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Inflation’s Just One of Retail’s ‘Storm of Challenges’

Forty-year-high inflation raises questions about whether consumers will be able and willing to spend this year.

Prices are rising across fashion and Russia’s war in Ukraine means consumers are getting sticker shock at the gas pump, a reality that could chill their spend on other categories.

“Post-Covid inflation has already been passed on to customers, and rising commodity prices are pressuring consumers’ incomes,” Jharonne Martis, director of consumer research at financial market data firm Refinitiv, wrote in a March report assessing Q4 2021 earnings results. Investors are now “questioning how long companies can continue to pass on those costs to consumers,” she added.

Martis said consumers will scale back their discretionary spending when they really start to feel the effects of inflation. Refinitiv projects a 1.4 percent decline in retail earnings for the current quarter, suggesting a slowdown for the sector. “The biggest drop in spending is expected among the department stores and mall stores, apparel, and specialty retail,” she said. Big-box stores like Walmart and Sam’s Club, along with discount-driven retailers, are expected to fare better with price-conscious shoppers.

Edited market analyst Kayla Marci said the industry can expect rising inflation to “further boost fashion’s increasing price tags.” U.S. mass market retail prices are already up 7 percent from the same period in 2021, and 10 percent from 2020.

In analyzing the average amount that a female shopper spends for a full outfit, including a T-shirt, pants, a jacket, sneakers, underwear and a bag), Edited found that U.S. consumers pay $250, while the same outfit runs $600 in Australia and $775 in South Korea. Italy is on par with the U.S., while the Chinese outfit would cost about $275.

But other factors weigh on consumers’ ability to spend. Numbeo’s cost of living index shows that people living in major U.S. metro areas spend more, about $800, on groceries, entertainment, transportation and accommodations their global peers. That compares to $650 for consumers in the U.K. and France, $600 in South Korea, about $675 in Japan and Australia, $400 in China and about $500 in Italy. “When retailers enter or expand into new markets, they have to be aware of macro factors” “on a local scale that can influence pricing,” Marci said.

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Power of pricing

Inflation is just one factor clouding retail’s outlook. Geopolitical tensions and ongoing supply chain problems also weigh on the consumer psyche. “Consumer behaviors and shopping preferences have been influenced dramatically by these changes,” DemandTec chief strategy officer Kevin Sterneckert told Sourcing Journal, noting willingness to spend will depend on geography. “With these environmental changes, the consumer preferences within one store vary widely when compared to another of the same brand.”

Precision pricing gives retailers a curated mix that meets consumer expectations at different store locations, though not enough companies invest in artificial intelligence processes to make this a reality, Sterneckert said. A DemandTec and RSR survey of 114 fashion and general merchandise retailer executives between December 2021 and January 2022 revealed that half of all respondents felt they could better use data to inform pricing strategies.

Under-performing stores (10 percent), retailers with average sales (35 percent) and high-performing companies (55 percent) all have concerns about pricing. Sixty percent of average and under-performing retailers rated competitive pricing as their No. 1 issue, survey data showed. Top-performing stores were most worried about raising prices too high and ultimately alienating customers.

However, attitudes about strategy differ—82 percent of high-performing retailers believe that advanced retail pricing technology is “essential” to driving business improvements. As a result, many are adopting more data-driven processes, and 64 percent said they’re satisfied with their ability to price regular and promotional products.

“These capabilities understand the buying behaviors at each location, or online customer segments, through the price elasticity of every item,” Sterneckert said. “Decision makers set the business rules and objectives, and the technology delivers the best prices.”

The best prices aren’t necessarily the lowest. Slashing MSRPs “is not the only path to winning customers,” Sterneckert said. “The challenge is to understand consumer behavior and set prices that reflect the correct value, measured by customer demand.” Effective pricing also takes into account competing prices from other retailers, as well as other brands and products offered, which consumers use to figure out what they think is fair.

Sterneckert said retailers must understand price sensitivity around high-demand products and keep key items in stock. “A key frustration with the rise of click-and-collect e-commerce is when a customer selects an item believing it is available, only to be disappointed when picking up the items that were purchased,” he added.

While discounts and promotions can drive sales, “a careful association with the everyday price is required to encourage balanced shopping behaviors,” Sterneckert said. Some offers might be too underwhelming to get shoppers to spend. But “drastic” price drops could lead shoppers to cherry-pick just those deeply discounted products, or load up on more items than necessary, potentially altering how the customer sees the retailer and discouraging full-price purchases over the long term.

For now, retail is battling a “storm of challenges,” DemandTec general manager Anis Hadj-Taieb added, “making price more important than perhaps any other value attribute.” Amazon and Walmart continue to dominate, and while retailers know that “offering a low price may not win new customers, having high prices will certainly cost them existing ones,” and makes precision pricing “a requirement for retailers to thrive in the market,” he said.