Increasing UK Retail Prices – When Will the Retailer Blink?

We welcome this opinion piece from Jeremy Smith, Director at European procurement consultancy 4C Associates  on increasing UK retail prices.

Sales growth is struggling, in fact a 0.8% fall in September in the UK, inflation at its highest level for five years, pressure on retail procurement is growing and still retailers are resisting being the first to increase prices. Grocers are laying off staff, high streets are decimated and charity shops are becoming more prevalent.  Over the past 12 months over 6000 stores have been shut or filed for bankruptcy, including the likes of Toys R Us, Jones the Bootmaker and American Apparel.  Yet still, they wait …

Retailers are pushing the boundaries of what they can sustain. They all want to retain, or grow, market share by maintaining pricing or even discounting.  While the customer gains, someone, somewhere, shareholders or owners, is paying for this. What concerns me is that some of these retailers are owned by our pension funds, so you can argue that it is UK Plc that is paying.

A worrying outcome is reduced competition on the high street: oligopolistic supply scenarios as online behemoths such as Amazon sweep up even greater market share or acquire retailers at discount rates.  Consumers benefiting now may suffer from reduced options in the future.  The supplier, too, could end up being dictated to as their customers reduce to a smaller, but more powerful number.

This doomsday scenario comes from the fact that retailers - particularly those on the UK high street - are fighting on so many fronts. Six primary factors are currently playing against retailers:

  • Brexit is causing foreign exchange uncertainty
  • High inflation in off-shore manufacturing locations is reducing the benefit of sourcing there, requiring changes in locations or product amendments
  • Commodity prices are tending to increase at a faster rate
  • Business rates on the high street are becoming prohibitive, whilst out-of-town distribution centres receive favourable assistance
  • The living wage is starting to bite and will only impact more in the future
  • With likely Brexit outcomes no clearer, store recruitment plans are still in flux

Many other industries would pass these costs on to the customer.  If you deconstruct the supply chain that is exactly what manufacturers, raw materials providers and wholesalers are doing to the retailers themselves, but the retailers will not blink.

The same concerns do not apply to online retailers to the same extent, raising the question of whether the Government should intervene before the online giants become too dominant.  Online retailers need the high street: Amazon’s trials of automated shop formats are nice marketing, but will be irrelevant if the high street doesn’t exist.  The high street is where people test their high-touch goods and is still a key part of the retail eco-system.

If the Government does not intervene and pricing is maintained, the only way for retailers to survive is cost control. GFR and GNFR cost efficiency has never been more important.  The answer could be tactical supplier-led cost reduction programmes, investment in integrated and agile supply chains, or the optimisation of internal processes and data insight.  All these options will help overcome pricing restrictions and set your business up for survival in the current markets.

Eventually something has to give. We can all hope that Brexit gets resolved simply and quickly, but no-one can expect that to happen, so retailers will have to blink at some point, prices are likely to rise, so the retailer who works on their cost base now can reduce or delay this price increase and win this price war.

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