Retail Inflation & What Your Business Can Do About It

Inflation, or the rate at which the prices of goods and services increase, has been highly volatile for the last couple of years. Between December 2020 and December 2021, the consumer price index for all retail goods increased to 7%, nearly triple the inflation rate the United States had seen in a decade.

From there, the inflation rate continued to increase to its peak in June of 2022 at 9.1%. As the country moved away from the pandemic and the economy recovered, however, things started to look up. In December of 2022, the inflation rate fell to 6.5%, and now, entering 2024, the inflation rate has decreased by over half the rate we saw at its peak, falling to 3.4%.

While this trend is hopeful and there is reason to believe that it will continue as the economy keeps gaining strength, inflation’s impact has already been felt by the retail industry and will continue to take effect this year and beyond. Keep reading to see just how inflation has impacted the retail industry and what you can do to prevent it from harming your business.

Inflation’s Impact on Retail

For retailers, inflation has impacted many areas, from consumer habits and loyalty to new hiring demands, as well as the health and survival of businesses.

Consumer Spending Habits

As things have become more expensive, consumers have changed their spending habits. Many are focusing more on necessities and cutting out discretionary spending, with some even turning to bulk buying and seeking out private labels for better prices. Additionally, consumers are looking for discounts and deals when they shop, now more than ever.

See more about how inflation has impacted consumer spending habits in the graphic below:

Staffing & Hiring

Another area that has been impacted by inflation in the retail industry is staffing and hiring. As inflation has taken its toll in recent years, workers are expecting more from their employers—more compensation, more benefits, more flexibility—all of which cost money. In response, many businesses have offered compensation increases and have bolstered their job benefits to stay competitive in the marketplace. Despite these undertakings, businesses are still having a hard time attracting and retaining their staff, as inflation continues to outpace their efforts.

Find more insights into how inflation has impacted the staffing and hiring landscape in the graphic below:

Operating Costs

Inflation has also had a major impact on the overhead costs of small businesses. This includes everything from inventory and fulfillment to technology, to rent—prices for everything have gone up and businesses are feeling it. In response, many businesses have had to raise their prices and anticipate needing to do so again, but are still not seeing the profits they need to grow and escape the stresses and strains of an inflationary market.

Learn more about how inflation has impacted small business operating costs in the graphic below:

Customer Loyalty

Another area that has been impacted by inflation is customer loyalty. Where experience, customer service, company ethos, and other factors used to play a leading role in what brands people supported and showed loyalty toward, now, it’s all about price. Customers will abandon a brand, no matter how positive their experience, to seek out better deals. In the face of inflation and tighter pockets, loyalty is nearly impossible to come by unless you can offer deals and discounts that actually impact the customer (and beat out Amazon).

See more about how inflation has impacted customer loyalty in the graphic below:

Business Survival Rates

At the end of the day, all the factors above and the way inflation has transformed them have made the ability for businesses to prosper much more difficult, and many businesses are scared for their future. Not only that, many have already had to shut their doors, unable to compete with rising costs and unstable conditions. While others are prepping for the worst, stockpiling money and cutting costs wherever they can.

Discover more about how inflation has impacted business survival rates and confidence in the graphic below:

What Retailers Can Do

As we can see from everything discussed above, the retail industry has been massively impacted by inflation. From cash flows to the cost of goods, customer loyalty, and the ability of businesses to survive—inflation is taking its toll. There is good news, however. Your situation is not hopeless and you can take steps to ensure the well-being of your business with the strategies below.

• Rein in your sales forecast: In normal circumstances, you would expect to see year-over-year growth in terms of your sales. Inflation times, however, are not normal and you should either reign in your growth projections or consider planning for a year of marginal decline or stagnation in terms of your sales. This forecasting strategy might seem depressing as you are drawing it up, but it will ensure you don’t overestimate your potential and set your budget too high.

• Review your operating costs: Another way that you can adapt to inflation is by reviewing your operating costs and cutting out things that you are not utilizing, that are not returning on their investment, or that you can pivot to doing manually/for free. Inflation times are typically slower for retailers, so you may have more time to do tasks manually. Additionally, you might not need some of the tools you had used in the past. Review all your outgoing expenses and see where you can make cuts and save some money to bolster your margins.
• Start an emergency fund: Inflationary times are unpredictable and one of the best ways you can prepare for the potential of dark times for your business is with an emergency fund. Set aside what you can every month so you can stay afloat if things go south. I would recommend having at least two pay cycles of employee checks on hand as well as two months of rent payments, at minimum.

• Be conservative with your inventory levels: Another way that you can fortify your business against inflation is by being more conservative with your inventory levels. Holding inventory costs money in the form of carrying costs, so holding less merchandise when sales are slow will help you save money. Consider only holding safety stock for evergreen merchandise, lower your inventory levels overall to accommodate lower buying budgets, and plan your buying trips with lower sales in mind—overall, hold less inventory.
• Diversify your sourcing: When inflation hits, you want to be sure that you avoid stockouts and can capitalize on every sale, all while being conservative with your inventory levels and sales forecast. A way to ensure that you can get restocks quickly and capitalize on unexpected increases in sales is by diversifying your sourcing. Try and have multiple vendors for the items you sell the most to ensure you can get them if your conservative inventory scheme is not meeting demand.
• Consider dropshipping: To avoid carrying costs and having to store your own inventory, you can opt to use dropshipping fulfillment.
• Focus on high-margin goods: Another way that you can adjust your inventory management for inflation is to focus on high-margin goods or items that you sell for two to five times the wholesale price. This strategy will ensure that you at least break even or make a small profit even if you don’t sell through everything in your inventory and can help prop up lower-margin goods.
• Host end-of-season sales: Rather than letting excess inventory sit (and incur carrying costs) or liquidating it, try an end-of-the-season sale to clear out the old and make room for the new.
• Sell back your unsold stock: A new practice we are seeing pop up in contracts between retailers and their suppliers is a clause that says that the supplier has to buy back unsold stock after a certain period. This arrangement is typically only available if you are buying products en masse and have a good relationship with your supplier already, but it can be a great way to get rid of unsold stock without losing money. Note that the sell-back price is typically the same or lower than the wholesale price that you purchased the goods for originally.
• Reward your staff to retain your staff: It is costly to lose a staff member, hire a new one, train them, and get things back on track. Avoid the hassle of hiring by making your business a positive place to work. Yes, this means giving scheduling flexibility, offering compensation increases as the cost of living goes up, and giving your staff competitive benefits. However, making your business a positive place to work can also mean buying the team lunch on especially busy days, forming relationships with your staff, and making everyone feel appreciated with recognition and team building.
• Hire seasonally: Another way that you can ease the pressures of inflation in terms of employee turnover and demands is by hiring seasonal staff. Seasonal workers typically require fewer perks in terms of benefits and flexibility, so they are a great option if you need extra hands and can’t afford more full-cycle staff.
• Adopt a loyalty structure that prioritizes discounts: Loyalty is key during inflation times, as regular customers can provide your business with a steady revenue stream. However, when inflation strikes, the only way to keep customers loyal is by delivering value in the form of savings. Adopt a loyalty program structure that offers discounts and exclusive sales as opposed to other rewards if you want to retain customers.
• Develop a pricing strategy that delivers a sense of value: Value and savings are the name of the game when inflation strikes. However, you do not need to sacrifice your bottom line to deliver on this demand and create a sense of value—it’s all in the pricing strategy. Options line psychological pricing, discount pricing, and price anchoring are all pricing strategies that will both create a sense of value and maintain your margins.

• If not price, then convenience: While ultimately price is going to be the biggest determining factor for attracting customers in times of inflation, if you simply can’t afford to meet the price demand, you should look to convenience as your next appeal. Strategies like click-and-collect services, buy-now-pay-later customer financing, free shipping, and self-service kiosks all make the shopping experience more convenient, which will be a draw even if your prices aren’t.
• Diversify your sales channels: Every sale is important during times of inflation and one of the best ways that you can reach more people and capture more sales is by taking your brand omnichannel. This means setting up an ecommerce store, selling on your social media sales channels, and even getting involved in your community with farmers markets, pop-ups, multi-store collaborations, and influencer partnerships.

What to Expect in 2024

While inflation is still relatively high as we enter 2024, inflation rates have been on a downward trajectory since their peak in June of 2022, and many expect this trend will continue throughout 2024.

In fact, the Federal Reserve anticipates that inflation will cool to 2.1% in 2024, back to normal levels. Not only that, a survey from the US Chamber of Commerce found that 65% of small businesses expect revenue to increase in 2024.

So, what should you do with that information? Is it time to start planning for an economic revival, free from the stresses of inflation? Or, do you stay conservative and wait to see if this good fortune actually comes to fruition?

As with all things in the economy, there is no right answer here as everything is still uncertain and highly volatile. The war in Ukraine, fighting in the Middle East, a US election year, and an unstable housing market all add to the unpredictability of the US economy in 2024.

With this in mind, my advice to retailers this year is twofold:

1. Consider your reserve: Look at how much money you have in reserve. This should ultimately determine your risk appetite. If you don’t have savings already built up to keep your business afloat Your business should aim to have at least three months of rent payments and three months of payroll in reserve before taking risks. , assume that economic conditions will not improve drastically and stick with your inflation-times strategies. Alternatively, if your reserves are insufficient, you may want to consider applying for a line of credit as a safety net. With a line of credit, you only pay interest on the funds that you withdrew. So if you never use it, there’s no cost; but if you do end up needing it, you’ll have cash ready to go.
2. Plan for now: The economy changes every moment. If you try to plan for the entire year, you might find yourself in a hole either because you were too conservative or because you were too hopeful. Try to plan your inventory needs, staffing, budget, pricing, and marketing initiatives in smaller increments so you can react as circumstances change and avoid getting stuck in a lackluster strategy.

Bottom Line

Inflation and retail are inextricably linked, unfortunately. As we have seen in recent years, inflation impacts consumer spending habits, staffing demands, operating costs, and ultimately, whether businesses can survive.

While it is easy to look at inflation and admit defeat to the larger economic conditions, there are things that you can do to fortify your business against rising prices so you can ride out the storm and make it to the other side. And, that “other side?” It might be just around the corner.