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Tesco’s recent interims showed that in the 6 months to end August 2020, its operating margin was 3.8%. At M&S’s recent trading update it broke out profits for the first time and revealed its food business operating margin was 3.6%. A generation ago these numbers would have been considered low – 5% was commonplace. But back then, the market was far less competitive...and Aldi had yet to land.
An optimised margin isn’t the highest number you can achieve. To a large extent margin reflects competitive positioning. Can it be comfortably defended in the marketplace? This is a question around value for money, product quality and how your customers define exactly that. My feeling is that today, for both Tesco and M&S, those margins are too high.
Retail businesses are very cash generative, especially in food. In the short term, burnishing trading performance is quite easy. You stop spending money, or severely limit spend. By the way, the current cost holiday underscores exactly what I am saying. There are some retailers who would have been close to insolvency but for the moment appear to be very cash positive. This is unlikely to last once the cost holiday ends.
Every retail business shares its customers with rivals. Your competitors define your customers’ perceptions of you as much as you do. So if you increase prices out of line, it will be immediately noticed. It may be more subtle but exactly the same principle applies to costs. Cutting costs almost invariably means lowering service, lowering quality and reducing the shopping experience.
Margins might be set by leadership teams but ultimately they are governed by your customers. Too high and your market share will begin declining. Too low and you might be “buying” share at reduced margins and potentially starving your business of the funds to invest in growth. Businesses with models that begin and end with the customer will be the only ones with a chance of winning.
We help retailers to optimise inventory to generate more cash at higher margins.
If you would like to know more, do get in touch for an informal chat - richard.hyman@tpc-group.com