The Impact of Inflation On the Retail Industry and Consumer Behavior: How to Overcome it?
By Multidev Technologies · PUBLISHED July 4, 2022
Retail sales slowed in May as consumers faced continuing inflation and its impact on the cost of everything from groceries to gas. Consumers are changing their shopping behavior in the face of rapidly rising prices. According to a recent NRF study, almost half of consumers are switching to cheaper alternatives and are more often looking for coupons or sales when shopping for everyday necessities. So how to deal with inflation in retail?
Retailers face the possibility of persistent inflation due to increased demand following the reopening of the economy after the lockdown. However, as interest rates rise and consumer purchasing power lessens, many retailers may begin to see a decline in demand, forcing them to respond more to inflation. They can meet this challenge by streamlining operations, building customer loyalty, and driving profitable growth. Retail leaders can focus their efforts on turning this period of stress into an opportunity for the future.
Retailers can catalyze these challenges into opportunities if they make bold and deliberate decisions. Indeed, companies that perform exceptionally well during economic downturns tend to outperform their peers in the following decade. Those that take a holistic approach will be able to combat inflationary pressures and preserve their profitable revenues. Below are some strategies to help you to deal with inflation in your retail business.
How Retailers Can Prepare for and Mitigate Inflation’s Effect on Your Retail Business
1. Revisit category strategy
Revisit your category strategies to reflect changes in consumer buying behavior and margin profiles. In today’s retail environment, consumers are becoming less brand loyal and turning to private-brand products to cope with inflation. To turn this to their advantage, retailers must regularly re-examine their category strategies. Winning retailers will balance rapidly changing consumer preferences with product-specific inflationary pressures. It means thinking differently about their mix of private and national brands. Those looking to improve private-brand penetration can first develop brands with high awareness, advocacy, and stand-alone loyalty by adopting consumer-led brand strategies and category management and design capabilities for which consumer goods companies are known. Knowing which product categories face the greatest inflationary pressures and are likely to experience significant changes in the consumer behavior can help retailers make informed category strategy decisions.
2. Enhanced supply chain visibility
Address end-to-end costs to serve through enhanced visibility and diversification of the supply chain. Retailers can realign their supply and distribution networks to route shipments through low-congestions ports and lower-cost shipping lanes. They place distribution centers in optimal locations that balance labor availability with last-mile costs and use logistics and supply chain as a service provider to reduce asset intensity and distribution overhead. Greater into end-to-end inventory, fulfillment costs, and customer experience metrics can enable retailers to more effectively balance expenses and services.
3. Keep an eye on competitors and inventory
In a period of inflation, competition can be fierce. According to McKinsey, US consumers switched brands and retailers more in 2022 than ever since the pandemic began, with most listing prices as their driving motivation. With this in mind, keeping a close eye on your competitors’ pricing and promotional strategies is essential.
In addition, it is important to keep an eye on your inventory levels. This trend of losing brand loyalty began when shoppers’ favorite brands were out of stock for long periods of time.
4. Stay customer-centric
While many price-sensitive shoppers choose to switch to cheaper alternatives, the customer experience is still essential. Quality customer service and thoughtful touchpoints hugely impact brand affinity, loyalty, and future word-of-mouth evangelism.
In the face of inflation, consumers are turning to cheaper products and brands. Be more precise in pricing and promotion and tailor value to consumers. Instead of making broad price increases that may erode customer confidence, retailers can tailor their response to price inflation by customer and product segment, taking into account both margin performance and consumers’ willingness to pay. Raising costs is unpleasant for both consumers and retailers. Retailers that take a strategical approach are more likely to emerge with profitability and consumer relationships intact. In addition, retailers can re-evaluate their price and promotion mix during this period by pulling back on promotions and build a structured and targeted pricing strategy that can help manage inflation without raising prices.
5. Use next-gen sourcing tools
Use next-generation sourcing tools to drive sourcing excellence for private brands and branded products. Private brand sourcing has reached a wide range of maturity. When retailers began sourcing private-brand goods, many simply replicated their branded-goods sourcing models. Leading retailers realize they have full control of the product design, specifications, value chain, and negotiation based on price. To accomplish this, retailers can deploy next-gen sourcing tools to create real-time visibility into the impact of inflation on finished goods costs and develop bottom-up product cost targets across their portfolios. Real-time cost tracking tools allow retailers to identify the true impact of changes in input costs (raw materials, freight, labor, exchange rates, etc.), determine deviations from supplier quotes, and take action. Digital should-cost models allow retailers to quickly develop a comprehensive view of their product price across thousands of SKUs and easily adjust for changing market conditions. They can then leverage this information in real-time to better manage their exposure to inflationary factors by optimizing product design and specifications and re-evaluating their supplier-country matrix.
For branded goods, retailers can enhance transparency to understand “all-in” margins with suppliers, incorporating all costs, funding, and value-added services to ensure that merchants fully understand the trade-offs between brands within their portfolio. Finally, they can engage their suppliers in a consistent, fact-based manner, with the support of a central team, to ensure collaboration to meet the challenges of an inflationary environment.
6. Optimize store operations for efficiency, productivity, and resourcefulness.
To mitigate the effects of labor cost inflation, retailers can re-evaluate their in-store operations and look for opportunities to reset the store operations model by deploying technology and analytics, resetting labor allocation and scheduling, and taking a comprehensive view of costs. Retailers can also invest in frontline employee experience and retention to reduce costly turnover by leveraging talent recruitment and analytics and rethinking capacity building.
7. Consider digital sales channels and new payment methods
As a result of COVID-19, many brick-and-mortar retailers have been considering alternative sales channels such as eCommerce, social media and buy online, pick up in-store (BOPIS). Using these digital sales channels, retailers can increase their sales and revenue without requiring foot traffic in their stores.
According to Salesforce, some shoppers navigate higher prices by opting for new payment methods. The steady increase of buy-now, pay-later plans as customers move away from higher-interest credit card purchases. This trend may also expedite the adoption of mobile wallets as consumers seek lower prices and more convenience online.
8. Wages and staff retention
With rising inflation and a red-hot labor market, many retailers have increased hourly wages at unprecedented rates to retain employees. With growing competition among employers to hire and retain staff, many retail employees are leaving their jobs for new, more profitable opportunities.
Even those who want to stay in their retail jobs are looking for new, higher-paying opportunities to pursue with their current employers. If retailers can’t match the pay increase, their talent will leave. This puts retailers in a difficult position. They must pay their workers more and retain them to increase brand perception and consumer value.
9. Set up an inflation win room
Managing the impact of inflation across a broad operational landscape requires a cross-functional, disciplined, agile response. The Inflation “win room,” or an agile, cross-functional structure with authority to coordinate the inflation response, can set up clear goals for the business, establish one source of truth, increase the decision-making speed, and ensure a systematic, fact-based approach to tracking execution, diagnosing wins and losses, and applying lessons learned.
10. Stay informed
Finding accurate and trustworthy data and analysis is often challenging in an era of information and content overload. If you’re looking to keep up with inflation and its impact on the ever-changing retail landscape, here are a handful of great resources:
- The U.S. Bureau of Labor Statistics (BLS) tracks the Consumer Price Index (CPI) to measure inflation.
- The National Retail Federation (NRF) tracks industry developments.
- Forbes provides data on consumer behavior.
- Industry reports from McKinsey and Bain are available.
- Harvard Business Review, Retail Dive, Retail Brew, and Retail Wire offer insights on retail.
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The retail environment will likely remain challenging for some time, but the situation also presents an opportunity for those who act decisively and quickly to develop a response. Most retail companies have the capabilities to withstand inflation and emerge as a winner. They can act holistically across the enterprise and value chain. The future will belong to those willing to reshape their capabilities and boost their organizational resilience.
The current landscape is also encouraging retailers to adopt strategies that focus on innovation to increase the productivity of all their assets. With an increased need for productivity improvements, merchandising, packaging, promotion, format, and the adoption of retail technology are all helping to offset some of the adverse effects of rising inflation.
ChainDrive retail management solutions can help you grow your business and deal with inflation. Need help developing the right pricing & discounting strategies to overcome inflation? Request a free live demo with our software team to know how we can help!