The study by professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics, forecasts that pre-tax profit margins will fall to 3.2% by 2025, compared to 3.7% in a ‘no Covid’ scenario where the trajectory for consumer behaviour would have remained unchanged.

However, the lasting impact of pandemic is not expected to be felt equally across all retail categories, with some businesses significantly more vulnerable to pressures on profit margins than others. The research has identified apparel, homewares and electricals as those which will experience a permanent step-change in consumer behaviour, brought about by increased online engagement and discovery since the onset of the Covid-19 crisis.

European consumers now expect to permanently shift approximately 20% of their spend across apparel, homewares and electricals online – an almost fourfold increase from the early stages of the pandemic in May 2020, after prolonged periods of lockdowns further embedded this way of shopping for many consumers.

In contrast, categories such as furniture and jewellery – where online experiences are typically less convenient compared to traditional shopping due to a preference for ‘touch and feel’ browsing – will be most likely return to pre-pandemic conditions, despite some shift in spending.

These changes are expected to be felt most by retailers with a presence in the UK, with 4 in 10 consumers stating that their shopping habits will change permanently – the highest across Europe.

Consumer expectations to permanently spend online across different product categories

Source: Retail Economics and Alvarez & Marsal

“Covid-19 has wrought irreversible change which has left the future of many retailers hanging in the balance,” said Richard Fleming, Managing Director and Head of Restructuring Europe at A&M.

“Those businesses that will remain relevant and survive the disruption will be those that are able to realign operating models with the new normal and meet the needs of a post-pandemic consumer – but there will be an inevitable shake out of those that cannot do so before it’s too late.”

As retailers attempt to capture online market share, the report suggests many will undergo a period of transition where profit margins come under intense pressure.

Online-only retailers typically operate on considerably lower margins than multi-channel and bricks & mortar business models, with analysis showing average pre-tax profit margins for pure online retailers across Europe residing at 1.4%, compared with 5.4% for the total industry. More competition and greater use of online channels across the entire market is expected to result in these challenges intensifying, particularly in categories like apparel where a greater proportion of spend will migrate.

The study highlights one major pressure likely to drive further profit erosion for retailers is the volume of online returns. As store visits decrease, left unchecked, rising levels could create increasingly complex and fragmented logistics channels in efforts to cater to customer expectations for fast and efficient service. This becomes more concerning given younger shoppers – the consumers of tomorrow – were found to be almost twice as likely to return goods than their older counterparts.

Erin Brookes, Managing Director and Head of Retail and Consumer, Europe at A&M, commented: “As digital becomes more critical across every stage of the customer journey, retailers face a make-or-break moment to prevent profits from spiralling downwards. There is no going back – retailers must acknowledge changing consumer behaviour and respond appropriately.

“Yes, this includes successfully transitioning away from some physical stores and re-imagining the purpose of others, but investing in the building blocks for efficient online operating models such as reverse logistics, strategic partnerships and intelligent data and technology is essential.