Retail trade: searching for new business models

26 febbraio 2016

patrizia.dicicco@prometeia.com

Retail trade is undergoing a phase of discontinuity with the past, in a highly competitive context characterised by structural changes in consumer and buying behaviour.

 

The retail business environment has undergone significant changes in these past years, as a consequence of new consumer behaviour generated by the income crisis and the demographic changes, as well as by the ongoing digital revolution.  Consumers nowadays are more aware, careful about waste and about the environmental sustainability of the productive processes, and search for the best price-quality ratio, with increasingly "experiential" purchases in which the physical meets the virtual sphere. 

Such trends will be more marked in coming years, thus defining a convoluted and ever-changing market context. Just like the clouds, to paraphrase the metaphor of the philosopher Popper. In this new world, the reorganisation of the business model and the innovation of the commercial offer will be essential for retail businesses, in order to retain a competitive edge and intercept new consumer and purchasing trends. 

From push to pull marketing strategies, whereby the individual (and no longer the consumer) governs the purchasing process, deciding where, how and what to buy; from multi-channel systems to omni-consumerism, in which the physical sales network coexists with the online offer, with a view to contamination and not cannibalisation.
 Retail companies are in the process of rethinking their development by following a number of macro trends: [1] multi-specialism (offer targeted to specific consumer segments), low cost and proximity (variety with design content and attractive prices), urban polarity (presence in the town centres for redesigning the relationship with the consumer) and the development of a brand community.

Specifically, in the food industry, the strategies relating to company repositioning and development have a keen focus on specialisation and innovation, in terms of service, price and/or variety (from discount stores to superstores). This offer is in the process of intercepting consumer styles oriented towards proximity and flexibility, often in search of a connection with the territory. 

Such deep changes make it increasingly important for companies not only to equip themselves for technology, but also from an organisational and cultural perspective. 

However, retailers face such significant innovations, starting from an economic and financial situation considerably deteriorated by the prolonged income and consumption-related crisis endured by Italian families. In fact, the budget analysis of over 7,100 companies in the industry with a turnover higher than 2 million EUR [2] points out difficulties encountered by all dimensional classes and sectors, more pronounced for small and medium-sized enterprises (with a turnover lower than 50 million EUR) and for retailers of furniture and electrical household appliances. 

In the last years, the analysed companies have experienced an anaemic increase in turnover and a marked drop in profit margins and profitability. This trend accelerated in 2014, when companies experienced the lowest growth rhythm in the past 15 years and an income performance at historically low levels.

The growth was dampened by the weak dynamic of purchasing volumes, but also by the accommodating price policies. Furthermore, in 2014 the effects produced by the strategies of rationalisation of the commercial network implemented by the key Mass Distribution players were reinforced, resulting in the closing down of points of sale no longer sustainable in economic terms and encouraging M&A transactions between previously existing chains. In fact, investments in capital assets have fallen by 13.5% in the last four years, more visible in food distribution and in the retail sale of durable goods, particularly electrical household appliances, also given the financial difficulties experienced by the greatest leading enterprises. On the other hand, the retail of personal goods (from fashion items to cosmetics) has continued to register a vigorous increase in the sales network, owing to the development of the large areas specialising in low cost clothing products, household and personal specialists and parapharmacies. 

The intense competition has brought about a sharp deterioration in the average net operating profit margins (in 2014 slightly above 1%, values more than halved compared to the years 2000-07) and a marked drop in profit-generating capacity. The worse performance belongs to small and medium-sized enterprises, drifting towards losses in the past years. Nevertheless, the reduction of profits has been equally intense for larger enterprises. The average return on equity of the analysed companies has been almost reduced to zero (0.7% in 2014), with the worse performance experienced precisely by the small and medium-sized enterprises, that in the last few years have operated with a negative R.O.E.

The ongoing feeble recovery of the demand for consumer goods and the presence of a parade of companies facing substantial financial sustainability issues may accelerate rationalisation and a focus on the retail distribution sector, continuing to promote M&A transactions so as to increase the corporate dimension and create synergies in terms of human resources and technologies. 

 
Retail distribution - return on equity (ROE) per dimension
Retail distribution - return on equity (ROE) per sector
 
 
Processing by Prometeia on Bureau van Dijk financial statements. Source: Club Consumo Prometeia – December 2015.
 

[1] Osservatorio Non Food, ed. 2015; Rapporto Consumi e distribuzione - Coop 2015.

[2] Club Consumo, December 2015 – Prometeia.

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