Retail's Rough Ride: From 2023 Pain to 2024 Speculation

It’s no secret that the UK economy is struggling right now, which, of course, has had detrimental effects on many businesses, with the retail and ecommerce hit especially hard. Sales in clothing and retail are declining a little, and paid marketing effectiveness is decreasing, especially in competitive segments like fashion. Everything came to a head last year…

Why was 2023 so challenging?

As referenced in a BBC article, 2023 was on course to see the highest number of company failures since the financial crisis of 2009 delivering some alarming statistics:

• Retail and consumer goods made the largest and second-largest number of redundancies respectively in 2023 compared to any other industries. (Layoff.fyi)
• 2.4% decrease in clothing and footwear spend, which was the largest seasonally adjusted drop in UK consumer spending quarter on quarter to Q2 of any segment. (ONS)
• 25% increase in UK firms in critical financial distress from August to October 2023. (Gov.UK)
• 26% of UK organisations stated they were likely to make redundancies, with half surveyed stating they were expecting to cut costs and reduce recruitment efforts. (Ayming UK)
• 54% rise in the number of redundancies year-on-year to August 2023. (GQ Littler)
• 64% of businesses are still recovering from the negative impacts of COVID. (Shopify)

Last year presented a unique set of challenges for UK businesses. It can be difficult to accurately summarise and explain all the nuances as to why 2023 was particularly hard without stating the obvious point: inflation reduced consumer spending and drove up costs. But this by itself doesn’t adequately explain why businesses struggled. To fully understand this we need to consider the other macroeconomic factors at play.

Sales declined for some businesses due to a loss of market share through competition. For those seeing increased sales, many were below target, perhaps due to forecasting. Meanwhile, costs of debt, shipping, marketing, engineering and software all rose, and barriers to trade brought about by Brexit are predicted to cost UK ecommerce firms £5bn a year.

In retail specifically, rising inflation reduced fashion spend (see chart) and profitability mostly fell because of rising costs driven by geopolitical and socioeconomic pressures. Online ecommerce platforms like Shopify are booming, due to factors like Covid, meaning more businesses are selling directly to consumers. This had a knock-on effect on high street brands and multi-brand and marketplace businesses. Plus, the cost of Pay Per Click (PPC) advertising has risen, but its effectiveness is decreasing due to privacy changes depending on the industry.

Surviving 2024

As much as we’d like it to be so, hope is not a strategy when it comes to business operations, and 2024 has seen ecommerce-based businesses harder hit as customers switch back to physical retail, as outlined in the Office For National Statistics January 2024 report.

Although times remain tough, many retailers are making it through. Many of those that have survived to date have the following in common:

Marketing For businesses to stay ahead of the curve when it comes to marketing in 2024, they require an understanding of customer needs, key trends and evolving algorithms. Businesses that ruthlessly track and target users are at an advantage. Having greater ownership of customer communication and more focus on relationships is another common trait, which fosters a loyalty mindset, with the potential use of loyalty programmes, private shopping, and social media playing a larger role via third party micro influences. With updates like the EEAT from Google, brands need to prioritise offering valuable information with educational content to build trust and promote their values clearly to customers who resonate with these. Authenticity and transparency are two further areas that are increasingly sought after by potential customers and younger generations.

Technology With the current market volatility, businesses need to focus on reducing costs and getting a solid return on investment from new work and projects. These are the commonalities of businesses who weathered 2023 well:

• Fewer but more highly and cross-skilled people
• Smart use of cheaper labour markets
• More use of SaaS that has usage-based fees and/or a greater focus on procurement
• Staying clear of overinvestment in cutting-edge technology like artificial intelligence

Strategy Investor risk aversion, will lead to more realistic and successful strategies. The following areas as wise strategies for businesses to consider moving forward:

• Abandoning “growth at any cost”
• Market profitability before expansion
• Avoid the hire and fire cycle (cautious hiring)
• Do fewer things but better
  

Wrapping up

Although growth forecasts remain cautious, better economic times look to be on the horizon. Taking on board those factors that helped retailers make it through the past few months should help the sector to thrive as the economy recovers and consumers have more spending power.

• If you’re worried about your cost rises being disproportionate to other businesses in your sector, get in touch to discuss software benchmarking costs and optimisation or your wider technology strategy…

Key takeaways

• The UK retails sector has had a tough time over the past few months due to a struggling economy cutting consumer spending power and rising costs.
• Rising inflation reduced fashion spend and profitability mostly fell because of rising costs driven by geopolitical and socioeconomic pressures.
• Online ecommerce platforms are booming, due to factors like Covid, meaning more businesses are selling directly to consumers hitting high street brands and multi-brand and marketplace businesses.
• Taking note of the approach of retailers who have made it successfully through these tough times in terms of marketing, technology and business strategy can help you to thrive as the economic skies brighten.

About the author

Dan Knight is Mindera’s FashionTech Lead.