‘How does inflation affect businesses?’
‘How will inflation affect consumer spending?’
These are some of the top questions on the minds of American retail business owners. Inflation rates in the U.S. have continued to climb since the COVID-19 pandemic, hitting an all-time high of 8.5% this year. This is the highest it has been since 1982.
Unfortunately, the high inflation rate is not going away as quickly as retail businesses and consumers would like. According to a CNN report, most economists predict inflation will not reduce to the ideal target rate of 2% until 2024. So even as 2022 rounds off and we get into 2023, the high cost of goods and services will continue.
So, as a retail business owner, it is essential that you know and understand what inflation is and how it affects your business and consumer spending. We will also share tips on keeping your business going to avoid closing shop during these economic upheavals.
On that note, let’s begin.
What is inflation?
In simple terms, inflation refers to an increase in prices. This is mainly due to the decline of money (purchasing power). This decline often results in a surge in the prices of goods and services over time.
As a result, what a particular unit of currency could buy changes. If consumers could buy bread for $5 in 2021, they might need $7 to buy it now. Ultimately, inflation affects essential commodities such as the following:
Health care services, among others.
Now the question is, what causes more money to exist in the hands of the public? This happens when the monetary authority:
Prints and releases more money to the public.
Legally devalues money.
Lends new money to the public by buying from banks government bonds.
All of this causes money to lose its purchasing power. Now, how does inflation directly affect your retail business? We discussed this next.
How does high inflation impact retailers?
As a retailer, you sell directly to consumers. This is because of the goods you sell or the services you're looking for. Therefore, for your business to stay afloat, consumers need to patronize you. Unfortunately, this patronage becomes less during inflation as people tend to buy less because of the declining purchasing power.
Different studies have been conducted on the impact of inflation on the retail business, and the results are pretty discouraging. For instance, 45.7% of retailers in the U.S. reported a noticeable increase in the price of goods and services between October 2021 and March 2022.
An online survey led by GetResponse, a marketing software company, found that about 4 out of 5 (79%) of 500 surveyed U.S. retailers were affected by inflation. Also, 72% of retailers and e-commerce businesses plan to increase prices. So, as a retail business owner, it is vital to understand how inflation affects you.
To comprehend the impact of inflation on retail businesses, we must look at how it affects the parties associated with them.
A business will only do well if it has customers willing to pay for its products. No enterprise can do without people because you exist for them, so inflation is a double-edged sword affecting you and your customers. For instance, you have personal expenses like utility bills, home mortgage payments, car payments, etc. With high inflation in the prices of services and products, you may have to increase your product prices to cover the cost of living and continue running your business.
However, by raising the prices of your products, you push the cost of inflation on customers, leading to low consumer value. In simpler terms, customers will spend less, which affects your bottom line.
Again, inflation affects everyone, including your employees. Often, retailers hire people on a per-hour basis or monthly salary, and the amount would likely have been decided before inflation. However, the money might become inadequate during inflation due to increased prices.
When this happens, employees will ask for increased pay, which most businesses might be unable to handle. For instance, more than 40% of workers asked for a pay increase in the U.S., but less than 25% of companies considered it. If you fail to consider a salary increase or raise your budget, you might lose staff when they get better offers.
One undeniable fact of inflation is that we all take on inflation costs for the goods and services we need. Even a retail business owner is not exempt from this. Likewise, your suppliers and manufacturers will pass on inflation costs to you.
An excellent example is the increased price of gas. If your supplier delivers goods to you long distance, you will pay more than you did for them before because they will factor in the increased cost of gas. The situation is the same with manufacturers; an increase in manufacturing costs will inevitably affect the product’s price.
Fixed and variable costs
Again, you will feel inflation in your business expenses, from payroll to rent, which often triggers an increase in your prices. However, you should not only pay attention to fixed costs. Also, note variables and check for inefficiencies.
For example, if you use traditional adverts and it no longer gets the kind of result you want, you may want to switch to social media ads. This is because social ads have more reach and might be cheaper, and the goal is to reduce costs as much as possible.
Can retail businesses mitigate inflation?
During inflation, retail businesses will either sink or swim. Thankfully, there are steps you can take to ensure your business survives these times.
First, consider creating digital sales channels like e-commerce. Most online retailers do not need physical stores, reducing business costs.
Second, identify and fix inefficiencies in your business. This could be anything from eliminating ineffective staff to getting a better handle on your inventory. Again, the focus is to find aspects of your business that must be fixed and fix them to avoid being bled dry.
Those who take a holistic approach can combat inflationary pressures while maintaining profitable revenues. To that end, below you’ll find other recommendations that will help retail business owners reposition their businesses:
Re-Examine your category strategies: Inflation made consumers shift from popular national goods to private brand products, goods produced by a particular retailer. Therefore, evaluate your category strategy to see what your customers are buying more, the product categories facing higher inflation, and how it will affect buying behavior.
Review your supply and distribution channels: If you want your customers to bear fewer inflation costs, review your supply and distribution channels. Use low-congestion ports and low-cost ocean lanes. You can also consider third-party logistics and supply-chain-as-a-service providers. All this helps you to stabilize costs and services.
Tailor inflationary costs to customers’ willingness to spend: Identify products people cannot do without or do not mind spending money on, irrespective of the price. Once you do, channel most of the inflationary costs to these products instead of spreading it across all your goods. Doing this will help keep your business afloat and your customers happy.
Create an inflation win room: An inflation win room is a structure that lets you coordinate your inflation response and set clear goals for your business. With it, you make faster decisions and accurately diagnose your profits and losses while applying the lessons learned.
Knowing how inflation affects your business is one thing but taking steps to deal with it is another. Therefore, you must devise efficient ways to manage your business and eliminate costs that bleed you dry. If you don’t, your customers will shoulder the inflation cost, consequently affecting your sales.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.