Retailers are running out of low-hanging fruit when it comes to cost-cutting, according to a new report from Deloitte, which means investments in optimization and efficiency could become a bigger priority in 2025.
“Over the past decade or so, retailers have really done a good job of taking out almost as much cost as they can,” Brian McCarthy, principal of retail strategy and business transformation at Deloitte, told Retail Brew. “So this idea of trying to grow profitability through cost reduction just isn’t going to be there.”
Cost-cutting measures such as layoffs have run their course, he added: “I don’t think when consumers are shopping in stores, they’re walking around and feeling like they see a lot of idle store labor standing around.”
- Layoffs in the industry have trended down in recent years after spiking early in the pandemic, according to the US Bureau of Labor Statistics.
As an alternative, Deloitte is recommending that retailers focus on “optimizing costs instead of simply cutting them,” and then reinvesting those savings into “enhancing productivity, acquiring or outsourcing new capabilities, and exploring new revenue streams,” per the consulting group’s 2025 outlook.
- If the buzz from NRF’s Big Show is any guide, retailers are already taking this advice to heart, as a number of major companies have signaled that they are investing in everything from AI to dynamic pricing.
There is a conundrum, however, at the heart of this strategic shift. The report argues that retailers are facing a difficult choice between investing in improvements such as AI and digitalization, and thus squeezing their margins, or losing customers to competitors who have already made these investments.
Brighter picture: The backdrop for this challenge is an economy that is no longer expected to slip into a recession. A recent Deloitte survey found that retail executives are expecting the industry to grow in the mid-single digits on average this year, and Deloitte economist Akrur Barua predicts consumer spending will rise 3.1% in 2025. This is a contrast from the past few years when the industry kept anticipating a downturn.
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“When [retailers] think they have no control over the top line, what they do is dramatically focus on controlling the bottom line,” Kirthi Kalyanam, director of the Retail Management Institute at the Leavey School of Business at Santa Clara University, said after reading the report. “A lot of what you’re being seen is exactly that. My sense is that what is [happening] right now is kind of a reversal. There’s a little bit more enthusiasm.”
Yet this enthusiasm is tempered by the fact that customers remain laser-focused on value and price. Six in 10 retail executives expect customers to value price over value in 2025, per a Deloitte survey.
Macro to micro: The way to thread the needle is to embrace an approach Deloitte calls “mass-to-micro, digital-first model,” which is focused on delivering a better omnichannel experience that is able to funnel shoppers to the channel that is the least costly.
“For a physical product that a consumer wants to buy, there’s a different cost to serve if they were to buy that product within a physical store versus if they were to buy it online and have it shipped to their home,” McCarthy said.
He predicts retailers are going to start aggressively looking at each of these “flow paths” and make investments in their supply chains to reduce costs in key channels, such as last-mile delivery.
Risks to margins: As for what extent this raises capital expenditures, Kalyanam said it’s unclear how it will impact the industry overall, but he’s confident there will be sizable investments in both AI and omnichannel improvements.
McCarthy said the impact will be a “case-by-case story,” with retailers that have already invested in their tech foundation being in a strong position to offer more strategic solutions, whereas laggards may be facing some more capital-intensive decisions in the year ahead.