How are general merchandise retailers remaining resilient and protecting profitability in 2025?

The secret to general merchandise profitability

In our latest POV, ‘Five tried and tested operational principles for retail resilience’, we examine the key challenges UK retailers face and the mindset shift required to maximise profit, reduce costs, enable all-channel growth, and connect with customers.

General merchandise categories like clothing, home goods, electronics, and entertainment, are particularly sensitive to inflation, shifting consumer behaviour, and global supply chain volatility. These categories often experience frequent price fluctuations due to their high elasticity, making profitability a moving target.

In the years following the pandemic, inflation has significantly increased operating costs – further compounded by the effects of geopolitical tensions and, more recently, tariffs. These mounting pressures are prompting retailers to reassess their pricing strategies and supplier partnerships to sustain profitability.

So, what actions are key players in the general merchandise Retail industry taking to ensure they’re ahead of the game in protecting their product profitability? And what can the rest of the sector do to follow suit?

Why is cost control key for Retail in 2025?

According to Lloyds’ Business Barometer, the UK retail landscape in 2025 was forecasted with cautious optimism as inflation has started to ease, interest rates are stabilising, and real household disposable income has grown by 3.3% over the past year. Despite this optimism, British retail sales for non-food stores, such as clothing and department stores, fell by 1.4% between April and May. This is telling us consumer sentiment remains fragile, shaped by lingering economic shocks, geopolitical tensions, and the impact of new tariffs and regulatory costs.

Retailers are preparing for a possible £5bn surge in operating expenses this year, driven by wage increases, National Insurance hikes, and the full implementation of packaging Extended Producer Responsibility (EPR) rules. Retailers are right to remain cautious, focus on resilience, margin protection and operational resilience.

What profit protecting strategies are general merchandise retailers taking?

Understanding end-to-end costs

To safeguard profitability, general merchandise retailers should take a comprehensive view of their cost base, factoring in packaging, transport, storage, and replenishment, while also navigating global tariffs and geopolitical uncertainty.

Despite a slight drop in sales, the Very Group returned to profitability due to continued and diligent cost control and a focus on higher-margin products. Their disciplined approach to cost management and product mix optimisation is a blueprint for the general merchandise market. The retailer focused on pushing sales of high-margin product, increasing operational efficiencies at their automated fulfilment centre to process and dispatch orders quickly, and technology investments to a cloud-based platform to improve customer experience and reduce friction in the purchase journey.

Exploring global opportunities

In response to newly imposed tariffs GM companies may be exploring strategic sourcing, such as reshoring or exploring new trade routes, but setting up new sourcing and manufacturing can cause cost-inflation so pricing strategy will remain a key consideration. They will need to be mindful of how price-sensitive their customer is to understand how much additional cost the company is prepared to absorb, or to pass along to their customer. They will need to leverage price elasticity and strategic promotions to determine customer sentiment.

Many UK retailers are reliant on global supply chains, and they will feel direct impact from rising tariffs on imports from the US, China, and Europe. To combat the tariff challenges, businesses may need to reconsider their suppliers, reshoring operations or seeking alternative trade routes. Positive action is being taken across the UK to alleviate margin pressure, with a UK-India trade deal that will reduce tariffs on India’s clothing and footwear exports. This will improve supply chain diversification, offer more attractive sourcing destinations and improved cost competitiveness without compromising on quality.

Designing strategies to remain competitive

Retailers are navigating a rapidly evolving landscape shaped by economic pressures and shifting consumer expectations. In response to the cost-of-living crisis, shoppers are becoming more value-conscious and we see shoppers trading down to own-label products, reducing discretionary spending, and limiting basket sizes. To remain competitive, retailers must adopt strategies that go beyond pricing, focusing on disciplined cost control, accurate demand forecasting, and strategic expansion to meet changing customer needs and protect margins.

As the retail environment becomes increasingly digital, a new layer of complexity is emerging: the rise of agentic consumers, where AI-powered shopping agents make decisions on behalf of human shoppers. These agents filter choices based on price, availability, ethical sourcing, and personal preferences – reshaping how products are discovered and purchased. For retailers, this means product data accuracy, localisation, and algorithmic visibility are becoming as critical as price and promotion. Adapting to this shift will be essential for capturing local demand and safeguarding profitability in an AI-mediated marketplace.

Sustainability and conscious consumerism: a strategic lever for profitability

As general merchandise retailers strive to protect margins and future-proof operations, sustainability and conscious consumerism are no longer peripheral concerns – they’re becoming central to commercial strategy. Today’s consumers are increasingly making purchasing decisions based on ethical sourcing, environmental impact, and brand transparency. This shift is not just a reputational imperative; it’s a profitability opportunity.

Marks & Spencer is embedding sustainability into its core business model to drive profitable growth. Initiatives include carbon footprint reduction across its supply chain through cutting plastic packaging and hangers at different stages of the customer journey, sustainable sourcing of raw materials, and customer engagement using transparency tools.

Retailers that embed sustainability into their supply chain through circular product design, low-impact packaging, and carbon-efficient logistics can unlock cost savings, reduce regulatory risk, and build stronger customer loyalty. For example, the implementation of Extended Producer Responsibility (EPR) rules is driving retailers to rethink packaging and waste, turning compliance into a catalyst for innovation.

By aligning operational efficiency with environmental responsibility, general merchandise retailers can meet the demands of both regulators and customers – while building more resilient, future-ready businesses.

How can digital transformations fuel profitability?

Intelligent forecasting is paramount

The macro-economic and geopolitical climate has been challenging to demand forecasting and promotion planning. Retailers need to be savvy about how changing customer behaviour will affect purchasing patterns. We recognise opportunity for AI-driven integrated business planning – for example implementing AI-driven demand forecasting to optimise planning through predictive analysis from AI analysis of historic data, sales trends, store behaviour, and customer traffic. This both frees up planners’ time, enabling them to be more strategic, and supports reducing overstock and stockouts while minimising waste.

As eCommerce continues to expand, retailers are under pressure to balance growth with profitability. Rising fulfilment costs and high return volumes are eroding margins, prompting a shift toward integrated, omnichannel strategies. By blending physical and digital operations, retailers are not only improving customer engagement but also driving operational efficiency and long-term value.

For example, Holland & Barrett is celebrating its second consecutive year of double-digit growth, attributed to its significant investment in its digital transformation strategy. This digital transformation has been focused on improving stores, technology, and new product development.

Capital investment to fuel transformation in value fashion

As the value fashion sector faces mounting pressure from shifting consumer expectations and rising operational costs, strategic investment is becoming a key lever for profitability. New Look’s recent multi-million-pound funding round of £30m signals a renewed focus on transformation, with capital earmarked for modernising its store estate, enhancing digital capabilities, and optimising supply chain operations. This investment reflects a broader trend among high-street retailers to future-proof their business models through targeted reinvestment, ensuring they remain agile, relevant, and profitable in a rapidly evolving retail landscape.

Unlocking operational excellence with AI

AI is rapidly becoming a cornerstone of operational excellence in general merchandise retail. From automating demand sensing to simulating supply chain scenarios, agentic AI empowers supply chain and operations teams to make faster, more informed decisions that directly impact profitability.

According to Salesforce, 73% of UK retail decision-makers are increasing investment in agentic AI, with the most significant gains seen in unifying commerce platforms – connecting inventory, logistics, and customer data to streamline fulfilment and reduce operational overheads.

In our POV ‘Agentic AI in Supply Chain: Transforming Operations & Decisions’, we explore how agentic AI complements traditional automation by introducing autonomous decision-making capabilities. This evolution enables dynamic inventory allocation, real-time exception handling, and predictive scenario planning – transforming how retail supply chains respond to volatility and complexity.

The most resilient retailers embrace strategic agility

In 2025, general merchandise retailers are operating in a landscape defined by complexity but also opportunity. Inflationary pressures may be easing, but rising operational costs, shifting consumer behaviours, and global trade disruptions continue to challenge profitability. The most resilient retailers are those embracing strategic agility: rethinking cost structures, diversifying supply chains, and investing in digital transformation.

Success will hinge on the ability to blend operational discipline with innovation. This means considering cost containment, omnichannel models to meet customer demand, and using data-driven insights to fine-tune pricing and promotions. There will be opportunities for retailers to begin leveraging AI, for purposes such as enhancing forecasting and planning. Retailers that take a proactive, end-to-end approach through balancing cost control with customer-centricity, will be best positioned to protect and grow their margins in a volatile market.

Ultimately, profitability in general merchandise retail will not be won by caution alone, but by those bold enough to adapt, invest, and lead with insight.

Get in touch if you’re looking to take control of operational costs and turn insight into action. We’d love to help.