2024 promises to be another challenging year for the retail environment. Unforeseen events and consumers’ lifestyle changes continue to affect the industry, while high inflation and the increased cost of living are limiting consumer spending as shoppers re-evaluate their priorities and cut back on non-essential items. Retailers’ profits are also being significantly dented by inflation, with high costs across sourcing, manufacturing, labour and logistics.

Aside from inflation, retailers must also focus on the rise of environmental laws and changing consumer concerns, which are increasingly affecting new products and manufacturing processes. Keeping all products on track with increasingly complex retail supply chains remains an ongoing backburner stress for retail companies. Retailers must balance keeping loyal customers while adapting to the increasingly tight and challenging landscape.

Here are the three main challenges for retail companies in 2024.

Environmental, social, and governance (ESG)

Consumers’ concerns about the ESG impacts of their purchases are rising, so retailers must take action to retain appeal. As well as implementing obvious ESG strategies such as using recycled or sustainable materials and ensuring workers are paid fairly, retailers are beginning to invest in more innovative solutions such as furniture and clothing rental and resale platforms. Retailers must also work to embed sustainability across all sections of their supply chains and processes. Regulators are applying pressure on retailers to act, with the US Securities and Exchange Commission, the EU Sustainable Finance Disclosure Regulation and the UK Sustainability Disclosure Regulation mandating that all publicly listed companies disclose their ESG performance in 2024.

Though the ESG theme has been prominent for many years, the Covid-19 pandemic increased the importance of sustainability. However, current economic conditions have threatened retailers’ sustainability strategies and consumer interest in them. As prices increase and remain inflated, many consumers are reluctant to pay more for sustainable products. Higher inflation is also intensifying pressure on retailers’ already thin margins.

Investing in sustainable practices not only helps retailers fight climate change but also allows them to cut costs in the long run. With many consumers aware of and on the lookout for greenwashing, retailers must meet their ESG targets to expand their consumer base.

Inflation - which rose sharply in 2022 and 2023

Globally, there was a sharp rise in inflation in 2022 and 2023. The impacts of Covid-19 and the war in Ukraine on the global supply chain contributed to a significant increase in fuel, food, raw materials and energy prices. Inflation soared in many regions, but most notably in the Americas and Europe, with annual averages exceeding 8% in 2022. While the rate of inflation decreased in 2023, the figure remains elevated and is not forecast to fall below pre-pandemic levels until at least 2025. It will take time for retail to recover, particularly given the gap between wage growth and inflation in many countries. As a result, some retailers are struggling to stay profitable, as operating costs remain high and consumer spending is constrained. The consequence will be a focus on cost-cutting and maximising cash flow, to the detriment of long-term investment. Retailers must find new ways to deal with rapidly rising prices without driving shoppers away.

Increasingly complex supply chain management

Retail supply chains are increasingly complex. Years of disruption following the pandemic and geopolitical tensions have increased the vulnerabilities of global logistics. Many supply chains have become progressively more extensive and interconnected and therefore susceptible to disruption and delays. Outsourcing and offshoring manufacturing to reduce production costs and yield greater profits has complicated supply chains and global relationships. An example of this is the current Red Sea shipping crisis, which is upending supply chains and increasing delivery times of global container trade that usually passes through the Suez Canal by 10 to 14 days. Increased costs will follow and many retailers will be unwilling to pass these on to consumers.

Consumers have increasing expectations of convenience, personalisation and speed. Retailers are expected to provide an experience that integrates bricks-and-mortar shopping with web, app and social channels. Omnichannel consumer engagement increases supply chain complexities. Online ordering, click and collect, free returns and exchanges make tracking products' dynamic paths and delivering the right product to the correct location essential to ensure a streamlined shopper experience. Using infrastructure unsuited for growing omnichannel supply chains leads to a dependency on manual, error-prone processes and longer timelines.