As we near the release of our 15th annual Turnaround and Restructuring Experts Survey, AlixPartners’ industry experts, Nick Parker and Dan Coen, reflect on what the results signal for the future of automotive and retail, how these sectors can prepare for disruption ahead and whether there is anything for retailers to learn from automotive.
We will shortly release our 15 annual Turnaround and Restructuring Experts Survey, in which we deep dive into the views of more than 500 financial and legal experts, to understand which sectors look likely to experience significant disruption and restructuring activity in 2020.
Global respondents felt that retail (66%) and automotive (49%) were the industries most likely to face distress in 2020, with 86% of UK respondents predicting the UK retail industry will face distress. In Germany, survey respondents overwhelmingly classed automotive as the most likely global industry to face distress (93%) in 2020.
It’s clear from these latest results that retail and automotive both face tough times in 2020, and for many of the same reasons. Shifting consumer behaviour looks set to have a particularly profound impact on both the retail and automotive sectors in the years to come, alongside sector-specific problems.
So, what challenges are they up against, how can they be mitigated and is there anything retail can learn from automotive?
What challenges do retail and automotive face in 2020 and beyond?
Dan Coen: In the case of retail, the rise of fast fashion over the last 10 to 15 years has seen the likes of H&M and Primark disrupt traditional high street stores like John Lewis and M&S. However, there is growing consumer recognition that fast fashion comes with a huge environmental cost.
While we are not yet seeing consumers abandon fast fashion quickly enough for it to affect bottom lines, this is likely to happen and we are already starting to see it being rejected on social channels in favour of second hand and re-used clothing. Consumers, particularly the young, are also changing what they look for in retailers, and are increasingly drawn towards those with a strong record on issues like employment practices and environmental impact.
At the same time, economic conditions mean that consumers will remain highly price-conscious throughout 2020. This is contributing to the ‘muddle in the middle’, where mid-market retailers are finding it harder than ever to compete against discount, online, and specialist competition.
On top of this, we have also had unexpected disruption hit the sector, most notably in the form of the coronavirus. Although factories are beginning to open again in China, the mills are not, which means we are likely to see a backlog of orders and inventory issues that will particularly damage fast fashion and luxury.
Nick Parker: Automotive is facing many of the same challenges, particularly when it comes to shifting consumer behaviour. Driven in part by climate issues, but also by the rise of ridesharing companies like Uber and Lyft, car ownership trends are shifting, and there will be a continued transition away from fossil fuels and towards battery-powered electric vehicles.
These shifts see billions being invested in advances in electrification and autonomous driving. The significant level of investment required to compete means that new entrants are unlikely to enter the market, but there will continue to be a race among the existing players to quickly and accurately adapt to consumer demand, while also trying to establish their own battery and charging technology as the industry standard.
As with retail, automotive companies will not remain immune to consumer demand for strong action on issues like employment practices and climate change.
Coronavirus has not yet affected automotive as much as retail, largely due to the level of sophistication and security built into supply chains. However, while procurement strategy and security tend to be very strong, it is almost impossible to react quickly enough to a developing situation like a virus outbreak in China, and supply chains will start to unwind in the weeks and months ahead if this disruption continues.
How can the retail and automotive sectors prepare for and overcome disruption?
Dan Coen: To manage disruption and stave off the long-term threat of restructuring, retailers need to stay relevant and focus heavily on the consumer. To do so, data and insight are key. Too many retailers lack true insight into what’s going on within their customer base and are continually trying to solve yesterday’s problems. It is essential to spend time with data, with customers and with focus groups, and use proper insight to stay relevant in the market.
At the same time, retailers need to develop the workforce and supply chain agility to deal with disruption, both expected and unforeseen. This agility has been a shortcoming across much of retail in recent years, where we have seen a loss of skills and oversight. Today, many retailers rely heavily on the supplier factories, and as a result they do not have full visibility of their supply chain and sourcing opportunities in-country. This means that when disruption hits, they cannot always react quickly enough to respond to distress. Scenario and contingency planning is essential to develop this agility and identify knowledge gaps.
Nick Parker: In automotive, responding to changes in consumer behaviour is just as important, but in many ways harder to achieve. As a typical vehicle takes four years to develop, and will be in production for seven years, it can be more difficult to react quickly. With consumer trends changing so rapidly, deep insight and the proactive use of data is essential to keeping a vehicle relevant throughout the development phase, and to minimise any potential decline in competitiveness.
Is there anything retail can learn from the automotive industry?
Dan Coen: Although the sectors ultimately work in different ways – and with retail experiencing far more restructuring activity in recent years – there are things retailers can learn from automotive. This is particularly true when it comes to the supply chain. There will always be unforeseen challenges like the coronavirus to contend with, but the security and sophistication built into most automotive supply chains allows the sector to absorb disruption more effectively than retail is often able to.
Automotive is also trying to proactively use deep, data-driven insight to keep products relevant through their long lifecycles. There is much retail can learn here. With consumer behaviour shifting so quickly, retailers that fail to harness consumer data and insight will find themselves further behind the relevance curve, and more prone to distress in the year ahead.
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