Inflation fears are lingering as retailers approach the holiday season, with 79% of consumers saying their finances are a concern and 62% expecting their living costs to increase even further in the next six months, according to EY‘s Future Consumer Index. EY Global Consumer Leader Kristina Rogers believes that shoppers remain positive about the future despite low sentiment levels, but the end of pent-up demand from COVID-19 means “they may be less willing to accept further prices rises, especially as interest rates rise pushing up their debt burden.
“I am expecting that consumers will still continue to spend, although more carefully in the coming festive season,” said Rogers in an interview with Retail TouchPoints. “I think there are two types of consumers at the moment: those who have been more affected by the reduction of their income and those who are still thinking inflation will go away. Eventually, both will have to realize that inflation will stay for a while and start changing purchasing behaviors.”
This behavior will impact retailers across the industry, but different segments will face unique challenges, each with its own solutions. For instance, retailers selling discretionary spending products will need to develop an even better understanding of what their shoppers want while delivering great experiences. Retailers focused on staples will see greater opportunity for private label and other less expensive brands to thrive or will need to concentrate on products with added value.
Non-Essential Retailers Should Look Into Experiences and Alternative Models
More than one-third (35%) of consumers are worried about having enough money to spend on things other than living expenses, according to data from EY. Rogers expects this to have the biggest impact on purchases of expensive items in general and technology in particular, with shoppers delaying unnecessary spending. However, this also presents an opportunity for retailers that offer something beyond the basic shopping trip to stand out from the crowd.
Rogers expects “a fierce fight from retailers to attract consumers through outstanding exceptional buying experiences,” which will give smart companies a chance to build trust and loyalty in new ways. For instance, Rogers noted that many grocery retailers have been freezing the prices of essentials despite growing inflation — which is something price-conscious shoppers will definitely notice.
The retailers facing the biggest struggle are those that don’t sell essential goods. For them, rising inflation adds another consideration to a challenge that has been growing for several years.
“Discretionary spend always falls in times of economic uncertainty and inflation, but underpinning this is also a subtle shift in consumer behavior during COVID-19 where consumers realized they needed, and could live with, less,” said Rogers. “Many consumers already feel they have too many possessions, and other factors such as rising sustainability concerns may drive consumers toward repairing, reselling and renting as an affordable alternative to traditional models.”
Fast fashion retailers in particular have their work cut out for them, as 64% of consumers no longer feel the need to keep up with seasonal fashion trends. With many shoppers cutting back on their spending, these businesses will need to explore alternative business models, such as resale or selling more durable items, to succeed.
“Whilst luxury fashion will maintain a close eye on trends, fast fashion will improve and accelerate their understanding of consumer behavior and choices through better data insights,” said Rogers. “Whether seasonal fashion trends persist or not, consumers will be looking more at the rapidly growing secondhand market. Fashion retailers may seek to tap into this with their own pre-loved ranges and could also develop lines that are designed for longevity — in terms of quality of product and in terms of less transient styles.”
Staples are also Under Pressure, so Compete on Added Value or Price
Consumer caution and price pressures aren’t unique to discretionary items: EY found that 77% of consumers have seen a price increase in food staples in the last four months, and that 68% of consumers expect price further prices rises for food staples in the coming six months. While some brands have been able to freeze prices despite their own cost increases, others will need to focus on brands that either win on price or offer something above and beyond what the competition offer.
“Discerning consumers are looking for more affordable options when a product delivers its basic purpose,” said Rogers. “I don’t think consumers will be trading down from premium brands — when the product delivers added value beyond its intended purpose. After COVID, when supply chain disruptions affected the availability of products, consumers got used to switching and trying out brands (more for need than want). Now, consumers are not that afraid to choose more affordable products and switch to private label in those products where brands deliver little added value.”
Household products are in a similar place — 61% of consumers have seen a price increase in home and household care products in the last four months, and 49% of consumers expect further price rises in the coming six months. While these price increases haven’t had much impact on sales in recent months, Rogers expects shoppers to cut back as we enter the fall and winter. Her projections include shoppers using smaller portions of items like shampoo or detergent to stretch what they already have, and trading down to cheaper substitutes for things like cleaning products.
Future Success Calls for Both Fresh and Traditional Selling Strategies
Cutbacks are on the horizon across both discretionary and non-discretionary spending, which means retailers need to carefully consider their Q4 strategies. This holiday season is poised to be uniquely challenging, but retailers have multiple options for making the most of it.
“Consumers may begin to seek out alternative, and potentially more cost effective, solutions when buying for the holiday season,” said Rogers. “For example, creating rather than buying gifts. Purchasing experiences is a trend that predated COVID but is likely to continue as consumers realize they might have more ‘stuff’ than they really need.”
However, this doesn’t mean traditional holiday strategies should be thrown out altogether. “A lot will also depend on how much retailers will be prepared to discount products on key shopping dates, and whether the intermittent lockdowns and dampened demand in the last two holiday seasons have created a groundswell of pent-up demand from consumers,” she said.
Ultimately, success in the coming holiday season and beyond will come down to competing on more than price. Rogers noted that offering cheaper products simply isn’t a sustainable long-term solution given current inflationary trends, but the aforementioned better customer experience and products that go above and beyond their basic purposes also help. There also are solutions that go beyond the shelf itself.
“[Retailers have] the opportunity for retailers to win consumer trust and loyalty by supporting the communities they serve,” said Rogers. “Helping food banks, seeking to control prices for certain essentials and shifting supply chains to incorporate cheaper substitutes or local products with less volatile supply chains may help to mitigate the challenges they, and consumers, face. Another opportunity for retailers is optimizing SKUs. We have seen many of them taking advantage of the situation to get rid of underperforming SKUs.”