Can Retailers Escape Inflation?

Retailers are facing a dilemma. Record inflation is forcing unwanted price increases while eroding already frayed consumer loyalty, hitting their bottom lines. Retailers can escape inflation’s grasp, and counter revenue erosion – but to do so, they must look far beyond their balance sheets, says Martyn Cole, Director of Commercial Operations, at Retail Directions.

With UK inflation rising to 9.1%, its highest levels in 40 years, it’s no wonder that total UK retail sales in May declined by 1.1% compared to May 2021.. This gloomy trend reflects a wider downward turn seen globally, with the US also facing a 40 year inflation high. In Australia, research from global bank Citi forecasted a ~$60b hit to consumers’ domestic retail spending capacity in FY23.

However, this is all relative, as the key comes down to timing. If the cost base goes up, prices must go up for retailers to stay viable. As currencies lose value, after a while people will get used to higher prices. The challenge is not to be one of the first retailers to be seen to increase prices, as this will only fuel a further decline in spending.

Inflation Isn’t a Pricing Challenge

For retailers to try and escape inflation, they need to adopt a robust pricing structure that has strong strategy, people, processes, and technologies in place to react to evolving cost increases and rapidly shifting market conditions.

Norman Drieselmann, Chief Executive Officer at Retailability, a South African based group of retail brands, offered some key insight into how retailers respond to the threat of revenue erosion:

“Pricing strategy talks as much to the retail sale price (RSP) we require to achieve a sustainable gross margin as it does to price positioning in the marketplace relative to your fashion/quality positioning. If all retailers have to shift price points, then your price positioning in the marketplace will remain intact if you move in proportion.”

When the inflationary wave forms, the best tactic retailers can employ is to stock up at a lower cost, so that they can delay price increases and as Malcolm Smith, Chief Financial Officer at Retailability, advises:

“…in this environment you really need to apply a strong ‘trader’ mentality and not be afraid to make bold calls.”

A retailer in this position may be able to weather the inflationary storm a little longer than their competitors, to gain an advantage over competitors, at a time where most others will be increasing prices.

However, retailers must look wider than this, as robust pricing practice has to include customer experience. Customer experience has to include pricing, honesty, and value – all of which, as Drieselmann says, “…ensures that value positioning remains intact in the mind of the consumer.

In an attempt to hide rising costs being incurred, some retailers have adopted a ‘less for more’ approach – in other words, ‘shrinkflation’. An ethically troubling response to an equally troubling economic reality.

Shrinkflation is no secret, and the practice was around well before the current economic crisis.

However, it does have its limitations, as consumers are acutely aware of the practice and punish retailers who succumb to such tactics by shopping elsewhere. Those retailers who continue to undertake shrinkflation may be seen as acting without integrity, clawing back profits at a time when consumers are being hit hard.

Instead, retailers need to take an empathetic approach, underlining their commitment to helping customers to ‘get more for less’ without compromising on quality, or damaging their reputation. John Lewis is one example of this, launching its ANYDAY range in 2021 which promoted ‘affordable quality’.

This approach fits in with retailers taking a longer-term strategic approach. As explained by Drieselmann, who said that in his experience, ensuring that key known items were maintained at pre-inflation levels may have:

“…necessitated a short term drop in input margins, but was felt as a fair sacrifice to ensure our price perception in the customers mind is maintained. It was noted that despite the input margin pressure in those selected lines, our overall margin through the till was maintained in that department.”

Retailers also need to harness data and technology better, to gain insights that can help pass on cost savings to consumers. If retailers can leverage customer data strategically, they can better understand responses to price increases and gauge how to react in each product category.

Retailers should also take an open and honest approach to how they communicate with their customers. Not just on the impact inflation is having on the business, but what they are doing to ensure their customers are shielded against increasing costs.

It is about adding emotional value to every experience, and as Smith says, “…offering strong value and tempting customers to make what is often a discretionary purchase.”

Smith continued, “We know what we stand for and which categories we want to ‘own’ and we need our customers to really perceive these value statements through our direct marketing and in-store promo activity.”

All of which helps to further increase profit margins.

Inflation

Retailers Between a Rock and a Hard Place

Brand and indeed retailer loyalty cannot be taken for granted. Retailers must balance the need to mitigate their own price rises, whilst not putting off, or worse, losing customers.

If a retailer reduces their margins, this changes their entire business model. Sooner or later, they will not be able to deliver on their brand promise, which will in turn impact their bottom line and will have much longer lasting implications than inflation.

Being able to truly understand customers and show empathy has always been important. Now it’s become vital in keeping retailers afloat.

There is no question that inflation is eroding already frayed consumer loyalty and retailers’ bottom lines. Retailers that balance financial stability with demonstrable customer empathy might just be able to escape the clutches of inflation and counter revenue erosion – which show no sign of going away anytime soon.