This article was originally published in Retail Week on 6th December 2022.
There is no shortage of commentary and analysis indicating that 2023 will be exceptionally challenging for the retail sector globally.
Consumer confidence is close to long-term lows, inflation has become far more entrenched than policymakers expected and consumer wages, in real terms, are contracting at unprecedented rates.
In this environment, it is understandable and, in many cases, rational for leaders to make ‘hard decisions’ – most obviously with respect to hiring and investment – to protect the financial health of their organisations.
Leadership is critical. Almost always, leadership teams get blown along by the prevailing current of the market, its overly emotional misplaced sentiment and crowd-led opinion
A chief executive’s job is incredibly challenging – fraught with noise and opinion, largely from those who have never been one.
However, particularly during times of macro uncertainty, leadership is critical. Almost always, leadership teams get blown along by the prevailing current of the market, its overly emotional misplaced sentiment and crowd-led opinion — much of which turns out to be wrong.
Why, for example, do boards elect to buy back their own shares when implied multiples are at record highs? Or, even worse, why distribute highly valuable cash flow unnecessarily when better options exist?
Most critically, why do executives sacrifice innovation-led activities at the first sign of macroturbulence when we know it always passes?
The answer lies in cultural and structural differences. In the UK, the reputation of public markets is suffering; the appetite and incentives for cutting-edge disruptive businesses to enter the public market are incredibly low.
Principally, I believe this is down to short-termism. Yes, the cost, process and red tape are cumbersome, but the real frustration is having shareholders not focused on the long term, which in turn applies unnecessary pressure to our captains of the consumer industry.
It’s incredibly difficult to manage a retail or consumer business quarter by quarter. It promotes all the wrong decision-making and inhibits investments that take more than a few weeks to manifest and any form of ‘experimentation’.
US has bigger appetite for early-stage investment
Our experience is that the US is more attuned to the benefits of entrepreneurialism and investment.
If you look at all stages of venture-capital funding, the US commits about 70% to 80% more per capita into early-stage investment than the UK ($933 vs $499 in 2021).
While the media’s mood music on the economy is funereal and risks exacerbating the situation, there is a more optimistic scenario regarding the duration and depth of the current downturn, which receives no airtime whatsoever.
Wholesale gas prices have fallen by almost 70% since September peaks and would, at current levels, be a deflationary force by the middle of next year.
Similarly, gilt yields (and, accordingly, mortgage-borrowing rates) have moderated following the reversal of the Truss/Kwarteng policy measures. Sterling is by no means out of the woods yet, but it has recovered meaningful ground since troughing two months ago.
Meanwhile, global supply chain frictions are demonstrably easing following the Covid trauma. Inventory lead times are falling, as are freight rates (down 18% last month in October – 68% lower than its level a year ago, but still 170% higher than October 2019, according to Freightos).
Maintaining a pulse on innovation is critical. All too often, companiesc onflate innovation with speculation and place it high on the list of‘ discretionary costs’ to eliminate when times get tough
We see first-hand that companies are being more prudent in their inventory buying for 2023, after some misplaced exuberance in 2021 — a positive sign for margins going forward.
So what should companies do or, more pertinently, not do now? Maintaining a pulse on innovation is critical in these periods. All too often, particularly in the UK, we see companies conflate innovation with speculation and place it high on the list of ‘discretionary costs’ to eliminate when times get tough.
Dangerous false economies exist within this paradigm of cost-cutting, which risk limiting the scope of individual companies and the broader sector from maximising the potential to recover from this challenging period.
Innovation can be targeted at near-term business optimisation with technologies capable of delivering material in-year net financial benefits.
It’s all very well to say that, in an ideal world, the roof should be fixed when the sun is shining, but when it’s pouring with rain the hole in the ceiling is still a massive problem.
Investments in technology, data capability and organisational adaptability provide a springboard for recovery once the headwinds abate
We’re seeing even the best consumer companies, capitalised with stable long-term shareholder bases, are reining back innovation at exactly the time they should be doing the opposite.
Investments in technology, data capability and organisational adaptability — specifically the ability for organisations to deliver innovation via technology implementation — will enable businesses in our sector to better weather the current storm and provide a springboard for recovery once the headwinds abate.
There are, however, some encouraging signs in the UK. Just last week, Marks & Spencer went with a buy-versus-build approach by acquiring the IP of Thread, the fashion marketplace, as it seeks to boost revenues from personalised services.
Next and Frasers Group are also taking proactive steps to bolster their platforms via acquisitions in this period.
Primark’s redoubled commitment to physical and online infrastructure is a good example of companies maintaining or even expanding investment through the most challenging phase of the current cycle.
We have no doubt this will position these businesses to emerge more dynamically as and when conditions improve.
Right now, chief executives need to be brave, recognise that this climate will pass and invest heavily when prices are cheaper, talent plentiful and competitors more challenged.
Today represents the best time to attract tech talent in the past decade and the best time to try something new, and it will get better still in 2023.
While competitors are under immense pressure, we should be seeing dynamism and agility from our leading retailers.