Retail is a large industry that includes everything from department stores to coffee shops, from the town square to online storefronts, and from the most optimistic changes to a possible end of the world.
Retail is an ever-growing industry, which was shown during the annual State of Retail & the Consumer conference, where the retail trade association forecast the sector will mark growth from 4% to 6% in 2023 – hitting between $5.13 trillion and $5.23 trillion.
According to Forbes, this promising development for retailers comes after 2022 saw retail sales increase by 7% annually over 2021, totalling $4.9 trillion. The projected growth is higher than the pre-pandemic average annual retail sales growth rate of 3.6%, even if it will be slower in 2023 than it was in 2022.
But what happens when the industry is faced with an obstacle?
Though viable, the retail industry faces various financial challenges that can impact its profitability and sustainability. A few of the bottlenecks retailers hit include:
Inventory management and supply chain disruptions
Retailers need to effectively manage their inventory to avoid overstocking or understocking. Overstocking ties up capital and can lead to increased costs for storage and markdowns, while understocking can result in missed sales opportunities. Retailers also face challenges in managing complex global supply chains, including issues such as delays, tariffs, and disruptions caused by natural disasters or political events.
Rising operating costs
Retailers face increasing costs associated with rent, utilities, employee wages, and inventory management. These costs can eat into profit margins, especially for smaller retailers. Additionally, the rise in the minimum wage in some regions can further strain the finances of retailers with large workforces.
Online competitors
The rise of e-commerce has intensified competition for traditional brick-and-mortar retailers. Online retailers often have lower operating costs, offer convenience, and can provide competitive pricing, which puts pressure on traditional retailers to adapt and invest in their online presence.
Margin pressure
Retailers often face pressure to lower prices to remain competitive, which can erode profit margins. This pressure can come from online competitors, discount retailers, or price-conscious consumers. Additionally, retailers may have to absorb increased costs from factors such as inflation, tariffs, or currency fluctuations, which can further squeeze their margins.
Seasonality and sales volatility
Many retail businesses experience seasonal fluctuations in demand, with peak periods such as the holiday season generating a significant portion of their annual sales. Managing inventory, staffing, and cash flow during these periods can be challenging. Moreover, unexpected economic or social events, such as recessions or pandemics, can significantly impact consumer spending and disrupt sales patterns.
Changing consumer behaviour
Consumer preferences and shopping habits have evolved significantly in recent years. Consumers now seek personalized experiences, convenience, and value for their money. Retailers must continuously adapt to these changing demands, which may require investments in technology, inventory management systems, and customer data analysis.
To navigate these challenges successfully, retailers often need to adopt a different approach, embrace technological advancements, focus on customer experience, optimise operations, and innovate to meet changing consumer expectations while continually growing their business.
How can Supply chain finance help your business in the retail industry?
Cash flow management
Retailers often face challenges in managing their cash flow, especially when there are time gaps between paying suppliers and receiving payments from customers. Supply chain finance can provide working capital solutions by allowing retailers to access early payment options with their suppliers. This improves cash flow and provides greater flexibility in managing operational expenses. By offering supply chain finance solutions, retailers give their suppliers the option to access early payment which gives them more flexibility in managing their inventory and operational expenses. SCF is an invaluable tool for retailers who want to achieve cash excellence and improve their customer experience in a competitive and uncertain market.
Mitigating supply chain risks
The retail industry is susceptible to various supply chain risks, such as disruptions caused by natural disasters, political events, or supplier financial instability. Supply chain finance solutions can help retailers diversify their suppliers and reduce the risk of disruptions. By offering working capital solutions, retailers can work with multiple suppliers and allocate funds more efficiently. Supply chain finance also ensures prompt payments to suppliers, strengthening their relationships and reducing the financial risk of payment delays or disputes. This supports a stable and resilient supply chain for retailers.
Controlling inventory levels
Effective supply chain finance solutions play a crucial role in enhancing the accuracy of demand forecasting and budgeting, controlling inventory levels, and preventing the challenges of overstocking and understocking in the retail industry. By using supply chain finance, retailers can closely monitor financial data, analyse previous sales patterns, and collaborate with suppliers, and as a result, gather valuable insights to make informed decisions. Using SCF solutions they can optimize cash flows, negotiate favourable terms with suppliers, and implement efficient inventory management strategies. This approach enables retailers to accurately forecast demand, allocate resources effectively, maintain optimal inventory levels, minimize waste, and avoid costly stockouts or excess inventory, thereby streamlining operations and improving overall profitability.
Mitigating rising costs and improving efficiency
The rising cost of rent, operations and wages occurs naturally with inflation but it can put a dent in the profit margins for retailers. Using supply chain finance solutions, retailers can streamline the financial processes and transactions, for a more seamless supply chain. Additionally, by digitizing and automating the payment and invoicing processes, retailers can reduce administrative costs, eliminate manual errors, and improve overall operational efficiency.
Working capital optimisation
Retail has changed greatly throughout the years, and so have the customers. While a large portion of consumers still prefers in-store shopping, the newer generations tend to browse online stores more than ever. Supply chain finance can optimise the allocation of working capital in the retail industry, by allowing early payment from retailers to suppliers. This frees up working capital for retailers to invest in growth initiatives, marketing efforts, or technology upgrades, setting them apart from the competition. Optimising working capital also means that you have more freedom to answer to the consumer demand for a specific product at that given time.
Final thoughts
Implementing effective supply chain finance solutions requires collaboration and coordination among retailers, suppliers, and financial institutions. By leveraging supply chain finance solutions, retailers can address the pain points mentioned above and improve their financial performance, operational efficiency, and overall competitiveness in the retail industry.
