Bain & Company predicts grocers in the US and Europe could see already-slim margins fall by 1-4 percentage points if they don't take action to get ahead of the slowdown
BOSTON, May 9, 2023 /PRNewswire/ -- As they wrestle with macroeconomic turbulence, retailers in the US and Europe can be certain of one thing: Now is a bad time to wait and see what type of slowdown lies ahead. New research from Bain & Company, published today, explores the outcomes of 100 retailers in the aftermath of the 2007-08 financial crisis, illustrating how some companies repeatedly manage to gain a competitive advantage by taking decisive action during downturns.
"The retailers that came out ahead after the Great Recession had one thing in common: they spent where it mattered most and cut where it mattered least," said Marc-André Kamel, global head of Bain & Company's Retail Practice. "Winners will act now to free up the funding required for continued investment in their points of differentiation and the drivers of long-term growth. The next 18 months could very well determine which retailers succeed over the rest of this decade."
While economists debate the precise nature of the current slowdown, macroeconomic shifts are affecting retailers in the US and Europe?including galloping inflation, which has masked serious demand challenges. In 2022, strong retail sales growth in key markets was powered mostly by price rises?instigated in large part by rising input costs for suppliers?rather than increased volumes. In the UK, 100% of 2022 retail sales growth was due to inflation. Retailers in Germany, the US and France saw similar trends.
Still to be determined is how badly sales will be affected by the consumer squeeze caused by the rising cost of living, higher interest rates, and other negative factors. In the same vein, industry profit margins will largely depend on the extent to which retailers pass on to consumers all or part of the ongoing cost increases they are receiving from their suppliers.
Despite this uncertainty, Bain's research indicates a clear downside potential. For example, the firm estimates that grocers who don't take preventative action could see a serious dent in their earnings before interest and taxes (EBIT) margins in a recession, with grocers' already slim margins falling by 1?4 percentage points in the UK, Germany, France, and the US. In the US, for example, a 1?2 percentage point dip would wipe out up to approximately 60% of a typical grocer's EBIT margin.
While the threats are real, retailers now have the chance to pull away from the pack through bold strategic moves, embracing uncertainty as a growth opportunity. This is what differentiated the retailers that came out ahead after the Great Recession. And today's rare mix of disruptive factors?including the post-Covid acceleration of e-commerce, macroeconomic flux, and advances in artificial intelligence?could magnify the advantage for those that get it right.
While the right response to the heightened recession risk will vary by individual company, Bain's research points to six broad actions that can enable retailers to both weather the storm and emerge stronger on the other side.
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SOURCE Bain & Company
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