Gemma Thompson & Spencer Shute

24 October 2023
Topics in this article
  • Inflation
  • Retail

Inflation background and context

Inflation has dominated headlines for the past two years. But what goes up, must eventually come down.

Fueled by Covid, war, and supply shortages, inflation rates across key global markets including the UK and US have remained over the 2% target rate since April 2021, peaking at 11% and 9% respectively, in 2022. While the pressures on the economy have continued, the rate of inflation (although showing an uptick in recent months in the US) has overall started to fall closer to the target rate on both sides of the pond. Albeit still some way off, we seek to explore the opportunity this could present to retailers.

What started with fuel and energy price spikes soon spilled over into food and clothing, with a variety of other areas experiencing the same; thus, the cost-of-living crisis emerged. The effect of inflation rippled through supply chains, causing rising materials, labor, energy, and transportation costs, making it more expensive to manufacture, store, and ship goods across the board for many individuals and businesses.

The increased costs experienced by suppliers upstream, are passed on to each layer of the supply chain before reaching retailers and are subsequently passed on to customers, causing public outrage at the rise of the cost of weekly grocery runs. As such, customers have been seeking lower-cost alternatives and own-brand products over retailer loyalty. This though is not an option throughout a Retailers operation where, in most areas, standards and specifications have had to be upheld.

Current state of inflation

However, is there finally some light at the end of the tunnel?

The rate of inflation had been steadily decreasing for 12 straight months, with the latest consumer price index (CPI) data reporting September prices rising by 6.7% in the UK and 3.7% in the US, versus the same period in 2022, notably down from the peak just a year before. However, while this figure has remained static for the UK over recent months, the US has seen slight increases since June, indicating further instability entering the market.

Reports by the Bank of England (BoE) credit the UK’s inflation holds to increased interest rates curbing buying behavior and slowing down demand, pockets of capacity in supply chains, and the labor market softening. However, approaching with caution is advised. While last month saw the BoE hold interest rates at 5.25%, it came after 14 consecutive increases, which economists are warning can take up to 18-24 months to affect economic activity, therefore suggesting the true impacts are still uncertain.

In the US, as the job market has remained stronger than expected and core inflation has begun to increase again, the Fed has indicated further interest rate increases could be implemented to achieve the 2% target. The Fed had previously paused increases as inflation decreased but is discussing further increases, suggesting the US is not out of the woods just yet. Additionally, treasury yields have strengthened, giving the Fed further hope that financial conditions could tighten in the near future.  

A picture of uncertainty with glimmers of optimism. Whichever perspective you choose to take, the fact remains that we are approaching an economic landscape that will require retailers to adopt different and innovative strategies if they wish to not only navigate but thrive through this period.

The opportunity for retailers

Now is the time to get ahead. It is time to stand up a team to target suppliers who implemented inflation-busting increases to obtain benefits that will help offset investment in peak trading as we approach the Christmas and the January Sales period. Having taken the “flow” down from the supply chain and your immediate suppliers, it’s now time for cost to “ebb” out of that same supply chain to support retailers and the end consumers.

The pendulum is also starting to swing elsewhere. Where supply chain capacity remained constrained early last year, with the lack of transportation, equipment, and labor contributing to the higher costs, there is no relief. Pockets of capacity within ocean freight and warehousing, stemming from weakening demand and additional space created during and post-Covid, present an opportunity for retailers to get ahead of the curve.

The challenge is in prioritizing the opportunity so it doesn’t pass you by. How do you give adequate attention to reversing agreements made during price hikes amid peak trading?

There are a few options available, each with pros and cons to balance. You could repoint people away from typical activity to focus on reversing some of the impacts in parallel but consider the capacity and capability of the remaining team to deal with trading demands. You could recruit resources to lead a program alongside the activity of your existing team, but consider the potential crossover of supplier engagement and the impact this may have during a pivotal time.

It may suit you to seek external support for a short time to bolster your capacity and capability, enabling you to conduct an effective cost-savings program alongside your team, who can remain focussed on trading activity. However, of course, there is a cost to this too.

The right option will vary by retailer, but what is consistent is the need to work this into retailer’s ‘golden quarter’ strategies as soon as possible. Whether it’s through contract reviews, negotiations, market exercises, or others, developing a war chest made up of short-, medium-, and long-term benefit realization will assist in offsetting the pressure to be competitive over the festive period and set you up for a strong 2024.

Building on the benefit

As we progress into the new year, where trading is likely to slow and more economic uncertainty likely to arise, retailers who act now will be at the forefront, having agreed to deals that others are only now looking to make. What will be key, is clarity in your objectives and responsibilities of the team you stand up to action.

Looking pragmatically at your organization’s capacity and capability to get after these opportunities will help identify the right solution for you. The application of knowledgeable, professional, and experienced specialists who can tackle the problem hands-on, and at pace, will set you up for the greatest success.

If you would like to find out more about how Proxima can support you, please contact our expert team here.

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