Research Highlights Profit Improvement Opportunities in Retail
The UK Retail Industry in 2017
The £370 billion UK retail industry is trading in uncertain times, with a political and economic environment that has changed significantly over the course of the last year.
Against many negative predictions on the financial impact of Brexit, consumer spending has remained strong. However, disposable income growth has been slowing, we have seen the return of inflation and there are growing fears that consumer spending is increasingly debt-driven - with unsecured lending rising steadily to levels last seen in 2008.
At the same time, consumer behaviour continues to gravitate towards digital and online purchasing, with retail business models being revised accordingly. The biggest winners so far are those retailers which have effectively executed click-and-collect and online convenience for customers. But the speed of change in this online revolution has been placing traditional business models under increasing pressure and costs are rising.
‘Indirect Spend’ – a major cost base for retailers
All retailers spend significantly on Indirect Expenditure – otherwise known as ‘Goods-Not-For-Resale’.
Spend categories such as Buildings, Installation & Fixtures, Logistics, Marketing, Facilities, IT & Telecoms and Utilities can account for more than 1/7th of a retailer’s turnover.
They are also often purchased by operational departments with no procurement support or, worse, left totally unmanaged, falling between functional responsibilities or distributed across the entire organisation.
Procura Managing Director, Richard McIntosh (pictured) said:
"The net result is that, even for retailers who have sophisticated buying functions, there are still significant savings to be made from indirect spend. In the current economic climate, where uncertainty is depressing top-line growth and sterling's devaluation and the introduction of National Living Wage means more costs are increasing, indirect spend could be an excellent target for savings and margin improvement. "
Unease about how Indirect Spend is managed
Research completed by the team at Procura with over 150 retail organisations highlights unease about how indirect spend is currently being managed:
- Indirect spend is often ignored by senior management even though it accounts for, on average, 1/7 of the annual turnover of retail chain stores
- Only 6% of boards had any visibility of indirect spend
- Although two-thirds of retailers have some procurement function or procurement resource dedicated to indirect spend, they are failing to harness the full opportunities for savings
- Savings from indirect spend often fail to be realised because of a lack of resources – capacity is spread too thinly across a wide range of categories
- Incorrect organisational structure – buyers have a transactional focus with no strategic sourcing expertise
- Dominance of operational functions – suppliers and contracts are agreed with little or no procurement influence
- Lack of specialist expertise – buyers have poor supply-market knowledge and a lack of expertise, methodology and tools
- In most retailers, more than 20% of indirect spend has no procurement control. Maverick spend is a significant issue.
Profit improvement – 4 steps to consider
Our research also shows that, with the right approach, significant savings are possible. The retailers who had most comprehensively addressed indirect spend made savings of 12.4%.
In summary, 4 steps can be taken to create savings and enhance profits:
- Undertaking a detailed Spend Analysis to provide complete transparency of indirect spend – what is being spent, with whom and who is spending it.
- Taking a realistic view of how Indirect Spend is currently managed. If it is not currently being managed tightly, professionally and thoroughly, there will be opportunities to make savings.
- Investing in Indirect Spend Procurement. Working with a trusted external partner who can bring expertise, knowledge, capacity and drive to implement savings can deliver significant return on investment.
- Ensuring Indirect Spend remains visible across the organisation. Ongoing Spend Analytics plays a significant role in ensuring spend stays optimised and a Contract Database will ensure commercial terms are managed and agreements are never left to chance.