UK retail profits forecast to shrink by £8bn by 2025

Pre-tax profit margins are expected to fall to 3.2% by 2025, compared to 3.7% in a pre-pandemic world where consumer behaviour would have remained unchanged, according to a new report from Alvarez & Marsal in partnership with Retail Economics.

Ecommerce retailers already operate on considerably lower margins than multi-channel and bricks-and-mortar business models, with pre-tax profit margins for purely online players is at 1.4%, compared to 5.4% across the entire industry. 

The report also suggests that retailers will also experience pressure due to the anticipated volume of online returns. 

The new generation of shoppers are almost twice as likely to return goods than their older counterparts, with 18-24 year olds in the UK returning 15.8% of online orders. 

The data also shows that the lasting impact of the pandemic will not be evenly spread across all retail categories, with businesses in the apparel, homewares and electricals categories perceived to be more vulnerable to pressures on profit margins.

Consumer behaviour in those categories looks to transform permanently due to increased online engagement over extended periods in lockdown.

Covid has permanently changed consumer behaviours

European consumers are projected to shift around 20% of their spending in these areas online, marking an almost fourfold increase from the early stages of the pandemic.

Consumers look set to return to in-person shopping for categories such as furniture and jewellery, despite some shift in spending over the pandemic.

These changes are expected to be felt most by UK retailers as 4 out of 10 consumers in the UK said that their habits will permanently change, the highest on record across Europe.

“There is no going back”

A&M managing director and head of retail and consumer Erin Brookes said: ”As digital becomes more critical across every stage of the customer journey, retailers face a make-or-break moment to prevent profits from spiralling downwards. There is no going back – retailers must acknowledge changing consumer behaviour and respond appropriately.”

“Yes, this includes successfully transitioning away from some physical stores and re-imagining the purpose of others, but investing in the building blocks for efficient online operating models such as reverse logistics, strategic partnerships and intelligent data and technology is essential.”