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Profit-Margin Pressures Force Global Retailers to Focus Their Attention Here

It’s certainly not the time for retailers to rest on their laurels or stick to what were once proven methods.

Global players are facing escalating operating pressures as they transition to a changing structural landscape, one that has a huge impact on profitability and margins and pushes them to be more nimble with regards to inventory management.

“Retailers that continue to drive efficiency in their supply chains to service demand swiftly while minimizing inventory investment will deal with increasing margin pressure more effectively. Changing demand patterns have made it difficult for companies with long purchasing lead times to be nimble,” Christina Boni, vice president and senior credit officer at Moody’s Investors Service, said.

“Retailers will have to predict demand more effectively and have shorter lead times to secure product,” she added. “This will involve increasing product availability and speed of delivery while maintaining lower inventory levels. Retailers will also need to partner more with vendors to increase direct shipment, speed and product breadth.”

According to Boni, the industry is facing change that is “moving like a wildfire through U.S. and European retail, fueled by the pandemic and companies are struggling to adapt.” Further, shelter-in-place orders and a more tech-savvy and educated customer is emerging.

“In the U.S. and U.K. at least, we expect online sales as a percentage of total retail sales to surge above 25 percent over the next five years, forcing many companies to reduce expenses in order to offset the cost of supporting expanding demand for online shopping,” Boni said.

Before the coronavirus outbreak, retailers had started to mine customer data and personalize interactions, but now it has become an essential tool to mitigate the pressure on operating margins. Companies are fine-tuning marketing to use promotional dollars in a more targeted manner. However, there are still too many dollars being spent on markdown promotions that fail to convert customers. Retailers facing severe operating margin pressures will have to mine their data and leverage algorithms to customize pricing and merchandise assortments to offset those pressures.

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The new normal retail landscape is forcing retailers to adapt as they deal with online shopping converts and added delivery costs that impact their bottom lines, a Moody’s special report concluded in its “Credit After Covid” series. The report, “Pandemic is forcing retail to accelerate its transformation,” from Moody’s eight-member retail credit analyst team predicts that in five years there will be far fewer stores and that profit margin pressures will only intensify.

Specifically, mall footprints will shrink more than 20 percent, with more store closures in the U.S. even in stronger malls. In Europe, where the retail sector is more fragmented, online sales growth will register 15 percent of total sales, compared with just 10 percent before COVID-19. That means that global retailers that have differentiated product, scale and financial flexibility will have a better shot at surviving.

The analysts concluded that much of the requisite strategies to adapt were already being considered by retailers, who were still years away from fully implementing their transformation plans. With the onset of COVID-19, retailers will need to scramble to play catch-up. Operating income is expected to plunge 25 to 30 percent in 2020, with retailers in apparel, off-price, specialty and the department store sectors the hardest hit.

“Digital now enables consumers to explore, check inventory availability and price compare in a much faster way, which forces more competitive pricing. We believe consumers will continue to shop at malls to enjoy the communal experience, in-person customer service and merchandise contact. To keep these customers engaged, higher-tier malls have been investing heavily to improve the in-store experience, for instance introducing more dining and entertainment,” the analysts concluded.