itim insights | Is there a need to increase productivity in retail?

Is there a need to increase productivity in retail?

Ali Athar | 04.01.2018

In the national press over the last month it was asserted that consumer spending not productivity was responsible for driving UK growth.

UK productivity, apparently, has declined over the last 10 years.

In retail, profitability has been declining as a percentage of revenue; we have not seen revenue increases mirror cost increases:

  1. Sales have migrated from stores to online. Growth in e-commerce has increased multi-channel costs without compensating decreases in offline costs
  2. Increases in promotions and markdowns (and general price competition) has reduced margins
  3. UK salaries and costs have increased
  4. Economic decline has for some retailers been mirrored in a sales decline

All of which have contributed to overall productivity decline.

Those that have kept profits from declining have only done so by improving input prices (the China and Bangladesh effect). Others have been able to buffer UK productivity decline by expanding successfully overseas. 

So what can we do to fundamentally increase productivity in UK retail?

There are three areas where retailers should focus.

  1. Reducing head office costs. Head office costs have grown and so trimming them is a must, particularly in three areas: IT, Finance, Buying & Merchandising. All of these areas are generally over staffed.
  2. Improving outcomes of processes. In the last 15 years, we have not seen any significant improvements/innovation in stock management, ranging and in price/promotions management. Stock distribution is still mediocre and (pricing and) promotions are leaking margin.
  3. Increasing standards of in-store sales and service. Service standards in stores have declined over the decade and need improving.

By improving productivity in these three areas we are seeing significant benefits.

Head office headcount reductions of 1-2% of revenues are possible. Add to that a 2-4% improvement in margin through better price, promotion and stock management and 3% uplift in sales through better ranging, improved customer service and better stock distribution. Surprisingly, it is possible to add a full 5% to the bottom line of any mature retailer today on a like-for-like basis.

How will the productivity increase materialise? In the end, it is about innovation and technology. But it is not about ERPs. The ERP movement has reduced every retailer to a set of average processes, whose outcomes have become worse not better.

ERPs created better integration but stifled innovation, so in a desire to be end-to-end process centric they have increased bureaucracy. Most ERPs are built on business models that are now 20 years out of date.

There is a lot more exciting innovation out there, based on excellence in each domain. Much of it delivered on a variable cost-usage model. And most of it is focussed on improving outcomes.

That is the future. That is where itim is going and so should you.

>> Read more about Price Optimisation
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