Rising costs and falling profits: how can retailers fight the margin squeeze?

The past decade has seen incredible transformation in the retail industry. The boom in e-commerce has been a catalyst for change. Where, and how customers shop has altered beyond recognition. The fast pace shows no sign of abating. This has not been without its challenges. Under pressure to deliver across multiple channels and fulfil customer demand, retailers are now faced with pressures that are squeezing their profit margins ever tighter, despite healthy sales.

In March alone, a series of UK retailers went public with their struggles to remain profitable. UK fashion retailer Fat Face revealed in its full year report that the brand’s pre-tax profits dropped by 9 percent, blaming the devalued Sterling post-Brexit. Meanwhile, Next announced its first drop in annual profit for eight years, whilst other British retailers including Card Factory and French Connection made similar reveals.

In attempt to prevent the same scenario, and retain profits, John Lewis has announced plans to cut jobs, whilst a number of retailers including Jones Bootmaker reported its intention to close stores.

Feeling the squeeze

A combination of factors are conflating to put pressure on the bottom line; escalating delivery and fulfilment costs, the strain of handling huge returns, the cost of e-commerce investment and delivering functionality across all devices, as well as the uncertain and unpredictable effects of Brexit. Regardless whether the retailer is a high-street stalwart, a medium-sized store or an e-commerce pioneer, the issue of profitability is being felt by all.

When faced with a similar situation in the past, the airline industry looked to secondary revenue beyond their core proposition in a bid to remain profitable and ease falling margins on primary revenue streams. With this in mind, we recently partnered with the BRC (British Retail Consortium) to produce the report Beyond the Core in attempt to understand this challenge and identify how retailers are exploring secondary revenue options.

The possibilities are endless

From affiliate marketing, to selling advertising space, cross-selling additional products and services and offering loyalty and reward programmes, our study revealed that these are just some of the key secondary revenue methods that are being employed. In fact, two thirds of retailers are using secondary revenue, with some businesses achieving more than 40 percent of revenues in this way. Interestingly, despite the high adoption, there seems to be little awareness of the term itself. Only 26 percent of retailers were aware of their business having a secondary revenue strategy in place.

With the rapid development of online retail, this presents an opportunity for retailers to fight the margin squeeze whilst enhancing customer experience. For example, by directing a customer to an affiliate link, a retailer can provide the shopper with interesting and complimentary new services, while also receiving commission. Or by offering a customer the opportunity to sign up to a cashback programme, the retailer can help them save money on future purchases.

Even with these mutual benefits created by secondary revenue, there remains a need for greater awareness of the term for it to be incorporated into solid business strategy.

Implementing secondary revenue methods

Regardless of how many secondary revenue methods are used, it’s important that they align with a brand’s values and offer customer benefits that are relevant, at the right stage of the customer journey. Ultimately, while all secondary revenue streams should fit together seamlessly, they can often sit across multiple departments and from our research, the most profitable outcome comes through sale sales route.

Secondary revenue programmes should also have little-to-low cost to effectively raise profit margins, whether working with an ecosystem of third parties, using an internal programme, or a blend of both. Furthermore, working with a third-party should be considered as the 74 percent of retailers who are reported that their efforts were successful.

The retail industry is changing, so the industry has no choice but to keep pace with consumers’ growing expectations and demands. But the fact remains, with these growing expectations and demands, profitability is negatively impacted. Secondary revenue methods are a great option available for retailers to try and beat rising costs and falling margins, without taking drastic measures like cutting jobs or closing stores. In this rapidly changing and challenging environment, one thing is clear - retailers most likely to survive this storm are those thinking beyond the core.

Guy Chiswick is Managing Director of Webloyalty, Northern Europe. He has 17 years’ experience in marketing and advertising and has worked for some of the industry's biggest brands as well as emerging start-ups.

Guy leads a diverse team of experts focussed on client development and category growth, and has spearheaded Webloyalty's retail and multichannel client engagement strategy since joining in 2010.

Webloyalty is a leading provider of online savings programmes designed to help companies build stronger, more profitable relationships.

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