The retail industry is one of the most competitive segments in the global economy. Retail chains are facing a number of challenges that are making their financials difficult to manage.
The following are some of the common financial challenges that retail chains face:
- Deteriorating sales trends. The retail industry has been hit hard by a global economic slowdown and rising unemployment levels. The global economic slowdown and rising inflation levels have led to declining consumer confidence levels and an increase in cost-consciousness among consumers. This has resulted in a decline in sales volumes for many retail companies, which has impacted their overall profits significantly.
- Higher competition. As more retailers enter the market, they have increasingly increased their competition with one another, resulting in lower margins for all players involved in this segment of business. This has made it even more difficult for these companies to generate profits from their operations.
- High costs associated with capital expenditures (CapEx). Retail chains have been spending large amounts on CapEx projects over recent years due to an increasing demand for new stores and expansion plans by existing ones. However, this investment is not yielding desired results at present due to high costs associated with it and other factors affecting business operations such as weak consumer spending and economic downturn.
- High costs associated with labor. Retail chains spend a lot of money on labor, especially on sales personnel. They spend a lot on hiring, training, and retaining sales staff, which has had a significant impact on their financials over the past few years. These costs have continued to rise over the past few years, which is a big concern for these companies.
- High costs associated with inventory. Retail operators face high inventory costs due to an increasing demand for inventory to meet the increasing number of customers visiting these stores. This has resulted in a decline in inventory turns for many companies, which has negatively impacted their profits.
- Increasing business costs. The retail industry is characterized by high operating costs, mainly attributed to high expenses associated with labor and other day-to-day operating costs. Retail chains are facing increasing expenses due to rising energy costs, prices of raw materials, and other basic operating expenses that they have to incur to carry out their business operations.
The above-mentioned challenges are hindering the financial performance of retail companies.
The three main metrics used for the financial performance of retail companies are net sales, gross margins, and net income.
Net Sales: Net sales are defined as the total sales from a company’s operations during a particular period. It is calculated by deducting the value of discounts given by the company from the total sales figures.
Gross Margins: Gross margins are defined as the difference between the company’s net sales and the cost of goods sold, expressed as a percentage. Cost of goods sold is defined as the direct and indirect costs incurred in the production of goods and services sold.
Net Income: Net income is defined as the difference between the revenues and expenses of a company, also referred to as the company’s profit. Net income is calculated by deducting all expenses of a company from its revenues.
The above-mentioned metrics are commonly used in the retail industry for analyzing the financial performance of retail companies.
Retail Industry Drivers
The retail industry is subject to a number of industry drivers, which are categorized as follows:
- Environmental – Environmental factors such as population growth, demographic changes, household incomes, and consumer spending are major industry drivers.
- Economic – Economic factors such as GDP growth and inflation rates, employment rates, and interest rates impact the retail industry.
- Legal – Legal factors such as changes in tax policies, laws and regulations, and ease of doing business affect the retail industry.
- Technological – Technological factors such as advances in IT and communications, customer behavior, supply chains, and e-commerce have a significant impact on the retail industry.
The retail industry has been facing a number of financial and operational challenges in recent years, which has significantly impacted their overall financial performance. Furthermore, a number of other factors have had an adverse impact on the overall financial performance of these companies. These factors have been impacting the industry in several ways and challenging almost every aspect of the retail business.
The retail industry has been facing a number of challenges for the past few years, but looking at the overall trends and future projections, it can be observed that most of the challenges are just temporary setbacks and the industry will continue growing in the future.
Grow with a Helping Hand
Alternative Funding Group can help your retail company by providing the funding you need to get over your financial challenges. We can provide your company with the capital you need to hire new staff, expand your services and products, and open up new stores. Contact us for more information about our flexible funding options and to take the first step towards growing your business and improving your finances.