Retail Challenges in 2012 and Beyond

Retail sales grew strongly in 2012, yet it is shaping up to be a challenging year for store-based retailers. The latest Euromonitor International retailing research shows two broad challenges, variously impacting grocery and non-grocery retailers.

Rising prices boost grocery sales

Inflationary pressures have become more acute for grocery retailers.  Raising food prices may have boosted turnover, but have also prompted cash-strapped consumers to search for bargains. This has placed pressure on many retailers’ profits, and benefitted those that can balance retail price increases – to maintain profit margins – while still offering attractive prices to consumers. Western European retailers have been strongly impacted by this issue, as the continent’s retail sales have declined in real terms, even within the grocery channel.

Non-grocery retailers are facing even stronger competition from online sales. 2012 is shaping to be the year internet retailing is coming of age, as the channel is generating strong sales, and has now passed the half a trillion dollar sales mark. Online sales are now an important source of growth for almost all retailers.

Amazon steps in offline

Amazon, which remains one of the fastest growing retailers in 2012, is encroaching ever more on store-based retailers. The company is expanding its product range in new, lucrative areas, such as apparel, and at the same time it is investing more in distribution. The “last mile”, or getting the products from the online store to the consumer, could be one of the trickiest steps for online retailers and the biggest advantage for store-based retailers. To tackle, this Amazon is moving aggressively into that space through partnerships with high street retailers and implementation of new technology. The company has started cooperation with convenience stores and grocery retailers, such as 7-Eleven in the US and Co-Op in the UK, either to host its Amazon lockers or to handle deliveries and returns of online purchases. Amazon lockers are self service pick up locations operated by Amazon. In the UK it has joined Collect+, a network of over 5,000 independent retailers, offering delivery services and returns to and from stores. In November Amazon announced further expansion of its Amazon lockers, through partnership with Staples, the leading stationery and office supplies specialist, with close to 1,600 stores in the US.

Amazon’s partnership with grocery retailers is a win-win situation for both parties, as neither competes directly with each other. The cooperation between Staples and Amazon is less clear cut, as Amazon either directly, or through its marketplace, carries many of the products Staples sells. Yet this shows how Staples, which mainly caters to business customers, is trying to get some of Amazon’s customers.

Non-grocery face challenges

To stay ahead of the game, store-based retailers need to find ways to out-manoeuvre lower-cost, pure-ecommerce retailers. BestBuy, the leading global electronics and appliances retailer by value, has been struggling to adapt and saw its share price decline from US$23 to US$15 in the space of year. Comet, the third largest electronics and appliances specialist in the UK, was sold by Kesa Electricals last year for £2 to private equity firm OpCapita, only to call in liquidators in October.  These problems are not only limited to electronics and appliance retailers, as Game Group, the leading video game retailer in Europe entered administration at the beginning of the year, and Schlecker, the leading German drugstore, was liquidated in 2012. The list of failed retailers in 2012 is long and in many cases it is a list of retailers which have lost their “voice”, and have ceased to be relevant to consumers – either through the products they sell or the services they deliver.

While growth prospects for 2012 and beyond look promising, and opportunities for expansion remain, particularly within emerging markets, retailers face a challenging macro environment which they need to navigate, especially given growing competition from other channels, particularly internet sales.