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Retailers to face delicate balancing act in the year ahead


Ernst & Young recently hosted a panel discussion on the evolution of the retail sector and the priorities for the year ahead. Its main conclusions were:

•The rapid change and intense competition in the retail sector is unlikely to abate in 2015

•This year will see continued pressure on margins as retailers have little escape from challenging costs - from the right investment in infrastructure and effective brand, to protecting execution on fulfilment

•Consumer shopping habits will continue to evolve – loyalty is declining, convenience is increasing

•Fierce price competition will continue despite predicted increases in consumer spending. This year will see consumers shopping around for value again and pricing wars will remain commonplace

•Black Friday 2014 has changed the shape of Christmas trading and is now an established event that is here to stay. However, retailers must be better prepared for it this year by engaging suppliers earlier, to help protect the bottom line, and ensuring more merchandise planning is in place

•Exaggerated peaks in demand, such as Black Friday, together with increasing consumer expectations, will continue to put pressure on retailers’ infrastructure As part of the panel discussion, 150 attendees from industry gave their views on the year ahead and the results found:

45% of respondents stated that the ability to maintain and improve margin would be the key challenge for retailers in 2015. Compared to only 27% who believed pressure on consumers’ disposable income would be key this year.

Julie Carlyle, Head of Retail at EY, said: “There has been a significant turnaround in the sector and retailers are no longer as worried about the squeeze on disposable incomes as they take comfort in the predicted 2.9% increase in consumer spending this year. However, pricing pressure, particularly in light of the vast increase in retail discounts, means there is no time for businesses to become complacent.”

56% of respondents stated that everyday pressure on pricing would be the highest pressure on margins for 2015. Compared to previous years when 60% believed property would be the biggest drag (currently only 2% this year).

Carlyle comments: “Many retailers have taken action to rationalise their portfolio and property costs now appear more controllable. These concerns have been replaced with challenges around strategic discounting and enhancing brand values across all channels.”

43% of respondents stated that private equity/other funds would be the buyers of retail assets in 2015. Furthermore, 21% of respondents stated overseas investors would be buyers in the year ahead and this figure has doubled year-on-year.

Jessica Clayton, EY Transaction Advisory Services Partner and Retail Specialist, concludes: “With improving sector fundamentals and a fair wind, deal volumes as a whole should remain robust in 2015. However, we expect to see less emphasis on IPOs alone, with more dual track processes, and uncertainties surrounding the outcome of the General Election may see investors delaying deals until the second half of the year.”

Published on Wednesday 25 February by Rachel Gee

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