifting consumer behaviour, expectations and stakeholder demands?’
Ultimately, any turnaround or transformation requires trust between a retailer and its stakeholders. Often, stakeholders will resist change unless they can see the tangible benefits that it will bring. It is imperative for retailers to communicate well and manage their stakeholders effectively during transformative change. This means communicating with key customers and suppliers, financiers, and shareholders. Based on our experience managing stakeholders during times of uncertainty, stakeholder management should include:
1. Transparent communication of the key issues, challenges, and opportunities
2. Timely disclosure of key events or problems (a ‘no surprises’ policy)
3. A clear commercial strategy for how issues will be resolved, with timelines and targets that are measurable, to identify progress.
While management is focused on business as usual and strategic initiatives, an independent expert adviser can help bridge the trust gap between borrowers and stakeholders, if the adviser is reputable, understands the industry sector and has the trust of both parties. Some of the key roles of an independent adviser are building stakeholder confidence that:
- Management is adopting appropriate strategies to resolve the issues at hand
- The underlying business is sustainable and capable of performing in the future
- The management team is capable, competent and able to execute on the plans going forward
- The financial forecasts are robust, and the underlying assumptions are reasonable and capable of being achieved.
It is not the role of the independent adviser to persuade third-party stakeholders to management’s point of view on key issues. Rather, their role is to be the honest broker – the bridge between management and third-party stakeholders that both parties trust.
In 2022, while we do look to operate under a new normal, the retail trading landscape has changed permanently and there are new and hidden costs retailers need to keep in mind. At the core of any transformation are stakeholders and they should be taken on the journey. For many retailers, now is the time for reinvention.