Spending more but getting less: how retailers can help consumers as inflation bites

Inflation has hit everybody hard, especially retail businesses and consumers. The price of some grocery items has skyrocketed, with the average cost of a basic food basket in the US rising by 15% in the year to January 2023.

Overall, the consumer price inflation in the US is at 4%, and with many other areas of life also becoming more expensive, consumers are cutting back on discretionary spending, seeking value, offers and discounts and looking to retailers who can help them manage the cost of living.

Demand-side pressures are also joined by supply issues, as labor, supply chain and energy costs are also soaring, placing retailers in the unenviable position of having to raise costs to meet their own overheads without squeezing customers too much.

How retailers respond to these challenges in both the short and long-term will come to define both their own organizational success and the experience customers receive when shopping.

Spending more, getting less

While steep prices are set to lift retail in value terms, retailers must be cautious not to overlook the reality that consumers will be cutting back on non-essentials and making fewer purchases overall, which will impact everything from stock management to overall margins.

But customers are getting a rough ride of it too. Value growth forecasts in Europe, for example, are up 2.7%, but actual sales volumes are set to decline by 3.2%. The upshot here is that customers are spending more but getting less – with the associated implication that retailers are passing on higher costs to customers.  

That means that, right now, the retail customer experience is suffering. To some extent, it’s unavoidable, and retailers can’t control all the forces of the economy at the heart of many of these issues. Still, in recognizing the challenges facing consumers, retailers can begin to put strategies in place to improve the overall experience, win loyalty and ultimately succeed themselves.

The squeezed middle

Looking at this situation objectively, retailers do have a difficult balancing act. Higher costs of labor, energy, wholesale, and logistics operations mean retailers themselves are feeling the financial pinch, and many have no choice to but to put costs up to compensate.

The difficulty for retailers comes in that customers do have options. There is a greater diversity of eCommerce possibilities than ever before, and fierce competition for footfall on the high street. If prices go up too much in one outlet, customers can very easily look elsewhere, or cut back on purchases full stop.

Not all retailers will be impacted the same way, though. Mid-tier businesses are likely to suffer the most. Luxury brands, as ever, will be somewhat shielded from the impacts of inflation as high-income customers will have more disposable income and greater job security, giving them freedom to shop uninhibited. At the other end of the market, discount brands will fare well with less affluent customers on the lookout for value deals and discounts wherever they can find them. Those retailers who reside in the middle could be squeezed.

But with the likelihood that both supply- and demand-side inflation will continue to cause issues for the foreseeable future, all retailers are going to have to adapt to stay ahead of the competition regardless of their target market. So, how do they do that?

Settling into hybrid

The demise of brick-and-mortar shopping has been largely exaggerated. While eCommerce experienced a massive boom during 2020 and 2021 for obvious reasons – and continues to show strong signs of growth - customers have relished the return of in-store shopping.

This has led to some confusion among retail observers, founded on the assumption that physical and digital shopping can’t exist harmoniously. Predictions of the difficulties facing eCommerce businesses are obviously largely overblown, but we are likely to see retail settling into a hybrid mode of in-person and online shopping going forward.

Customers will use the options available to them to seek out value wherever that is. It could be online or in-store, and retailers that can offer a streamlined and personalized shopping experience across multiple channels will be best placed to benefit.

Technology will play a key role here, as retailers will require accurate visibility to predict demand on those different channels and understand shifting consumer behavior with regard to pricing. They will need to do so with agility, as the market moves fast.

Unifying experiences to build loyalty 

The focus of any technology investments in today’s retail landscape should be on building a unified commerce approach, blending the physical environment with the digital. However, just as important is deploying technology and hardware that can make operations more efficient overall.

This can include everything from handheld barcode scanners to operational intelligence software and voice-guided work devices that can have an impact in the warehouse and on the road as much as on the high street.

Combining these two approaches enables retailers to attract and retain more customers by providing continuously convenient experiences and avoiding passing rising costs onto consumers. With inflation stubbornly refusing to relinquish its grip on people’s wallets, that will be extremely valuable in the coming months.