At the start of 2024, office vacancies in the US hit their highest point at 19.6% due to the traditional work week being replaced by an increasingly adopted hybrid model. Although brick-and-mortar retail business is experiencing a resurgence, the deficit against pre-COVID foot traffic means bad news for retailers and restaurants whose business model relies heavily on office workers.

With retailers’ operating costs steadily rising over recent years, outpacing revenue growth, pressure is mounting from both sides in the challenge to remain profitable. Additional urgency comes in the form of the recent tariff increases in the US announced in May 2024, impacting wholesale price structures.

the challenge

As such, retailers need to reduce costs. What they do with savings will vary by organization, but the common challenge among long-standing retailers is cost inefficiency. In the days of tactical procurement, where it was firmly a “back office” function, operational and commercial decisions were made that are no longer optimal in today’s market, causing inefficiencies to rise to the surface and eat into profits. This inefficiency affects various cost structures within the retail business.

However, procurement has a significant opportunity. As it continues to evolve as a strategic, business-critical function, there is an opportunity to identify these inefficiencies, rectify them, and bank the savings. Typical categories of opportunity within retail business include IT, Stores, FM, Marketing, and Supply Chain. Examples of spend inefficiencies that retailers experience include:

• Duplication of software agreements – where one-off purchases have been left to lapse and renew by various users, and are often no longer required and/or have been replaced
• Over-specification of packaging or inefficient packing leaving voids in boxes, causing overspend in often an already high-spend category
• Inefficient cleaning schedules, such as cleaning at the end of one day and the start of the next, mean paying twice for the same clean
• Security tags that cost more than the product value of those they have been placed on in stores
• Transportation and delivery inefficiencies, such as sending trucks out each day when decreasing volumes, could justify less frequency

Good procurement can solve all of these. Goods not for Resale (GNFR) is a significant area of opportunity for retailers and something they should consider closely, as experiential stores are on the rise in response to the evolving future consumer. Inefficiencies such as the above examples are likely present in many retailers, waiting to be uncovered and recouped.

Cost of Goods Sold (COGS) and Goods for Resale (GFR) also hold opportunities. The products can be unpicked, negotiated, or re-sourced at a component level and brought back together at a lower price (at a quality that you are happy with, of course).

Additionally, examining direct cost elements within the supply chain can reveal significant savings. Direct cost reduction strategies are essential for managing production costs effectively and ensuring competitive unit costs. By closely analyzing direct cost components, retailers can achieve substantial improvements in their overall cost structure.

how to do it?

This really is procurement’s time to shine—to think and do differently than before. Leading procurement organizations are delivering significant value within their businesses by learning from the past and embracing future innovation.

Procurement has the unique ability to provide an objective view of requirements and specifications without being caught up in the category specialization or any associated internal politics. This even allows procurement to challenge whether the spend is needed at all, and if it is, to challenge whether it can be spent “better.”

This is the rapid, cost-out approach many retailers need to rebuild much-needed cash stocks to invest in organizational priorities and growth, including enhancing customer satisfaction.

In addition to “stopping spend,” rapid cost-out might look like rationalizing or consolidating supply, negotiating with incumbents to recalibrate post-inflation spikes, or fast-paced market engagement for simple requirements. Opportunities for longer-term strategic projects will be uncovered, too. With these, you can develop a pipeline of activity to ensure the cash you save in the short term is also realized 6 to 12 to 18 months down the line.

The challenge is finding the time to do this alongside BAU when already balancing competing business priorities and challenges. To deliver cost savings at pace, consider standing up a SWAT team with either your existing team, sharing across pockets of capacity, or calling on external experts to inject capacity and capability that can not only drive results but also do so at pace and efficiently. Effective inventory management can also play a significant role in reducing overall costs.

So, assume you prioritize those projects that will provide cash in the short term – for example, some retailers are clawing back price surges experienced during COVID – and a key question is raised: what do you do with the savings?

readdressing the decrease in sales

If we revisit the problem set out at the start – a decrease in foot traffic impacting profitability – retailers have a choice. Should the savings hit the top line via price reductions to drive greater sales or bottom-line profitability?

The answer may be a mix of both. Some strategies allocate a portion of savings straight to the P&L, spending the remainder directly on growth. Thus, they enable you as a company to do things differently to improve sales—such as investing in different routes to market (e.g., click-and-collect) or developing a more experiential store offering.

Either way, setting a clear strategy that aligns with and addresses the specific organizational challenges will be key to making it a success. By making informed decisions based on comprehensive financial metrics, retailers can better manage production costs and unit costs, ultimately improving the retail price offered to consumers and ensuring overall business success.

Additionally, effective cost management practices will ensure that operational costs and direct cost elements are kept under control, leading to improved profitability for retail stores. Balancing cost of inventory and operational costs will further enhance the efficiency and financial health of retail businesses.