Just as the consumer retail sector was taking a breath from the compounding effects of a volatile inflationary time, the March Consumer Price Index (CPI) was announced. This spike of 3.5% year-over-year in consumer prices and higher than expected Personal Consumption Expenditures (PCE) could mean continued bruising to margins and long-term growth for consumer retail businesses.
March and April PCE forecasts are showing a 0.3% monthly inflation reading - if this holds it will mean an acceleration of inflation. Furthermore, if compounded over 12 months, that roughly translates to 3.7% annualized inflation. Though well below peak inflation, it is still significantly above the Federal Open Market Committee’s current goal of 2%.
Another factor adding to the growing strain on the consumer retail sector are the lower-than-estimated gross domestic product (GDP) combined with higher-than-core PCE shows that inflation fatigue is moving from pure sentiment to impacting business. Given that consumer spending constitutes roughly 70% of the overall GDP, we can expect there to be continued downstream difficulties for companies servicing the consumer and retail sectors.
What does this mean for consumer retail businesses?
The higher-than-anticipated increases in CPI and PCE have raised concerns about the ability of retailers to maintain revenue growth as current rates of consumer spending may not be viable long-term, especially as many are financing their lifestyles with credit card debt.
The downstream effect of declining revenue growth is margin pressure. As the squeeze on margins intensifies, retail businesses need to adopt proactive measures to safeguard their profitability. Reacting with knee-jerk adjustments to pass on cost increases to consumers should not be strategies retail leadership leverages — consumer sentiment towards brands can have lasting consequences. Retailers must think holistically by employing differentiated pricing strategies that address the sophisticated dynamics of their business models.
While pricing serves as a crucial tool to safeguard revenues and margins, there are cautionary tales regarding its blunt-force use, such as a peanut butter spread approach across the product assortment. A smart retailer pricing strategy considers product roles, competition, regional differences, promotions, brand value, merchandising, and other factors.
However, delivering on margin expectations in an inflationary environment continues to be a reality for many public companies. A release valve that can ease more immediate margin pressure is leveraging a trifecta of strategies across optimizing pricing, promotions, and assortment.
Pricing Optimization as a Leader
Pricing optimization involves analyzing market demand, competition, costs, and consumer behavior to set prices that are competitive and profitable. This also involves differentiating consumers based on their willingness to pay, adjusting prices dynamically based on demand fluctuations, or implementing promotional pricing strategies to stimulate sales.
Overall, price optimization is about finding the pricing strategy that achieves the best possible outcome for a business, considering both financial objectives and consumer perceptions. Key inputs to price optimization include:
- Consumer willingness to pay
- Key price thresholds
- Brand value
- Category and product differentiation/uniqueness
- Product roles within the assortment
- Competitor benchmarking
- Regional differences
- Seasonality
- And finally, cost of goods sold (COGS).
By strategically adjusting price points, retailers can strike a delicate balance between profitability and market competitiveness, ensuring that their offerings remain attractive to target consumer segments.
Protecting Margins Through Strategic Promotions
Equally critical is refining promotional calendars to maximize impact and minimize margin wastage. Effective promotions are not merely about slashing prices or giving discounts; they are strategic investments aimed at driving traffic, building baskets, and enhancing brand loyalty – which can be done through a number of ways, such as buy one get one (BOGO), bundling, or spend more save more mechanisms.
Often, retailers rely on legacy promotional calendars without discerning the effectiveness of past promotions to adjust upcoming quarters. Retailers must leverage historical data analytics to determine true return on investment in the promotion and constantly re-balance spend towards high-performing promotions and away from low-performing promotions in addition to strategically using promotions based on overall sales performance.
The Checkmate: Product Assortment
Product assortment optimization plays a pivotal role in margin protection and maximizing shelf space (in store and online). Similar to promotion optimization, retailers should evaluate the roles across all their SKUs (stock-keeping units).
Hero SKUs that are core to the assortment, selected for their ability to drive both traffic and revenue, will always be the priority, while the broader range of products in the long tail warrants a second look to understand whether they should be pruned or substituted with higher-performing alternatives in the assortment mix. By aligning product offerings with customer demand and eliminating redundancies, retailers can streamline operations, reduce costs, and maximize revenue potential.
Pulling it Together for Growth
Retailers must adopt a comprehensive approach to margin protection, one that transcends simplistic one-size-fits-all and reactive pricing tactics and embraces refined strategies tailored to their unique business realities. This demands a departure from conventional wisdom and a willingness to embrace change in how they manage pricing, promotions, and assortment.
To achieve the end vision, retailers must invest in advanced analytics capabilities, empower their teams with the requisite skills and expertise, and foster a culture of continuous improvement. Only by embracing agility and adaptability can retailers navigate the complexities of inflationary pressures and emerge stronger and more resilient in an ever-evolving marketplace.
Now is the time for retailers to innovate, differentiate, and thrive. Reach out to our experts for guidance on how to take control of the squeeze between costs and consumer preferences to secure long-term growth.
