UK retail profits to decline by £8bn in four years

New research has found that UK retailers will lose an estimated £8 billion in profits by 2025, triggered by the dramatic shift to e-commerce seen over the past 18 months.

A report from professional services Alvarez and Marsal (A&M), in partnership with Retail Economics, forecasts a pre-tax profit margin decline of 3.2 per cent by 2025. This compares to 3.7 per cent in a ‘no Covid’ scenario where the trajectory for consumer behaviour would have remained unchanged.

But the study found that the impact of the pandemic will not be felt equally across all retail categories, with some businesses significantly more vulnerable to pressures on profit margins than others.

The research identified apparel, homewares and electricals as those which will experience a permanent step-change in consumer behaviour, brought about by increased online engagement and discovery since the onset of the pandemic.

The report suggests that European consumers now expect to permanently shift around 20 per cent of their spend across apparel, homewares and electricals online – an almost fourfold increase from the early stages of the pandemic in May 2020, after prolonged periods of lockdowns further embedded this way of shopping for many shoppers.

In contrast, categories such as furniture and jewellery – where online experiences are typically less convenient compared to traditional shopping due to a preference for ‘touch and feel’ browsing – will be most likely return to pre-pandemic conditions, despite some shift in spending.

These changes will be felt most by retailers with a presence in the U.K., with 4 in 10 consumers stating that their shopping habits will change permanently – the highest across Europe.

“Covid-19 has wrought irreversible change which has left the future of many retailers hanging in the balance,” said Richard Fleming, managing director and head of restructuring Europe at A&M. “Those businesses that will remain relevant and survive the disruption will be those that are able to realign operating models with the new normal and meet the needs of a post-pandemic consumer – but there will be an inevitable shake out of those that cannot do so before it’s too late.”

E-commerce retailers tend to operate on significantly lower margins than multi-channel or pure play brick-and-mortar stores. The research reveals that average pre-tax profit margins for online retailers across Europe are at 1.4 per cent, compared to 5.4 per cent for the total industry.

A&M said that more competition and a greater use of online channels across the entire market will inevitably see these challenges intensify, particularly in categories like apparel where a greater proportion of spend will migrate.

“As digital becomes more critical across every stage of the customer journey, retailers face a make-or-break moment to prevent profits from spiralling downwards,” said Erin Brookes, managing director and head of retail and consumer, Europe, at A&M. “There is no going back – retailers must acknowledge changing consumer behaviour and respond appropriately.”

Brookes added: “Yes, this includes successfully transitioning away from some physical stores and re-imagining the purpose of others, but investing in the building blocks for efficient online operating models such as reverse logistics, strategic partnerships and intelligent data and technology is essential.”

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