Secondary revenue can smooth cashflow bumps

There’s no denying the UK’s retail sector is in turmoil as the union is plotting its divorce from the EU. A shift in consumer spending, higher wages and business rates, and a weaker pound are all conspiring to squeeze retailers’ sales and profits. In order to bear the brunt of this perfect storm, many retailers are turning to “secondary revenue to diversify and de-risk revenue streams,” explains Guy Chiswick in Webloyalty’s latest report Beyond the Core: How UK retailers are looking beyond core offerings to drive new revenue streams.

The current environment isn’t great for UK retailers

There’s a long list of challenges facing UK retailers at the moment that could spell trouble for those who don’t take heed and start thinking creatively.

As of now, retailers must start paying the new National Living Wage of £7.50/hour for staff aged 25 and up, which represents an additional burden in total wages in the order of 2 to 4%, says Deloitte.

But it’s the increase in business rates that’s going to hit retailers the hardest. Following the first re-evaluation since 2010, the retail sector will be hit with an estimated £2.3 billion in hike this year.

While difficult, these changes are at least somewhat predictable. But other factors are not so easy to forecast. Since the UK voted to exit the EU in June, the pound has fallen by 15% against the dollar and 12% against the euro. This presents a challenge for a great number of retailers who pay their Asian suppliers in dollars. This has prompted some, like Next, to increase shop prices by 4% in order “to offset the higher import costs from a weaker pound.” That said not every retailer is secure enough in the market to pass on the additional cost to consumers.

However, in the end, it’s consumers who present the greatest puzzle of all. There’s a shift in consumer spending, says Lord Simon Wolfson, Next’s chief executive, “on experiences and away from things.” As a result, high street clothing sales are down 0.3% while sales in restaurants rose 11%.

Evening out the bumps with Secondary Revenue

It would be easy to throw in the towel in these uncertain times but many retailers seem to have found another option. According to Beyond the Core, looking for “secondary revenue is now common practice among UK retailers and can clearly have an impact on the performance and stability of a business for those that get their strategy right,” says Chiswick, Managing Director for Webloyalty in Northern Europe.

The report, produced in partnership with the British Retail Consortium (BRC), found that 67% of retailers already generate at least 1% of their revenue from secondary sources, while around 18% generate at least 20%, and a few close to half.

However, not everyone agrees that retailers are set to divert a lot of their attention to secondary revenue. “We believe the likelihood of the big retailers putting large resources into developing new income streams in this environment is low, says Nick Huisman, Associate Director at retail consultancy firm Newton, “certainly until the core threats of the here and now are properly addressed.”

This might explain another one of the report’s findings that is the lack of stated interest from senior management in seeking new revenue streams and the lack of awareness surrounding the issue with “only 26% of those polled” being “aware of their business having a strategy in place.”

No two secondary revenue strategies are the same

Secondary revenue can come in many forms. Among the most used methods listed by respondents to the Webloyalty survey are selling advertising space, internal and external loyalty/reward programmes, affiliate marketing, and cross-selling internally and externally. The larger the retailer it seems, the greater number of methods they use.

Internal loyalty schemes and advertising are the most popular options overall but other methods garner interest as well.

“Businesses seeing 20% or more contribution of secondary revenue to total revenue are using at least three secondary revenue sources,” found the report, indicating that flexibility is an asset in today’s volatile retail environment. Considering the current conditions are less than favourable for UK retailers, it might be time to give non-core revenue options a go.

For those who want to explore the possibilities, Webloyalty has a few words of advice:

  1. Ensure the programme aligns with your brand values and offers customer benefits
  2. Introduce relevant offers at the right stage of the customer journey
  3. Ensure all revenue streams work together holistically
  4. Secondary revenue programmes should have a low-cost of implementation (or ideally no cost attached)
  5. Consider an ecosystem of third parties and internal referral

Developing a strategy to generate secondary revenue can soften some of the challenges retailers face at the moment. While the Beyond the Core report admits that secondary revenue generation is not for everyone, it argues that “with the right strategy and attention within the business it can represent a low cost means of substantially boosting revenue in a tough commercial environment, whilst at the same time keeping with a retailers’ ethos and values.”