The new National Living Wage being introduced in the UK on 1 April, coupled with changing sales channels and the impact of foreign exchange fluctuations on imports, are among the biggest challenges facing UK retailers in the coming months, a new report warns. 

The report: 'Like-for-like sales is not the only story', published by The Institute of Chartered Accountants in England and Wales (ICAEW), explains that profit margins for retailers have never been tighter and, in the current environment of price deflation, like-for-like sales are not the best guide to retail success. 

Among the challenges facing businesses at the moment, the national living wage is top of the agenda for retailers, as independent analysis shows they will bear the greatest impact. The report notes that retailers will not only see wage costs rise, but also the cost of compliance, along with secondary effects. Businesses, ICAWE suggests, will have to strike the right balance between customer service and staff costs, or invest in new technology as they reduce headcount.

Three key areas stakeholders need to consider to gain clarity and understanding on how well retailers are making profits are suggested: changing business models, the impact of the living wage, and foreign exchange. 

"While there are many factors that impact on margins, these three are where we anticipate there will be the greatest change and therefore challenge in determining the real performance and value of a retailer," report authors note.

In terms of changing business models, retailers are having to re-engineer their businesses to create single, unified commerce platforms that offer the consumer a seamless, integrated and flexible shopping experience for browsing, purchasing and delivery.

This, in turn, raises a number of questions: What are the investment costs in infrastructure to deal with new ways of shopping?; What are the costs of replacing in-store and digital technology to keep pace with changing shopping habits?; How are retailers treating store impairments?; Are any online revenues allocated to the stores, and is there a genuine commercial rationale for this with sufficient reliable evidence?

The national living wage will see workers aged 25 and over receive GBP7.20 per hour – a rise of 10.8% on the 2015 national minimum wage of GBP6.50 per hour. Further increases mean that by 2020 wages will have risen by 38.5% over the 2015 minimum wage. Questions arising from this change, the report suggests, could include: To what extent will retailers be able to increase productivity to offset the cost of the living wage?

Currency fluctuations also had a significant impact on retailers that import goods into the UK in 2015, particularly on their ability to set prices and safeguard profit margins. This is particularly true for retailers sourcing their goods from the Far East.

"The need to balance changes in customer trends with hedging forward contracts can be very challenging in certain retail areas, for example fashion retailing," authors noted. 

They suggest a number of questions for companies trying to navigate this challenging landscape: What is the difference between the budgeted and reported exchange rates?; How much of the retailer's forecast expenditure and revenue is being hedged?; What is the retailer's level of flexibility in changing both suppliers and countries of supply?; and, how quickly can they switch supply on and off to meet customer demand?

Click here to view the full report.