People
David Bassuk
Partner & Managing Director, Global Leader, Retail
New York
Hope is usually the theme at the start of every New Year, but it will not be a good strategy for retailers going into what promises to be a difficult 2023. The challenges this year are expected to be different from what the industry saw over the last three years when the focus had been on getting product to consumers at any cost. That often meant throwing money at the problem to maintain sales and market share as the world shifted.
But now, as consumers across retail sectors feel the financial pinch, discretionary spending is expected to slow dramatically. At the same time, retailers continue to feel the pinch of inflation coupled with high labor and operating costs. To win in this environment, retailers must infuse discipline and rigor into their business and proactively take action. They must read and react to changing demand and shifting pricing models that can expand margins while maximizing conversion.
Against this backdrop, here are our 2023 retail predictions:
Consumers spend more discerningly
Economies around the globe have been flirting with the possibility of a coming recession for months now. In an AlixPartners survey, 50% of retail executives said they expect a recession within the next two years. Consumer demand will drop double digits in nearly every retail sector this year. Savings balances will fall further, and consumer debt will creep back up. Over the holidays, consumers relied heavily on buy now pay later (BNPL), a harrowing harbinger for the near future.
(Perceived) pricing becomes vital
As consumers become more price conscious, perceived affordability and value will be critical. This is an opportunity to market personalized promotions or offers based on consumer insights. The value-conscious consumer will also spark a renewed demand for private label and store brand offerings. This should give retailers that already have private label programs a much-needed pathway to improving beleaguered margins.
Margin protection goes mainstream
Speaking of margins, the deep discounting to address high inventory levels this past holiday season – and likely into the New Year – coupled with material cost inflation mean that retailers will struggle to return to price points that achieve target margins. More than half the retail executives we surveyed said their company had been very or extremely impacted by the recent inflationary environment. To protect margins, retailers and brands will partner more closely with vendors while enforcing stricter “return to vendor” policies for unsold merchandise. Discount retail will continue to perform well in this environment throughout the year.
Digital is seen as more than a channel
Many retailers have been seeing decelerating digital growth – especially as the pandemic’s supercharged e-commerce growth stabilizes -- but consumers’ reliance on digital channels is here to stay. There is an opportunity here: rising digital penetration has coincided with declining profits because retailers put in place expensive omnichannel capabilities over the last several years without regard for profit. Almost 75% of retail executives told us that they believe their company leads the industry in digital tools – perhaps an indicator that retailers were just chasing the next shiny digital tool. In 2023, retailers will strive to become digital first in their relationship with their customer and not just in the transaction. This means resetting all operating practices across people, tools, processes, and KPIs to digital-first metrics and focusing on customer lifetime value, not customer acquisition.
Customer-centric mindset seeps into business plans
When retailers think digital first, they will also start to move from a product-centric mindset to customer-centric mindset. Using zero-party data, which comes directly from customers and is considered better for consumer privacy, retailers will be able to make better decisions about everything from product to marketing and logistics to inventory. Retailers will also invest in loyalty programs, thinking about them not just as discount vehicles but a way to develop relationships with customers, understand them better, and integrate insights into decisions. Large retailers will also use this data in developing Retail Media Networks to sell highly targeted brand vendor ads to consumers.
Consumers embrace circularity
The resale market has continued to grow over the last five years, with the pandemic providing a significant bump. In the past, while consumers have expressed concern for the environment, they have been reluctant to pay more for sustainable goods. In 2023, the demand for secondhand fashion will keep growing as it provides consumers both affordability and an easy way to make a difference when it comes to sustainability.
Retailers finally gain control of inventories
With the inventory mistakes of 2022 still fresh in planners’ minds and the pressure on to cut costs this year, there will be a focus to return to leaner days of supply. While this means that inventories will finally become manageable, this will create potential risk toward the end of the year.
Supply chain Chexit becomes real
As China’s relationship with much of the world stays tense, and global logistics costs return to below pre-pandemic levels, retailers in categories beyond apparel will accelerate the diversification of manufacturing locations. There will be other supply chain changes: New and (greatly) improved logistics technology will provide visibility and automation for everything from assembly line to shelf space.
Bottom lines rise to prominence
After a decade of chasing growth – mostly through digital, retailers must now focus on profit to ease the pressure on bottom lines that have suffered from investments made over the last few years and the high costs incurred to deal with the supply chain crisis. They will do so through a big focus on both margin expansion through strategic vendor partnerships and cost optimization. This does not mean fully ignoring the top line as there will be ample opportunities to improve the effectiveness of ongoing tactics.
Cash reserves reign
Many retailers have already begun taking liquidity contingency measures on the back of disappointing fourth-quarter predictions. Not enough did so, however – in an AlixPartners executive survey, only a third said they had built cash reserves to prepare for a possible recession. Those that did not act early enough will have a difficult 2023, creating opportunities for those who have the cash to ride the storm out.
Every trend hides an opportunity if leveraged with care. And it’s not all doom and gloom: Some of the problems that occupied retail in 2022 are expected to ease, including labor availability. There are also prospects to streamline or consolidate some of the expensive add-ons to operations over the last couple of years. Ultimately, 2023 will force retailers to take stock of business, which has been hard to do in the face of the recent constant disruptions.