Australian retailers faced many challenges in 2024, with rising interest rates and high inflation reducing consumer spending power, as well as increasing the cost of capital for growth investments. In addition, theft and rising wages compounded the pressure on the retail industry.
With interest rates projected to stay high well into the new year and any future cuts likely to be gradual, 2025 is also expected to be tough for retailers. In this challenging economic environment, it’s crucial for retailers to focus on reducing costs in a sustainable way to enhance profitability.
Breaking down silos to boost profitability
Traditionally, retailers have approached cost reduction in silos. Merchandise teams focus on lowering cost of goods sold (COGS) and securing additional supplier funding. Supply chain teams optimise sourcing, warehouse processes, transport, and renegotiate third-party logistics (3PL) contracts. Separately, operations teams enhance store processes through time and motion studies, and operating model reviews.
While this segmented approach has proven effective in the past, their scope for further optimisation has diminished. Many processes have been refined over multiple cycles, leaving limited room for more gains without innovative approaches. In addition, isolated cost-saving initiatives often have inadvertent consequences elsewhere in the business. For example:
- Introducing a new product might boost gross profit, increase in-store or logistics costs;
- Changes in the supply chain could reduce costs, but lower shelf availability or product quality, impacting customer satisfaction;
- Reducing in-store hours to save costs might degrade the customer experience; or
- Investing heavily in self-serve checkouts could increase loss through theft, requiring additional capital to mitigate.
Unlocking value through end-to-end profitability reviews
A comprehensive review of profitability – spanning all categories and operational costs – can uncover valuable insights and drive better decision-making. This holistic approach allows retailers to identify cost-saving opportunities, optimise operations, and prioritise investments based on a complete understanding of their impact.
Tangible results can be achieved in many ways, including:
- Rethinking low-priced stock keeping units (SKU): A retailer discovered that low-priced SKUs were unprofitable due to fixed costs. By introducing larger product sizes and multipacks, they improved profitability while offering better value to customers.
- Optimising packaging dimensions: Collaborating with a supplier, a retailer optimised packaging dimensions to fit more units per carton, significantly reducing logistics and handling costs across the supply chain.
- Balancing convenience and profitability: A convenience retailer found that large packs of toilet paper, despite high margins, were unprofitable due to high service costs. Adjusting retail prices to cover these costs resolved the imbalance.
- Reevaluating fresh vs. packaged products: A supermarket’s focus on fresh seafood in their deli to maintain a ‘fresh’ image was reexamined after an end-to-end review revealed that packaged seafood was significantly more profitable due to lower fulfillment costs. This insight led to a strategic shift in stock prioritisation across the fresh, packaged and frozen stock.
- Informed category prioritisation: Using end-to-end profitability insights, a retailer adjusted their category prioritisation strategy, leading to more informed investment decisions.
Moving forward together
In today’s retail landscape, isolated cost-saving measures are no longer sufficient. An end-to-end approach to profitability is key to ensuring decisions are made holistically – assessing operational, financial and customer impacts. This enables your business to address inefficiencies, rebalance category priorities, and mitigate unintended cost increases, creating more resilience and long-term sustainability.
If you’re a retailer looking to cut costs, don’t hesitate to contact us to assess your business and the value of integrated profitability strategies. By focusing on areas such as supplier profitability, margin improvement programs, operating model reviews, supply chain optimisation and strategic investment, we can help you achieve meaningful results.
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