Expect UK physical retail profits to sink on 'seismic' shift to e-commerce - report

By

Nigel TAYLOR

Published
Jun 30, 2021

While it’s great to be back after finance-sapping lockdowns, physical retailers can expect to pay a hefty price for a dismal stop-start year, especially those in the UK fashion sector.

A new report estimates UK store retailers will see profits fall by £8 billion by 2025, “a result of the seismic shift to e-commerce brought about by the Covid-19 pandemic”, says global professional services firm Alvarez & Marsal.

In partnership with Retail Economics, the report also claims pre-tax profit margins are forecast to fall to 3.2% by 2025, compared to 3.7% in a ‘no Covid’ scenario where the trajectory for consumer behaviour would have remained unchanged.

However, the lasting impact of Covid-19 will not be felt equally across all retail categories, with some businesses “significantly more vulnerable to pressures on profit margins than others". 

The research has identified fashion and homewares retailers among those that will experience “a permanent step-change in consumer behaviour, brought about by increased online engagement and discovery since the onset of the pandemic”.

It goes on to say that European consumers now expect to permanently shift around 20% of their spend across apparel and homewares online – an almost fourfold increase from the early stages of the pandemic in May 2020, "after prolonged periods of lockdowns further embedded this way of shopping for many consumers".

And these changes will be felt most by retailers with a presence in the UK, with 40% of consumers saying their shopping habits will change permanently – the highest across Europe.

By contrast, categories such as furniture and jewellery – where online experiences are typically less convenient compared to traditional shopping due to a preference for ‘touch and feel’ browsing – will be most likely return to pre-pandemic conditions, despite some shift in spending.

Richard Fleming, MD and head of Restructuring Europe for A&M, said: “Covid-19 has wrought irreversible change which has left the future of many retailers hanging in the balance.

“Those businesses that will remain relevant and survive the disruption will be those that are able to realign operating models with the new normal and meet the needs of a post pandemic consumer – but there will be an inevitable shake out of those that cannot do so before it’s too late”.

Erin Brookes, MD and Head of Retail and Consumer, Europe for A&M, added: “As digital becomes more critical across every stage of the customer journey, retailers face a make or-break moment to prevent profits from spiralling downwards. There is no going back – retailers must acknowledge changing consumer behaviour and respond appropriately.

“Yes, this includes successfully transitioning away from some physical stores and re-imagining the purpose of others, but investing in the building blocks for efficient online operating models such as reverse logistics, strategic partnerships and intelligent data and technology is essential”.