Operating margins will fall by 3%-5% in 2017 as a “perfect storm” of challenges hits high street retailers, a new report has shown.
Business advisory firm Deloitte said bricks-and-mortar retailers are facing five major issues that will test their profitability this year: rising property costs, including business rates and rental costs; increased staff costs following the increase to the National Living Wage and the introduction of the Apprentice Levy; the drop in the value of sterling; rising fuel and commodity prices; and higher pension costs due to falling gilt yields.
In its report The Retail Profitability Challenge, Deloitte looked at the profit and loss accounts of the UK’s leading 1,000 retailers between 2008 and 2015 and found profitability was declining. Between 2007/08 and 2010/11, average margins stood at 6.1%, but by 2014/15, average margins had declined by 2.1 percentage points, to 4%.
The accountancy firm said the fall in profitability has coincided with the rapid growth of ecommerce over the last decade. The share of total retail sales accounted for by online has grown from 2.8% in November 2006 to 18.3% in November 2016, following advances in smartphone technology and changing consumer behaviour.
Ian Geddes, head of retail at Deloitte, said: “The retail industry is undoubtedly going through a period of unprecedented change, and profit margins have never been under greater pressure. Successful retailers in 2017 are likely to be those that concentrate on genuine customer engagement, differentiation and innovation while improving productivity and keeping a laser-focus on reducing costs.”
He added: “In particular, it is likely that the evolution of the retail industry will see more specialisation in the market – our research has found that the most clearly differentiated retailers are often the most profitable.”