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5 Key Retail Trends in 2022

Full report: Outlook for the UK Retail & Consumer Industry 2022

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Carbon emissions net zero sustainability

 

Trend 4: Path to Net Zero

Greenhouse gas emissions reached new record highs in 2020 as world leaders met for the 26th Conference of the Parties (COP26) of the United Nations Framework Convention on Climate Change in November 2021. This is despite an estimated 6–7% reduction in carbon dioxide emissions due to the economic slowdown brought about by the global pandemic.

As international agreements and targets were penned to strengthen global action, the critical role that multinational corporations play in tackling the crisis was thrust under the spotlight. While the UK is ahead of the curve in its aspirations for carbon neutrality compared with its European neighbours, corporations’ commitments around net zero emission targets often remain vague, lack comparability, and reporting is often infrequent, if at all.

The gap between ‘commitment’ and ‘action’ must narrow rapidly if businesses are to fulfil their net zero carbon emissions obligations by 2050. Under one third of the largest 1,000 European corporates have a solid commitment in reaching net zero by 2050. Of those that have commitments, just 5% are on track to meet their target if current trends continue.

Consumer facing industries in the UK have a leading role to play. Albeit, the level of commitment towards net zero carbon emissions differs widely by retailer, sector and size of company. The research shows that from a sample of the largest 50 listed UK retailers (combined market capitalisation of £156 billion), under half (46%) have committed to net zero carbon emissions. Of those that have committed, the average number of years to net zero emissions is 21.5 years or by 2041.

An aggressive reduction of emissions must occur across all sectors to achieve net zero objectives. However, the level of burden faced by firms differs substantially by sector, and ‘scope 3 emissions’ (those produced outside the control of retailers and further down the supply chain) differ widely depending on the length, carbon intensity and complexity of the supply chain.

A combination of regulation, investor pressure, and consumer and corporate awareness is encouraging businesses to commit to net zero pledges – and they are doing so in increasing numbers. Commitments to net zero require companies to develop decade-long strategies that often rely on significant investment requiring assurance by long term government backing in many instances.

 

Figure 11 - Willingness to pay for the reduction in carbon emissions

 

Who is willing to pay for carbon emission reduction ESG in retail

Source: Retail Economics

 

UK government is signalling to firms its intention to commence a ‘green revolution’ to leverage a global competitive advantage in its post-Brexit and post-pandemic state. Armed with a comprehensive 10-point action plan, the UK is making strides towards reducing more carbon emissions than EU countries. This includes a ban on new petrol and diesel car sales from 2030 (compared to EU’s 2035), and an infrastructure bank to invest in green projects. Additionally, in June 2021, UK government set into law what it believed to be the world’s most ambitious climate change target – to reduce emissions by 78% by 2035 compared to 1990 levels.

It is difficult to overstate the quantum of transformation required across consumer-facing businesses if they are to rise to the challenge. Against a backdrop of growing population and rising energy demand, the industry’s de- carbonisation will rely heavily on access to clean power generation, carbon capture and storage, technological advancements, behavioural changes, and a transition away from fossil fuels.

 

Retail Profitability Economics

 

Trend 5: Protecting Profitability

Even before COVID-19, retail profitability was already under significant pressure. Over the last decade, pre-tax profits have almost halved for the largest UK retailers, falling from 9.2% in 2012 to an estimated 5.1% in 2021. The combination of rising costs, fierce competition and the shift towards online has put intense pressure on margins.

Some of the biggest challenges have been felt by retailers with large store estates. The shift online has left many retailers exposed with cost structures disproportionately weighted towards their physical channels. This comes at a time when variable costs are rising and online sales account for a growing proportion of total sales. With more physical outlets than many can commercially justify, and often tied to inflexible lease structures, their ability to pivot business models as rapidly as required has been hampered.

Meanwhile, heavy investment will be needed to make online operations more efficient: automating dispatch processes, hiring data scientists, integrating more sophisticated marketing campaigns. The digital shift will create new challenges throughout the entire value chain, adding additional cost at each stage.

Pure online retailers typically operate on considerably lower margins than multi-channel and brick-and-mortar business models. This reflects the difference in cost structures, business models and the price sensitivity of consumers, where transparency in price, service and quality place further downward pressure on margins.

 

 

As the retail industry undergoes a period of transformation, businesses need to adopt a more detailed and data-driven approach to profitability. The shift towards online will exert the greatest pressure on store-dependent operating models, requiring businesses to align with more digital-centric customer journeys.

For retailers, the priority of protecting margins and improving operational performance will mean using data to gain increased visibility on e-commerce profit and loss. Here, data-driven decisions will be critical in executing more informed investment trade-offs.

Retail strategies will vary widely. Many factors such as category, customer demographics and the maturity of online propositions all influence strategic success. Furthermore, external influences such as regional market dynamics, regulation and infrastructure, ensure that transformation plans are dependent on individual company and market characteristics, such as existing online penetration rates, concentration and competitor activity.

Indeed, the research shows that the shift towards online is a significant contributing factor of dwindling profit margins. Figure 16 shows an inverse correlation between the rise in the proportion of online sales and a fall in pre-tax profit margins over the last decade.

 

Figure 16 – Pre-tax profit margins have fallen as penetration rates rise across key UK retailers

Pre-tax profit margins have fallen as penetration rates rise across key UK retailers

Source: Company financial reports, ONS, Retail Economics analysis

 

Irrespective of the nuances across operations, successful companies will be those that quickly deploy effective margin-improvement strategies targeted at the largest cost drivers underpinning the digital switch. For most retailers, these strategies centre around digital marketing, supply chain optimisation and channel-mix management.

 

Things to do now

You've got three options:

Click on part one of this mini-series and find out about the macroeconomic effects on consumers and the retail industry.

Click on part two to investigate the uneven impact of industry disruption across the six main retail categories. 

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Found this short article interesting?

This article is the last in a three part mini-series from our report “Outlook for UK Retail and Consumer 2022”. (be sure the explore articles one and two). However, this article provides in-depth analysis, forecasts and insights which focus on the key retail industry trends that will impact retailers and consumers throughout 2022.

The insight in this report is critical for industry professionals operating in the retail and related industries for improving strategic planning, forecasts and to navigate the ongoing disruption and wider structural changes with the retail sector.

View Full Report Here

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