How can technology help retailers manage the impact of inflation?
10th May 2022 | 4 min read
Retail Express’ UKI General Manager, Ed Betts, considers the challenges faced by retailers as the financial situation worsens, and how merchandising software can maintain profit margins.
The deepening cost-of-living crisis, with inflation running at its worse rate in decades, is impacting us all. But, for more than a few, the soaring energy costs that are set to reach stratospheric heights by autumn will mean a choice between heat or eat. While the chancellors’ £15bn package is welcome, one retail veteran described it as “a drop in the ocean[1]”, and that “there is still going to be continuing pressure and a lot of toughness for people,” as inflationary pressures are set to put a squeeze on household budgets and therefore on retailers’ profits for months to come.
Naturally, consumers will be tightening their belts with the obvious shift in purchasing behaviours that this entails. For the retailer, already under significant pressure, difficult decisions will have to be made about if, when and how much of the suppliers’ cost increases are passed on to customers. Buyers and category managers will be faced with an uneasy balancing act between maintaining overall margin and retaining customers who may choose to shop elsewhere if the price increments are too great. The challenge then is how to face this decision-making process with greater insight, control and forward visibility on the potential impact across the category?
Critical questions for category management
Of course, evaluating the key lines will be critical with the obvious questions arising: What should we protect? What should we invest in? But for many retailers, these are questions that are easier said than done. A price-protection strategy and offering discounts on certain staples may on the surface maintain store footfall and brand equity, but could have unintended consequences across the category and cannibalise sales in other areas damaging profits. All too often, category decisions are not sufficiently joined up.
At the same time, profit margins will need to be made up from price increases on premium lines. And with, perhaps, more staying at home to conserve finances, what should the premium lines comprise and at what price points? A focus is needed on introducing new ranges and exciting product extensions that bring in new customers and justify a slightly higher spend by existing customers.
More often than not, this is an abstract art that relies too heavily on ‘guestimations’ and gut feel, rather than a scientific process based on data and fact. Legacy systems, and a confusing mix of phone calls, emails and spreadsheets, burden the buyer with category admin; rather than focusing on category strategy, new product sourcing and supplier negotiation, dated systems result in a disproportionate amount of time firefighting the almost universal cost increases being passed on by suppliers and manually tweaking hundreds of product prices within a certain tolerance of competitor discounts. This isn’t adding value to the business, nor to the customer. Mistakes are easy to make and can have disastrous consequences very quickly. Surely, it’s time for change.
AI: Put in the data, take out the guess work
Customer loyalties are tested in challenging times. And it is those challenging times that highlight insufficiencies and inadequacies in the systems and processes relied on to engender that customer loyalty. Right now, retailers will be feeling the pressure of prolonged underinvestment in systems and a siloed approach to negotiating, buying, planning, funding, marketing and recording activities. And with pressure to act quickly, buyers and category managers need access to data in real time to make better, more informed decisions about their go-to-market offer to maintain margin.
The latest in intelligent merchandising solutions based in the cloud combine real-time data and artificial intelligence (AI) to generate accurate demand forecasts, boost productivity and drive better financial results. With workflow and visualisation, retailers can test and simulate the effects of different prices and promotions on specific items and the cross-effects on the whole category at the planning stage to give accurate forward visibility on profit and loss. And with all the data hosted centrally, the system provides ‘one version of the truth’ for all stakeholders.
The automation of rules-based pricing also means that prices are manipulated based on market intelligence and within certain thresholds, delivering efficient promotions without cannibalising other stock. And when the business is running more efficiently, buyers are freed from the burden of administration to be more productive and innovative in their approach; to focus on finding new product lines, delivering enticing offers and better engaging with customers to cement their relationship with the brand.
Take control: an intelligent solution for smarter merchandising
In challenging times, more than ever, retail leaders need an acute understanding of what their customers want and what their competitors are doing so that decisions can be made with greater confidence, clarity and speed. It’s easy to lose control in the heat of the battle, but intelligent merchandising with advanced forecasting and planning tools, provide the necessary insight and dexterity to pivot category items and promotions as required and deploy more effective margin-improvement strategies.
[1] https://www.theguardian.com/business/2022/may/26/sunaks-15bn-cost-of-living-package-not-enough-asda-boss-stuart-rose
