The outlook for retail in 2016
4th January 2016
It's all about trust
The nature of retail is changing, week by week, day by day, and at an alarming rate. Anything that we used to be able to say with certainty, has gone.
As we stand at the beginning of 2016, we have colleagues with job functions we never knew would exist five, or even two years ago, knowledge about our customers and competitors that we never thought possible and opportunities to buy and sell across the globe.
All this requires investment, but while costs are increasing, our ability to raise prices has never been tighter; standing still often means reducing cost by 5% each year and competition remains as tough as ever.
Retail is tough but it is also very exciting. Retail remains simple but still hard to deliver.
Those that will continue to be successful will be the retailers who win and maintain customers trust.
The technology challenge
So, 2015 saw retailers continuing to adapt to meet consumer expectations of a seamless shopping experience whether online, on mobile devices or in store.
Wearable technology presents retailers with the opportunity to experiment with how they use technology to engage with their consumers, but has had the double effect of increasing the demand for a instantaneous, reliable and accessible service. This has meant that retailers have needed to invest heavily in robust order fulfilment systems and fast, yet high quality, customer service.
Head in the cloud - data and cybercrime
This increased use of technology platforms in retail has had the knock-on effect of dramatically increasing the amount of data collected and held, including customers’ personal data. With several major data breaches hitting the headlines this year, retailers need to prioritise data protection and risk mitigation. Cyber-attacks not only have financial implications, but can also damage reputation and lose the trust of consumers.
In the region of 2.5 million incidents of cybercrime were recorded in England and Wales in 2015, a figure set to rise in 2016. In response to growing concerns of how personal data is stored and used, the European Court of Justice (ECJ) took action to override the Safe Harbor pact. Over the last 15 years an estimated 4,500 companies have used Safe Harbor to store personal data in relation to Europeans, on servers in the US. The pact was struck down by the ECJ because it violates the privacy rights of Europeans, by exposing them to allegedly indiscriminate surveillance by the US government. Retailers wanting to move data from Europe to the US now need to negotiate specific rules of engagement with each country. This will have a significant impact on all retailers, but especially those heavily reliant on cloud technology.
Cloud technology, in particular cloud storage services, has come under the scrutiny of the Competition and Markets Authority (CMA) this year. In December the CMA launched a review of compliance with consumer law, amid complaints about price rises and reductions to unlimited storage capacity deals. With a number of investigations ongoing or in the pipeline, it is clear that the CMA and other regulatory bodies are focused on online sales and e-commerce, and are not afraid to tackle issues across a range of industries. Retailers who can demonstrate that they can be trusted with personal data, such an emotive issue for each and every consumer, and can then utilise that data properly, are likely to be the winners in 2016.
Consumer rights update
2015 saw the biggest overhaul of UK consumer law to date when the Consumer Rights Act 2015 (CRA) came into force on 1 October. The CRA has seen many of the existing laws updated, and sets out all key consumer rights in one place. The revised CRA now gives consumers the right to the repair or replacement of faulty digital content including online films, downloads and apps. This means that retailers need to review their approach to remedying faults, if they wish to avoid the costs of refunding consumers and retain the trust of each customer. Getting their customer service right, whether at point of sale or as aftercare, will be essential to this.
The CRA aims to improve the quality of service consumers receive, this will work in tandem with a new consultation by the European Commission (EC) that aims to improve the consistency of online services available across countries. The consultation seeks to harmonise online consumer protection as part of its Digital Single Market strategy, and ensure consumers can enjoy the same online content and services regardless of which EU country they are in. There are, however, concerns that the new EU rules could contradict the provisions of the revised CRA. The EC’s proposals would allow businesses to rely on their national laws based on a focused set of mandatory EU contractual rights for domestic and cross-border online sales.
Supply chain and modern slavery
Cross-border legislation has featured strongly in 2015, with one of the most significant pieces coming in the form of the Modern Slavery Act (MSA). From March 2016, all retailers who conduct business in the UK and have a turnover of at least £36m, will need to provide an annual statement detailing how they are preventing slavery and human trafficking in their supply chains. The MSA is a major piece of legislation aimed at safeguarding human rights and encouraging ethical business practices on an international level.
Risk to brand reputation is acute. Non-governmental organizations and online consumer sites that review, investigate and report on issues throughout the supply chain are becoming more common place. The trust placed in your brand has seldom been more valuable and yet more under threat.
Retailers will have to introduce a greater level of rigor around their existing auditing and due diligence processes, with some having to re-examine their approach to subcontracting, resourcing and operating if they are to maintain the trust consumers have in their brand, from point of sale way back to original source.
What is coming your way in 2016?
Introducing the living wage
Retailers wage bill in the UK is set to rise with the introduction of the National Living Wage (NLW) in April 2016. Workers aged 25 and above will receive £7.20 per hour, increasing the National Minimum Wage by 50p.
Retailers will have to balance the increase in their wage bill by improving efficiency, but there is concern that they will need to recoup the costs by increasing their prices or reducing their workforce. For some of the major supermarkets the aim is to improve efficiency through attracting and retaining talented employees by offering salaries that exceed the proposed NLW, with budget supermarket, Aldi for example, offering £8.40 per hour. Indeed, competition between the supermarkets will continue as the price war intensifies in 2016. The knock-on effect has already been felt by small to medium sized companies who bear the brunt. Smaller companies (turnover below £25m), saw their profit margins fall from 3.5% to 2.1% due to their lack of negotiating power, while the biggest manufacturers (over £1bn turnover) saw profit margins increase from 5.2% to 5.4% in the same period.
Competition in the market
Keeping markets competitive not only between small and large business, but across jurisdictions will be a key focus for 2016. Similar to the Digital Single Market strategy, the Transatlantic Trade and Investment Partnership is a trade agreement between the US, and the European Union that will aim to encourage competition among businesses by reducing barriers to trade. The agreement aims to remove the majority of custom duties on EU-US trade, including regulations which make European goods up to 30% more expensive when sold in the US. It would also end technical regulations, meaning products could be labelled under the same name in both the EU and US, which would streamline retailers costs and procedures.
Open all hours – Sunday trading
In a bid to help smaller businesses and bricks and mortar retailers compete with online retailers the Sunday trading rules will be discussed again in 2016. This follows a consultation paper in August 2015 that aimed to discover whether Sunday trading rules should be devolved to give communities greater control of their local economy. Supporters believe the change will help to counteract the current decline in footfall across high streets and shopping centres. An increase in footfall would be beneficial to all businesses, whether large or small, but critics have argued that the cost of keeping premises open for longer may outweigh any increase in consumer spending.
Under pressure – the squeeze on bricks and mortar
Further financial pressure looms for bricks and mortar retailers with the revaluation of business rates in 2017. Acknowledged as the largest increase in business rates for high street retailers in a generation, 76 out of the UK’s main towns and shopping centres will see an increase in their rates bill with some parts of London reportedly seeing an increase of more than 400%.
Rising to the challenge
The retail market remains a highly competitive environment and retailers face a number of challenges for 2016. On one hand they must align their businesses with the ever changing demands of their consumers, whilst on the other hand remain vigilant and responsive to regulatory changes.