COVID-19 rapidly accelerated the digital disruption of the retail sector leaving nearly no player untouched. For many retailers COVID-19 became a reason to change their business models. Some pivoted to online just to survive and those who were already leveraging digital and data pulled away from the pack. The global shift to online and digital is still being felt, and the transformation of retail business models is far from over. More than ever, it is the customer who now determines what they buy, where they buy it and how much they pay. Now the challenge is about being fit for growth in the new reality.
Highlights:
Fundamental structural changes continue to change market dynamics
Digital business and data led operating models continue to disrupt all segments. The pressure to ensure long-term viability is growing.Market polarization puts pressure on retailers in the gap
Those competing on a low price or high experience model are seeing healthy growth. Those in the middle may continue to struggle.Lease renegotiation and cost rationalization top of the agenda
For many, management of fixed costs and working capital continue to be the key challenges, particularly as economic stimulus is withdrawn in some markets.
Retail industry insights
The pandemic created clear winners and losers in retail segments. The winners were those that were data led, with flexible business models, digital channels and organizational agility. The losers were the ones forced to stop trading all together due to lack of digital options, those that were already suffering from high overhead costs and those adhering to outdated business models.
Retailers aren't just dealing with changes in customer preferences and the shift to digital. The past year has accelerated a general trend towards market polarization between discounters (competing on price) on the one side and premium retailers (competing on experience) on the other. Those in the middle are feeling the squeeze.
While the outlook for some sectors and markets continues to improve, other retail sectors may face a prolonged period of uncertainty and disruptive changes to consumer behavior. Managing real estate cost, inventories and supply chains will remain significant challenges. In some markets, wage pressures (driven by tight labor markets) and rapidly rising global freight costs (driven by COVID- 19 related supply constraints) are also squeezing margins..
COVID-19 has also brought to light the hidden cost of transformation facing many retail models. This cost does not sit on balance sheet yet needs to be funded from cash flow or shareholders. It is arguably the most significant operational and financial challenge facing retailers today.
Going forward, retail organizations will need to continue to focus on updating their business and operating models, improving working capital and cash flow, and managing their costs in order to remain resilient and ready for growth.
Want hear about sustainability in the retail industry? Join KPMG retail leaders Paul Van Eyk, Julia Wilson and Michael Musso with special guest Iain Nairn, President and CEO of The Bay examine how to develop a platform-based retail model in an exclusive KPMG webinar. Register to join us on 15 November 2022.
How can KPMG help?
Getting you back to growth
Restructuring - formal or informal - is not easy. It's not about striking deals and doing paperwork. It requires deep experience working with retailers, suppliers, landlords, investors and financial backers. It also requires an understanding of what success looks like and requires a keen insight into the trends and challenges driving changes in the markets today.
At KPMG, our retail sector Restructuring professionals are known for their retail sector experience and insights. Leveraging KPMG's global network, our teams focus on bringing their clients the very best ideas, relationships, tools and services from around the world, tailored to your unique situation.
Case studies
The situation:
Unable to move out of their bricks-and-mortar origins, this iconic 150-store retailer faced voluntary administration. A plan to save the company and repay the secured creditor was needed.
The solution:
KPMG undertook an urgent review of the company's operations and implemented various restructuring initiatives to prepare the business for sale. This included the controlled wind-down and closure of approximately 50 underperforming stores and a review and restructure of head office and other costs.
The outcome:
The KPMG-led restructuring process and sale allowed around 100 stores to continue to operate, saving upwards of 700 jobs. The sale resulted in a significant repayment to the secured creditor.
The situation:
As a result of COVID-19, the organization needed to close more than 60 physical stores, transition to online-only sales, demobilise 10,000 of their people, negotiate with its landlords and cancel or defer orders. More importantly, it needed to secure the continuous support of their lenders and present a comprehensive financial forecast of various scenarios to them.
The solution:
KPMG completed an independent business review and created a tailored integrated three-way financial model that allowed the client to present weekly financial forecasts to lenders under a range of scenarios. KPMG also provided a range of other services through the firm's wide network, including strategy services, technical support with government programs, tax advice, valuations and finance advice. In particular KPMG supported the management in facing and managing the top priorities in the most critical phase of COVID-19 crisis as operating costs optimization (lease, fixed costs and personnel cost) and net working capital improvement.
The outcome:
By introducing KPMG's Restructuring team into the process early, the client was able to bring comfort to its lenders and trade through the crisis profitably and recover a profitable business model.
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