Three Steps Retailers Can Take To Weather The Inflation Storm

Inflation in the UK is at a 40-year high, and there's no sign of it slowing down. Inflation has been the final cocktail derived from a mix of Brexit, Covid, supply chain disruption, and rising energy costs.

These factors, amongst others, have led to a significant increase in fixed and variable costs that have left retailers reeling and asking themselves some difficult questions. Do they pass this increase on to the consumer and risk losing their loyalty? Or do they absorb the cost, thus reducing their profit margins and limiting their ability to invest for the future? Are there opportunities to save costs without impacting the customer experience or product quality?

So what exactly should retailers do? In this article, we aim to shed light on this question by exploring how inflation is impacting the industry and share some examples of retailers who are seemingly weathering the storm.

how has inflation impacted retailers?

Out of all the industries, retail has been the most affected by inflation. The current high inflation rate is stifling the sector, disrupting supply chains, and increasing wages and prices.

Staff wage increase: Inflation has undoubtedly triggered a wage bidding war amongst retailers, with companies fighting to hire and retain the best talent. This is also being exacerbated by the cost of living crisis, which is forcing employees to look elsewhere for a better salary.

Consequently, retailers now find themselves in a precarious position; do they pay workers more and risk a reduction in their profit margins, or do they avoid increasing salaries and potentially lose staff, causing further disruption? Recently, we have seen many retailers choosing the former. Extensive research conducted by Fourth (the leading global software provider for the retail and hospitality sectors) found that 97% of retailers planned to increase staff salaries in 2022 in line with inflation.

Price increases: Price increases have inevitably led to decreased consumer spending and demand. This was evidenced by UK retail sales (excluding fuel) being down in May 2022 by 4% since last October. These increases have hit food retailers the hardest, with bread, cereals, and meat being the largest culprits.

Food spending alone is down by 1.6%. According to ONS, this drastic fall in spending is a consequence of higher prices. Asda’s Chairman, Stuart Rose, stated that customers are even asking shop staff to stop scanning items when the till total hits £30 in an attempt to cut down on costs, further evidencing a decrease in consumer spending. This trend is expected to continue as prices remain high and the cost of living keeps increasing.

Fashion retailers such as Next and Asos recently warned customers that the increase in staff wages will cause the prices of goods to rise.

What now for retailers?

Despite there being no indication that inflation will be reducing anytime soon, there are still opportunities to come out stronger. History has shown that companies who prosper during an economic downturn tend to outperform their peers over the next decade. Therefore, these challenging times can be turned into opportunities. There are several steps that retailers have taken to combat inflation and preserve profitability:

Strategic price increases: Rather than simply increasing prices across all products, companies must ensure that they tailor increases based on a thorough understanding of the different consumer segments & sectors and how much customers are willing to pay. For instance, Zara increased their prices across Europe by 11% in 2022. To avoid losing customers, Zara decided to raise its profile in the eyes of the customers by featuring more limited edition collections and also opted to use more upmarket fabrics.

Reduce costs elsewhere: To balance the effect of the various increases, companies can use this time as an opportunity to re-evaluate store processes and assess where they can reduce costs. For instance, to deal with the cost of living crisis, Deliveroo decided to reduce its marketing spend in 2022, instead pledging to make marketing spend ‘more efficient’. For example, they chose not to renew their £3.5m deal with the English FA.

Monitor competitor pricing: The current cost of living crisis has caused consumers to relinquish their brand loyalties and instead opt for retailers who offer the best value for money. According to McKinsey, US consumers have switched brands more times than any other time during the pandemic. Therefore, it's vital that retailers closely monitor their competitors’ strategies and adjust accordingly. For instance, Tesco constantly monitors competitors such as Aldi, whose main USP is value, and attempts to match them on price. They then strategically increase their prices in tandem with Aldi. That way, they continue to attract and retain customers based on value.

What’s evident is that inflation is not going anywhere anytime soon and is likely to be a challenge for the foreseeable future. However, the current situation presents an opportunity for resilient and brave retailers to capitalise and turn these challenges into opportunities. Those who make informed decisions backed by the right type of research, will make it out on top through these turbulent times.

If you’d like to discover how you can transform your cost base in the most sustainable way, please consider downloading our latest white paper, Better Than Just Making The Cut: Cost Transformation For Sustainable Business Growth.

BJSS is home to a talented team of retail consultants who provide digital and IT consulting services to many of the world’s top retailers, including the Co-op, Specsavers, and Waitrose. They routinely deliver innovative strategies, rapid turnkey processes, and next-generation technology solutions to give retailers a competitive edge.

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