By Peter Sheppard
Senior Performance Consultant, Retail Doctor Group
Despite lots of analysts, banks, government and many others having an opinion on how inflation will trend going forward, no one really knows how high and for how long we will have to fight inflation.
What we do know is that the authorities want us to spend less. Their main tool to achieve this is to increase interest rates, which effectively reduces our discretionary spend, which of course seriously affects retailers’ sales and profits.
In addition, it pushes up the costs of doing business, especially wages, rentals and most other expense lines. This is therefore a very concerning equation for retailers, especially those whose categories mainly include ‘discretionary’ products.
So how has Australia been affected by inflation?
The above graph shows how inflation has increased quarter on quarter for the last 6 years. The Covid quarter (Q3 2020) stands out and from there inflation has been ‘off to the races’ and there seems no indication of this slowing.
In addition, consumer confidence remains at low levels of around 80% (100 being normal) which is an indication of what consumers’ future intentions are, particularly when it comes to their future spending intentions.
So with all the bad news we see, what do we as retailers need to do to remain resilient and trade profitably? If your sales are to fall, in real terms, we need to do a couple of things really well in our business.
In short, if you do the important things better than your competitors, then that is a simple goal to aim for. If the consumer sees you as a better experience, or better value, or better service and therefore chooses you, then you will be okay and navigate through these times.
So, decide what are your points of difference. Is it service that is so exceptional that makes customers tell their friends or is it ‘connecting’ to your loyal regulars so that they spend more time and money with you, or with clever promotional activity that make people feel that they are getting a fantastic deal.
Fine tune your pricing strategy and make sure that your offer is always fresh and well presented. These actions will all assist in maintaining and growing sales.
Remember, one of the most important tasks and tests for any retailer is to maintain your gross profit dollars. This is what pays your bills. Do not be tempted to discount profusely, though this might maintain or even increase sales, it is only a short term benefit.
Do the maths on the effect on profitability. Remember, if say you have 50% gross margin, and you discount by 25%, you need to double your sales in order to maintain your gross profit dollars.
We at Retail Doctor Group are well versed in assisting retailers increase their gross margin dollars to the category benchmark level, or better, and in addition know what your expense ratios to sales need to be. If you don’t know how, give us a call and let’s see if your business is in line with where it should be in order to successfully navigate these changing retailing landscapes.
Peter Sheppard is a Senior Consultant with over 40 years of retailing experience, having worked in retail during the last high inflationary period and remembers the pain that ‘getting it wrong’ can bring. Give us a call on +61 2 9460 2882 or email: [email protected] and we can help you with the insights to stay resilient during inflation and improve your profitability.