Inflation is growing faster today than it has since the Great Recession. The consumer price index increased 9.1% in June 2022 from a year ago, the highest increase since November 1981. With this rise in inflation, retail companies are reporting a hit to their margins, and are expected to continue to do so for some time to come. But that doesn’t have to be the case.
With costs increasing across the value chain, ranging from raw materials to manpower and transportation, retailers must develop a comprehensive approach, and make bold moves to gain a competitive advantage, and to catalyze the challenges posed by inflation into opportunities. While there is no silver bullet to tackle this problem, retailers can take several transformative steps to address inflation and drive a step-change performance to protect their margins. Here are seven bold moves retailers can make to combat inflationary pressures and preserve their margins.
- Get more mileage out of each promo dollar
Heading into what looks like a very intense promotional period, retailers need to start promoting smarter, not bigger. Smarter means finding the sweet spots where promotional spend can drive more margin dollars than it costs, and these promos can be bigger by saving money on unproductive toxic promotions.
Toxic promotions are those that cost you more money than you make by actually running them. Typically these are whole house types of events designed to drum up big business in tough times. But they don’t typically work.
Beyond promo planning, retailers can also carefully manage markdown optimization to get clearance and end-of-season timing right, using the in-depth knowledge they gain about elasticities from their promo work. - Keep inventories nimble with advanced demand forecasting and inventory management Retailers can now accurately predict sales patterns that persist year after year using cutting-edge demand forecasting engines. They can leverage AI-powered demand forecasting for identifying trends, seasonality, and other unique demand drivers, all in one place. Sophisticated forecasting can be accurate enough to help businesses plan effectively even in the crazy environments the retailers have been in, during the past two years.
Sales and inventory data can provide a clear understanding of current inventory levels, as well as what products sell at full price and what don’t sell unless marked down. This data can be helpful when ordering products, to ensure retailers are buying products that sell at full price and not over-stocking. Better inventory management will help prevent markdowns that are triggered by overstocking.
A robust inventory management system can also provide insights into product performance, suggest ideal order quantities, automate vendor relations, determine optimal pricing, and calculate profit margins and other KPIs. Retailers have the option to optimize inventories with advanced allocation and replenishment tools that leverage predictive analytics for the greatest accuracy even in the wake of changing consumer preferences. - Boost your Average Transaction Value (ATV) in spite of softening demand
Most retailers assume their baskets will shrink in tough economic times, but this does not have to be the case. This is the perfect time to push strategies designed to add to the cart, including optimizing check-out queues, carefully managing shopping adjacencies, and understanding who is shopping in your stores and how to satisfy their shopping needs successfully.
Retail space planning solutions can help you do exactly this, and inflationary times are precisely the time for building the careful analysis and machine learning algorithms that will allow you to win the basket, and grow transaction values. Automated retail space planning software minimizes manual effort and ensures high accuracy in retail space planning and retail floor planning, through automated and localized space plans and planograms that deliver improved top and bottom-line results. - Make your planning process your strategic weapon
In difficult economic times, laggards resort to broad based cost cutting and business simplification to save near-term margin dollars, while long-term winners use the opportunity to invest in solutions that let them manage the complexity in their business and build efficiency into their processes.
With AI-powered planning solutions that leverage machine learning, teams more efficiently turn out better assortment plans with fewer invested hours. Better assortments and better flow of product will drive increased sales, and improved margins. What’s not to like? - Make pricing work harder for your business
Most retailers are reluctant to raise prices because they fear losing existing customers, but sometimes it is the most effective way to protect profit margins. Retailers must focus on understanding their consumer, and identifying Key Value Items (KVIs), before making any pricing decisions.
Best-in-class companies rely on advanced retail analytics for pricing recommendations. Modern pricing tools examine customers’ willingness to pay, and the margin performance expected from the price change. Considering customers’ willingness to pay and product differentiation when making pricing decisions can help companies make more thoughtful pricing decisions in the present, as well as when we pass the current inflationary period.
And no matter what, even in what seem like intensely competitive times, retailers must avoid strict competitor-based pricing. Just because your competition does it, does not mean it is right for your business. Consumers are notoriously attentive to pricing of certain products and categories. But in other cases retailers have the opportunity to price more freely; being aggressive where it matters, and backing off where it does not.
It is also important to deploy smart communication strategies emphasizing product attributes that justify higher prices, such as superior quality, innovation, and exclusivity. - Time your clearance sales to meet your broader traffic generation needs
If you are going to mark it down anyway, get credit for intelligent clearance pricing. This seems obvious, but most retailers get this wrong, and pack all their clearance messaging into just one clearance event each season. By carefully considering which product categories to apply markdown on, and creating a smart cadence for it, retailers can drive more traffic into stores, over a longer horizon.
A comprehensive end-to-end lifecycle pricing solution can help retailers carefully manage end-dates and store capacity, to create careful clearance patterns that extract the most revenue, sell through the most product, and preserve margin throughout, while keeping customers satisfied with the value they receive. - Eliminate low-margin products that are not traffic drivers
As mentioned earlier, incorporating retail analytics solutions can help retailers easily track key metrics like gross profit margin on individual products. Despite how simple this may sound, many retailers do not have the end-to-end visibility into their business systems to accurately allocate costs to product level P&Ls, blinding them to where they actually make money. By minimizing or altogether eliminating products with the lowest profit margins from their stock, especially those that are not effective traffic drivers, retailers can focus their time, energy and money on products that yield higher returns. If selling low margin products is not essential to the business, try eliminating them to see how the customers respond to such change.
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The retail environment is likely to remain challenging for some time, with increasing pressure on margins, but the situation also presents an opportunity for those that are ready to make bold decisive moves. Recognizing that inflation is likely to stick around for at least a few more quarters can give retailers an incentive to act holistically across the value chain. Most retail organizations have the capabilities required to weather the storm and emerge as a winner as long as they get to work immediately by reviewing their product portfolios, promotional planning, product flows, markdown optimization and retail clearance strategy to protect their margins and drive incremental growth. Impact Analytics has done this for dozens of retailers.
How can Impact Analytics help?
IA’s robust predictive analytics can take into account millions of data points across myriad variables such as seasonality, trends, inflationary pressures, price elasticity, supply chain challenges, customer demand patterns, and many more, to provide actionable insights around assortment, allocation, pricing, and overall financial planning. Combining technology innovations—such as big data analytics and ML-based algorithms, IA also provides superior demand forecasting to tackle shifts in consumer demand patterns and rising inflation.
Whether you want to explore a specific opportunity like identifying your KVIs, and optimally pricing your products during the holiday season, or you want to opt for an end-to-end merchandising suite to drive profits across your retail value chain, Impact Analytics is here to help address your needs. Please reach out to schedule a conversion to hear more about how we might be able to help.
