The electronic industry's consumer market is price sensitive. So while 2011 is looking promising on the demand side of the retail sales equation, higher costs on the supply side mean profit margins will stay under pressure.
Senior financial executives participating in a KPMG International survey of global retail companies expect to see improved financial performance in 2011 as a result of increasing consumer demand, but many indicate that their companies will have difficulty raising prices and sustaining profit margins.
More than 75 percent of respondents expect “some” or a “significant” increase in financial performance this year, but 58 percent of those executives believe their companies will have difficulty raising prices. As a result, only 41 percent of executives believe they will be able to sustain profit margins. In identifying the greatest threats to margins, 56 percent pointed to costs of inputs or merchandise and 47 percent to discounting and other sales incentives.
“Retail executives are seeing strong top line growth, but in order to generate growth and success in the years ahead, their companies will need to reconsider and often recast their understanding of customers, markets, and their means of serving them, as well as the level of investment that it will take to succeed going forward,” said Mark Larson, KPMG's Global Head of Retail, in a press release.
Among those investments: improvements to supply chain efficiency. Retailers will pursue major investment in customer relationship management systems, business intelligence systems, and enterprise resource systems for transaction processing. In other words, managing costs at the front end of the transaction is becoming as important as managing prices at the back end of the equation.
This is a lesson the industrial channel learned many years ago. In improving supply chain efficiency and costs over the next two years, the retail execs, in order of priority, see enhancing distribution structure, investing in production or distribution technology, decreasing inventory levels, and consolidating suppliers as the greatest priorities.
“We're witnessing the beginnings of a cost-to-growth agenda in retail characterized by a renewed focus on growth, while preserving margins, and investing in IT,” says KPMG's Larson. “The sector has learned the hard way that it can't take its eye off the ball of cost management.”
KPMG conducted its survey in the first quarter of this year with a follow-up to gauge how crisis in the Middle East and Japan in April may have affected operations. Among its findings:
- Sixty-four percent reported little or no impact on their business operations, while 31 percent reported moderate impact, with five percent seeing a dramatic impact. When presented with an array of issues, 61 percent said they expect “energy, input, and merchandise prices” will be most affected, followed by 35 percent who said “availability of goods and services from my company's suppliers.”