If you are a retail business owner, chances are you have experienced increased prices for your products from your suppliers in the last several months. Inflation is palpable, and the ongoing geopolitical crisis between Ukraine and Russia does not make it any easier.
While economists and the National Retail Federation still expect U.S. retail sales to increase between 6 and 8 percent this year, the uncertainty surrounding the impact of inflation has left consumers and retailers looking for answers about the future of the retail industry.
One thing is sure, though: inflation will not last forever. But for now, it’s a serious concern for every retail business in 2022. After all, high inflation changes consumers’ behavior towards certain products, with retailers bearing the brunt. In this article, you will learn how inflation impacts retail and how to deal with it effectively to soften its impact on your retail business.
What Is Inflation?
Inflation is an economic term that describes rising prices, which can result in a decline in purchasing power over time. The rate at which purchasing power declines can be represented by the average price increase of a selected set of goods and services over some time.
For example, let’s say you own a grocery store, and a basket of potatoes that cost you $50 two years ago now costs you $60. Obviously, the potato basket has not changed, but it has become 20% more expensive. A devaluation of the currency used in any given economy is a by-product of inflation. Thus, when everyday goods and services prices rise, consumers’ money earned and saved is worth less than before.
Indeed, some inflation is neither good nor bad but a natural process within a healthy economy. It’s simply a reflection of many other uncontrollable factors in an economy. Inflation is generally a response to two key factors: an increase in demand and costs. And it’s these two factors that largely determine the severity of the inflation.
Increased consumer demand for a product is considered a more positive indicator of inflation. It occurs when an economy has more money and can afford more goods and services. This increase in demand eventually leads to a decrease in supply, which causes businesses to raise their prices.
On the other hand, cost-push inflation is generally a more damaging form of inflation, as it occurs when input expenditures increase. Rising prices often offset a firm’s rising direct and indirect costs.
Both forms of inflation are typical and expected in the life of an economy. According to the Federal Reserve, the normal annual inflation rate in the United States is 1.5% to 2%. At this rate of inflation, economies can grow reasonably and without drastic changes in consumer or business behavior.
Unfortunately, the annual inflation rate in the U.S. accelerated to 9.1 percent in June 2022, the highest level since November 1981, up from 8.6 percent in May and above the market forecast of 8.8 percent. But that didn’t prevent retail sales from increasing exponentially. In fact, retail sales grew a record 14.1% in 2021, the highest growth rate in over 20 years and well above the 3.7% growth rate prior to the pandemic. In other words, U.S. consumers spent $1 trillion more on retail goods in 2021 than in 2020 and are spending at an even higher rate in 2022.
For retailers, inflation can lead to cash flow disruption, excess inventory, high storage costs, lower revenues, and reduced margins. To counter these problems, it’s crucial for you to have a thorough understanding of inflation and how it explicitly affects your retail business.
How Does Inflation Affect Retail Businesses?
One of the most significant impacts of inflation on your retail store is not necessarily inherited to your business. Instead, the impact comes from how your customers react to inflation with their purchasing decisions.
Less Consumer Demand
If your retail store sells non-essential items, inflation could decrease demand as consumers reallocate their spending to more essential goods and services. Consumers, of course, are more concerned about preserving the value of their existing cash and covering their debts and day-to-day expenses than investing or spending on fantasy. This works against retailers, as it leads to a decline in consumer purchases, creating inventory forecasting problems. Of the 79 major retailers that reported earnings between April 1 and May 23 of this year, 59% revealed a decline in consensus revenue estimates for 2023, and 71% saw a decrease in earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates for 2023, according to a report released by McKinsey.
Supply Chain Impact
Also, it’s important to note that retailers’ dependence on the global supply chain and its impact on retail prices and consumer buying patterns are crucial to understanding the effects of inflation on retail. The COVID-19 pandemic has created an unprecedented demand for goods such as electronics, furniture, sports equipment, and more, putting a strain on an already stretched global supply chain.
This, in turn, put tremendous pressure on suppliers and port workers worldwide, especially in China, which was already hampered by pandemic-related restrictions, including factory closures and understaffed ports. As demand for goods increased, so did the need for shipping capacity. Increased shipping costs have significantly reduced retailer margins, but they have also caused massive inventory backlogs. These receiving delays lead to shorter sales windows and faster markdowns to make room for new seasonal products.
According to Taylor Offer, founder of Feat Clothing, supply chain delays, and increased costs were additional barriers to opening their first brick-and-mortar retail store. “Opening a retail store in this environment was a real challenge,” he says. “There are so many moving parts we need to source, from retail shelves to sofas and hangers, all of which are delayed by months. We’re seeing eight- to 12-week delivery times and significant price increases on basic items that are usually always in stock. This makes us realize how important the global supply chain is and how competitive prices used to be.”
Other Ways Inflation Affects Businesses
Other than the wholesalers and customers, inflation can also affect rental fees if you have a brick-and-mortar store, energy costs, warehousing, order fulfillment, and pressure from employees to earn higher wages to cover their higher standard of living. The average hourly wage rose 5.1 percent between February 2021 and February 2022, the largest increase over a decade.
And with increased competition among employers to hire and retain workers, many retail employees are leaving their jobs for new, more lucrative opportunities. As a result, retailers are facing a difficult situation. Not only do they have to pay their employees more, further squeezing their margins, but they also have to continue to be severely understaffed. Neither of these are good for brand perception or consumer value.
How Can You Dampen The Effect of Inflation On Your Retail Business?
As a result of the spike in demand that followed the reopening of the economy after the lockdown, many retailers have yet to feel the full effects of inflation. However, as interest rates rise and consumer purchasing power declines, many retailers may begin to see a decline in demand, making it more necessary to respond to inflation. Below are some tips to address inflation in your retail business.
Leverage More Digital Sales Channels
A brick-and-mortar store is no longer sufficient to meet the demands or requirements of consumers. The advent of the pandemic has driven an explosion of online sales and purchases.
Most consumers’ initial research begins in a digital environment, whether they are shopping online or in a traditional store. Because of this, many brick-and-mortar retailers have turned to alternative sales channels such as eCommerce and in-store pickup (BOPIS). These digital sales channels have allowed retailers to drive business without visiting their stores.
Retailers looking to fight inflation should consider adopting digital sales channels for a variety of reasons:
- Such channels are available 24 hours a day to convert customers and collect sales.
- They require little overhead. Operating online sales channels requires fewer resources than operating a brick-and-mortar store.
- Online channels provide more value to customers. Customers value options, and having an online store with delivery can increase sales and offer more convenience, making the customer’s shopping experience more seamless.
Note: Opting for an online store to increase your sales means using point of sale software that can facilitate any type of online payment your customers desire. The software should also allow you to access important consumer behavior data to refine your marketing strategies. All this requires an integration of your POS and your online store. For retail businesses with both an online and a physical store, an eCommerce POS integration allows you to synchronize your store’s information and give customers a seamless shopping experience.
Streamline Your Inventory, Sales, And Other Inefficiencies
Even if you can’t control inflation, you can look at your operations and find areas to improve and limit waste. These small, incremental changes can significantly impact your retail business while mitigating the effect of inflation. Here are some areas of the retail business model you could improve.
Inventory management: Most retailers do not have a good understanding of their inventory, which, along with inflation, can be one of the most costly resources for your retail business. In fact, the average retailer’s inventory accuracy is about 60 to 65 percent. If you can improve your inventory management, you can avoid overstocking underperforming items and still have your best sales available. Investing in automated inventory management software is the first step to better inventory management. Inventory management software lets you get notifications of low-stock, overstock, and out-of-stock directly from your retail point of sale system.
Streamline Your Inventory Management With The Best Retail Inventory Management Software
Sales trends: Do you know what trends exist in your retail business? Is your business seasonally dependent? Do your customers take an average of six months to convert? If you understand the real data about how your customers interact with your retail business, you can use it to make better strategic decisions.
Perhaps you are highly dependent on holiday sales to turn a profit, which may mean you only work three days a week the rest of the year to minimize overhead. Again, you’ll need accurate data before making any choices or decisions. Choosing your point of sale software is essential to ensure that you have the necessary data.
For example, the assortment feature in KORONA POS can help you better adopt your assortment planning process to take advantage of your customers’ purchase requests. It lets you know which products to sell and where to sell them based on seasonality and regional demand.
Fixed and variable costs: Your business expenses are often the most affected by inflation. Inflation can drive these costs up quickly, from rent to electricity to advertising to wages. These are also the areas where you can find inefficiencies. Perhaps you’ve noticed that advertising in the local newspaper is less efficient since the pandemic, or perhaps you can negotiate better terms with your landlord. If you can reduce costs in these areas, it can help your retail store better manage inflation.
Learn how to manage your inventory effectively with this free eGuide.
Stay Customer-Focused
Customer satisfaction must be at the center of your decisions. While many price-sensitive shoppers choose to go with cheaper alternatives, the customer experience is still essential for customer satisfaction and retention. Quality customer service and well-thought-out touch points significantly affect brand affinity, loyalty, and word-of-mouth.
That’s why knowing what matters to your customer is more important than ever. Retailers who can identify the key drivers of their net promoter score can be better informed on how to tailor their customer experience to prioritize loyalty in turbulent times like inflation.
Control inflation through a steady cash flow
One of the most effective strategies to minimize the effects of inflation on your retail business is to maintain a steady cash flow. For instance, you might want to reduce your monthly overhead by negotiating better lease terms with your landlord. If you want to start an eCommerce business, it’s meant to increase your revenue.
Both actions are designed to increase cash inflow while decreasing cash outflow. You have a negative cash flow when your retail business expenses are higher than your revenues. If you bring in more money than you spend, you have a positive cash flow.
A constant cash flow alleviates the impact of inflation because your business can continue to operate without interruption. If you have a steady flow of working capital, you don’t need to make any drastic changes. That doesn’t mean you shouldn’t always be looking to improve, but it does give you more flexibility to grow at your own pace. Retail lending solutions, such as a business line of credit and a merchant cash advance, can help ease your cash flow. Such a type of financing acts as a safety net for your retail store.
No business, large or small, has been spared from the COVID-19 crisis and high inflation. If your retail business is still alive in 2022, it means you have survived one of the most difficult times for small businesses in our history. A better way to manage inflation in your retail store is to operate more efficiently and eliminate waste in your business. This approach is not strictly reserved for times of inflation. Reducing costs such as rent, electricity, or other non-essential expenses is particularly useful for cost management. Another way to mitigate the impact of inflation is to set up good inventory planning to avoid tying up capital in inventory.
Investing in inventory management software that will allow you to eliminate guesswork and make decisions based on data is a great starting point. It’s true that you need to reduce the cost and certain expenses in your store. But if there’s one thing you shouldn’t skimp on before investing, it’s your POS software, as it’s the backbone of all the operations taking place in your store.
Very happy with my decision to use this software and track the performance of my remote stores. KORONA POS is well worth the money. I chose it because it did not require a payment processor. Highly recommend!
-Richard D.
And that’s where KORONA POS can help. KORONA POS is a cloud POS system that allows you to track your sales, the most popular consumer trends, and the evolution of your inventory. For companies that own both online and physical stores, KORONA POS makes it easy to integrate both stores seamlessly for a smooth customer experience. Need to know more about KORONA POS? Feel free to click on the button below for a demo with one of our product specialists.
FAQs: How Inflation Is Affecting Retail Businesses
Inflation affects businesses in several ways. High inflation rates mean consumers’ purchasing power decreases, resulting in less consumer spending and lower business sales. This, in turn, can create excess inventory, dead stock, and therefore lost revenue for your business.
While the vast majority of retailers surveyed see inflation as an opportunity to increase prices and margins, nearly 54% see deflation as still having a future. Over the next 12 months, more than half expect industry revenues to increase by 5%.
When inflation rises, companies have to reduce revenues and profits and spend more on goods to stay solvent. Stocks, however, seem to be a good hedge against inflation since, in theory, they should grow at the same rate as wages.
According to an analysis by Insider Intelligence, global retail sales are expected to grow by 5% to over $27 trillion in revenue by 2022. Similarly, retail sales are expected to grow 4-5% annually through 2025, reaching just over $31 trillion.
