Retailers Scramble to Adapt As Inflation; Supply Chain Woes Persist

The rules of retailing are being rewritten as hope fades that inflation will subside any time soon, or that supply chain disruptions are easing. These ongoing challenges have retailers scrambling daily to reinvent how they operate as conditions seem to lurch from quarter to quarter even affecting those previously able to avoid like Amazon’s financial performance announcement today.

For example, in spite of inflation raging at a four-decade high, consumers indulged themselves in the first quarter, according to major credit card issuers. Their latest reports show surges of up to 33% over a year earlier, driven by travel, entertainment, and dining.

But a fresh consumer survey by First Insight suggests conditions may be rapidly deteriorating.

More than 40% of consumers now say that due to rising prices they expect to be cutting back on dining out. A third plan to cut back on entertainment, and 30% expect to spend less on vacations and travel. More than a quarter mentioned cutting back on premium and organic groceries and on fast fashion, a back-to-basics trend that’s already benefitting private label goods.

Meanwhile, consumer expectations about inflation — a bellwether indicator of future sentiment — have hit a new record, according to the Federal Reserve’s latest survey. The NY Fed’s Center for Microeconomic Data poll of 1,300 household heads found that, “year-ahead household spending growth expectations jumped … to 7.7 percent, marking a new high.”

Last year, with supply limited and inflation expectations rising, consumers loaded up on essentials. Buy now, save later. This year, without the flood of stimulus money we had last year, and with the economy expected to slow, the calculus is likely to reverse. On tight budgets, consumers will tend to buy in smaller quantities or trade down.

Conditions on the supply side are also looking grim. The Federal Reserve Bank of Cleveland reported recently that, “supply chains remain disrupted, in some cases to an even greater degree than earlier in the pandemic.”

The Covid shutdown wiped out the advantages of just-in-time inventory management, so some companies are opting for “just-in-case” inventory, ordering further ahead than usual,

according to a report on DigitalCommerce360.com, an ecommerce media platform.

Gordon Industries, an ecommerce retailer of Christmas and swimming pool merchandise, “now acts as if supply chains will remain slow and unreliable forever.” The company usually orders one year ahead of its seasons. Now it’s ordering for two. Gordon has also cut its assortment (SKUs), a trend we have been seeing at other companies that aim to weed out low-margin, low-volume items.

Using a customer-centric approach, Home Depot has been building inventory depth across its highest velocity SKUs to appeal to its loyal Pro customers.

The pandemic may have killed off just-in-time supply, but retailers have a tool which might be called just-in-time demand information: real-time data in the form of transactions and the ability to test just about any detail of any product or service.

For many retailers, this is new territory. According to some reports, half of retail industry executives say they don’t have a good handle on pricing.

“Attempting the sort of reinvention and reinvestment required against a backdrop of rising inflation and changing consumer behavior is not for the faint-hearted,” says Ben Gilbert, retail guru and head of Australian research at Jarden Australia.

He recently told the Financial Review of Australia, “You’ve got to have a point of differentiation. That could be price, or it could be value, which is price, service, quality and range. But whatever it is, you need a point of differentiation.”