How The 11.1% UK Inflation Rate Is Affecting Retail & E-commerce
As many consumers struggle to afford even the basic essentials, their spending habits and where they shop are also changing. Retailers are struggling to stay profitable as sales decline while the costs of goods, energy, transport and staff, continue to rise.
What is the cost of living crisis?
The cost of living crisis is essentially the rapid increase in the prices of products and services as wages struggle to keep up. The rate of price growth (known as inflation) is currently outstripping income growth and the value of the pound in your pocket. This means, in real terms, that people’s wages are going down in value.
Inflation has been rising for a period of time, now standing at 11.1%, its highest rate since 1981*. This is due to irregularities and disruptions in demand and supply, and increasing energy prices. Demand patterns have been inconsistent as the Covid-19 pandemic becomes less of a factor, affecting production and distribution, and disrupting global supply chain availability and costs.
In the UK, Brexit has no doubt increased costs and difficulties in obtaining labour and importing and exporting products. It has also had an indirect impact on exchange rates, particularly with the pound falling against the dollar. But it is energy prices that are driving current inflation. Increasing wholesale gas and electricity prices are feeding into rising domestic and commercial energy bills. The cost of petrol has almost doubled in the UK since May 2020, exacerbated by the Russian invasion of Ukraine.
How are consumers being affected?
Everyone is hurt by inflation, but the impacts are not felt evenly across our society. Low-income consumers are more adversely affected as they spend a larger proportion of their income on food and energy. The effects of rising energy, housing and transport costs have a differential and significant impact on lower-income consumers, as do food and other consumer goods prices.
How is the retail sector affected?
The retail sector is beginning to see the impacts of these trends. Individuals are postponing spending on larger ticket items. For retailers, this may lead to an accumulation of surplus stock in the supply chain.
As mentioned at the start of this article, the location and type of shops that people use may also be changing. With high transport costs (especially petrol), local stores may benefit from consumers avoiding costly travel. In contrast, larger car-dependent stores may see a decline in footfall and spending.
Increasing costs may also affect how many online retailers charge for delivery, potentially hurting online sales.
The Bank of England and the UK government argue that the current cost of living issues (and especially inflation) are temporary. They are hopeful that pressures will ease in 2023, and that inflation will return to its 2% target by 2024.
But international geopolitical tensions – from pandemic-hit supply chains (particularly in the supply powerhouse of China where covid continues to impact production and distribution) to the war in Ukraine (which is affecting food, energy and fertiliser supplies) – do not show signs of easing. As a result, the prices of various commodities and products are predicted to remain high.
But there will be some winners. Retailers focused on value and low prices perhaps through their own private retail brands, can benefit from the switching underway. Those with a local presence, allowing consumers to avoid costly travel, will also stand to gain. While many consumers and retailers are finding life very difficult, others are relatively unaffected, and some groups clearly have money to spend.
In the short term, it is going to be tough for consumers and retailers. Worries about inflation and the impact of price rises across the economy are leading to reduced spending and personal hardship. Retailers are experiencing this slowdown and, until inflation falls and/or consumers see increases in their disposable income, spending will continue to struggle, impacting retailers in turn.
Focus on refining your product-market fit
It can often be tricky to know where to start in the face of a crisis, but back-to-basics is always a good starting point. A great way to begin is to honestly focus on your product-market fit. Swirling in a floundering market, and gaining sales traction can be crucial to standing firm and standing out. What companies need to do is really define their market needs and ways in which they can refine their product offering to that market. Does the product need tweaking in line with changing habits? Is the target audience still the right one, or does it need revising or adding? Times like these require adaptation in order to evolve with the situation.
Quick customer surveys and product feedback can help you make incremental changes based on research. Gauging the temperature of the market needs to be in continual evaluation, allowing you to make small updates to your offering. This includes demonstrating that you are listening to client needs, and potentially solving problems that competitors haven’t addressed, to create meaningful value for clients. This also crafts the agility needed to keep up with changing market conditions.
Utilising digital transformation
Many companies are still hesitant to fully harness digital capabilities, but digital transformation provides the extra edge and capability to not only survive a crisis but to scale and grow in one. Continued digital investments can help navigate a crisis while creating a competitive advantage and long-term benefits.
This can be an intimidating task, so you should turn to a marketing and digital transformation agency that are ready to guide you through the process and provide creative solutions. For example, these companies can provide the strategy, framework and basis for you to scale effectively, meet business needs and ensure tougher tasks become that bit easier.
If you have any further questions, please don't hesitate to email me at roy.butcher@raffingers.co.uk or click here to get in touch.
*statistics accurate at the time of writing (Friday 16th of November 2022)