According to a report by global professional services firm Alvarez & Marsal, UK physical retailers are expected to face significant profit losses as a result of the rapid rise of e-commerce. The report, conducted in partnership with Retail Economics, predicts that UK store retailers will experience an £8 billion decline in profits by 2025 due to the impact of the Covid-19 pandemic on consumer behavior.

The fashion sector is highlighted as one of the hardest-hit by the shift to online shopping. Pre-tax profit margins are projected to fall to 3.2% by 2025, compared to 3.7% in a scenario where the pandemic did not occur and consumer behavior remained unchanged.

The report reveals that not all retail categories will be affected equally, with fashion and homeware retailers facing the most significant changes in consumer behavior. European consumers are now expecting to permanently shift approximately 20% of their spending on apparel and homeware online, which is a fourfold increase from the early stages of the pandemic. Prolonged periods of lockdown have ingrained online shopping habits in many consumers.

The impact on UK retailers will be particularly pronounced, with 40% of consumers stating that their shopping habits will permanently change, the highest percentage in Europe. However, categories such as furniture and jewelry, which heavily rely on in-person browsing and a tactile experience, are more likely to return to pre-pandemic conditions despite some shift in spending.

Richard Fleming, Managing Director and Head of Restructuring Europe for A&M, stresses the irreversible changes brought about by Covid-19 and the importance for retailers to adapt to the new normal. He warns that businesses that fail to realign their operating models and meet the evolving needs of post-pandemic consumers may face insurmountable challenges.

Erin Brookes, Managing Director and Head of Retail and Consumer, Europe for A&M, highlights the crucial role of digital transformation for retailers. She emphasizes the need for investments in efficient online operating models, including reverse logistics, strategic partnerships, and leveraging intelligent data and technology. Retailers must recognize and respond to changing consumer behavior in order to prevent further profit declines.

The future looks challenging for UK physical retailers, particularly in the fashion sector. In order to survive, retailers must adapt to the dominance of e-commerce. The ability to embrace digital transformation and effectively meet the needs of the post-pandemic consumer will be crucial for the success of the industry.

Useful Links:
1. Retail Economics
2. Alvarez & Marsal