40-year ache: Inflation forcing consumers to make choices, cut back
"Hey Siri, find cheap food." Consumer spending is weakening as sky-high inflation forces shoppers to tighten their belts. How can brands keep customers?
With stocks tumbling into a bear market and prices on nearly everything continuing to soar, the economy is in rough shape. Experts say bear markets happen periodically and that the economy always bounces back, but that’s not much solace right now.
In the face of inflation rates unseen since the 1980s, consumer confidence is plummeting. Consumers are making choices and cutting back. Meanwhile, businesses struggle with supply chain issues and logistics bottlenecks as the bear market depresses the economy and alters buying behavior.
How can brands steer their e-commerce business through this bear market and prepare for a potential economic downturn?
Bear market sets in, consumers sit back
After months of sliding, stocks officially dropped into what’s considered a bear market last week. The last bear market – a market decline of at least 20% or more from recent highs – was in the early days of the pandemic.
A bear market alarms investors and triggers fears of an oncoming recession. There have been several in the past 75 years, varying in length from a few months to over a couple years. The March 2020 crash was relatively short-lived, with stocks rebounding the following August.
Stocks are spiraling as Wall Street worries that the Federal Reserve will aggressively increase interest rates to combat inflation. Consumer prices surged in May, up 8.6% year-over-year. It’s the biggest yearly increase since 1981.
As prices for gas, groceries, and other essentials continue to soar, consumer sentiment dropped to a record low, according to researchers.
Cost-conscious consumers are cutting back on discretionary spending and delaying big purchases as they tighten their belts, with some industries are impacted more than others.
For example, airlines continue to see increased demand despite rising prices. Movie theaters also are enjoying strong sales. However, the housing market has cooled with rising interest rates, and retailers like Target are discounting certain items.
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The supply chain factor
As they face a looming recession, brands continue to grapple with supply chain problems. Many of the issues that plagued them during the pandemic persist: COVID surges and lockdowns leading to clogged ports and shipment delays.
The supply chain problems have a cascading effect, leading to logistics and warehouse problems, uncertain fulfillment, and inflation. Brands are paying more for materials, finished goods, labor, and shipping, resulting in higher prices for consumers at the store.
The impact on customer experience can be severe. Shipping delays and lost orders can quickly sour a customer on a brand.
Retailers need to take action now to limit the collateral damage and protect their brand.
Fortifying the retail supply chain for an omnichannel future
Faced with ongoing uncertainty, retailers are strengthening their supply chain to keep shelves stocked, inventories healthy, and customers satisfied.
Smarter order fulfillment
So how can brands manage all this supply chain and fulfillment uncertainty? What should they do as consumers cut back on spending as inflation grows amid a bear market?
Above all, they need agility and intelligence. They need to track shifting buying behavior patterns and expect that price-sensitive shoppers will mean lower average order value. One way online retailers can adjust is by displaying recommendations for cheaper alternatives or smaller quantities.
At the same time, they need to protect their margins, which have already been under pressure as customers today expect next-day or same-day delivery and hassle-free returns.
Online retailers can focus on profitable outcomes by implementing intelligent fulfillment practices, including:- Develop micro-fulfillment locations, especially in areas with larger concentrations of customers to deliver more efficiently.
- Offer customers the option of receiving multiple orders in one package. Adding in a 5% discount offer for an in-store purchase can encourage customers to pick up their purchases at a physical store, which reduces delivery costs.
- Create subscription ordering and fulfillment capabilities to optimize your business and create more predictable revenue.
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Reducing returns for cost savings
Another way online retailers can weather the tough economy is by managing returns, which take a serious bite out of the bottom line.
Across industries, return rates for online orders average around 30% compared to 9% for in-store purchases. On top of that, processing these returns costs 50% more than previous years due to the supply chain crunch and tight labor market.
There are two key steps brands can take to help reduce returns and the cost of returns management:
- For high returners, limit the number of similar products they can purchase.
- Charge for returns. Zara and many other brands have started charging return shipping and restocking fees.
Time will tell how long this bear market will last, but brands that take practical steps now will steady the ship and protect their margins to drive consistently profitable digital commerce revenue.
