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A brave new world The retail profitability challenge © 2017 Deloitte LLP. All rights reserved. Average profit margins 2010-11 2014-15 6.1% 4% 2.1% decline A six fold increase in e-commerce in the last decade has squeezed profits and rendered many retailers with larger store portfolios than required. Due to a number of key negative cost pressures, operating margins could fall a further 3-5% in 2017. Contacts Dan Butters UK Lead Partner Retail Restructuring Services +44 (0) 113 292 1279 [email protected] Rob Harding UK Lead Partner Special Situations M&A +44 (0) 20 7007 2514 [email protected] Hugo Clark Director Real Estate +44 20 7007 3584 [email protected] Fiona Kaufman Director Restructuring Services +44 (0) 20 7007 9328 [email protected] Three year average profit margins have fallen between 2010-11 and 2014-15 As a consequence, it is likely that we will see greater differentiation in the market. Retailers are already responding to these challenges but the question is – are they moving fast enough in the digital age? 1. EQUIVALENT TO C. 6% RENTAL INCREASE IN LONDON BUSINESS RATES INCREASES IN DEFICITS EXPECTED TO CONTINUE INTO 2017 PENSION COSTS IMF PROJECTS 10% COMMODITY PRICE INCREASE IN 2017 COMMODITY PRICES GBP DOWN C. 15% AGAINST USD AND C. 10% AGAINST EUR FX EQUIVALENT TO BETWEEN 2-4% INCREASE IN TOTAL WAGE BILL NATIONAL LIVING WAGE Perfect storm of cost pressures present potential for a 3-5 percentage point fall in operating margins 4. Rising importance of e-commerce requires ongoing investment to stay relevant The rapid growth of e-commerce Online sales as a percentage of total retail sales Source: Deloitte/Office for National Statistics (ONS) 2. Nov 2006 Nov 2016 2.8% 16% Top line pressure as prices fall for past five years Deflation in retail British Retail Consortium Shop Price Index 2012-16 Deloitte analysis shows that in the run-up to Xmas 2016 discounting across the retail market reached 43% – a record level Source: Deloitte/BRC 3. -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2012 Jan Jun Nov 2014 Feb Jul Dec 2015 May Oct 2016 Mar Aug 2013 Apr Sep Working with our market leading Deloitte Digital practice, we can assist retailers in restructuring situations (and more broadly) in ensuring their real estate footprint is future proofed, margins are maximised and their online offering is compelling. Our innovative retail analytical tools are potential game changers: • L3. At the touch of a button, drawing on public information, our data driven analysis tool can tell you what your optimal real estate portfolio should look like. • Pricing Analytics. Our specialist ‘retail margin maximisation’ software can markedly improve the outcome in mark down situations , typically realising 7–10% of margin improvement. Source: Deloitte Analysis
