In January 2022, inflation was recorded at 5.5%, and the Bank of England is expecting it to rise as high as 7%.

There are lots of reasons being used to explain the rise in inflation – the cost of raw materials, cost of shipping, cost of labour and the cost of energy. All these costs are increasing, with the result of rising prices for consumers.

We have not seen inflation this high since March 1992 – almost 30 years ago. In business terms, 30 years is a long time, and many of today’s high street retailers will not have experienced running a business in such an inflationary period. In this instance inflation is being increased due to cost price pressures rather than consumer demand, and that type of inflation is even more challenging for businesses to manage.

Bira has been talking to members and former members to obtain some ‘top tips’ for retailing when inflation is increasing. We have identified four key areas for addressing inflationary pressures that all retailers will need to consider. These are:

Stock Management

Probably the single biggest cost to a retailer – the cost of stock. We would urge you to consider the following:

  • Check the cost of replacement stock: The cost of stock sold is not just the original cost price, but more importantly the replacement cost, i.e. the cost of buying the stock back in. This means that if you can increase the sale price of existing stock before you sell it you have sufficient cash to replace it.
  • Stock up before price increases: Stocking up on key products if you expect costs to rise. If you think a product range will continue to rise, it would be wise to buy more stock now whilst the prices are lower. Obviously, this is only possible if the business has the cash and is able to tie up more money in stock. With that in mind, best practice would be to focus on the faster selling lines so that the stock is moving.
  • Reduce slow moving stock: Reducing stock range performance with the objective of removing or not re-ordering slower moving stock/products. This will reduce the amount of money being held in stock, and release cash to help finance the higher cost of other stock.
  • Consider secondary branding: Secondary branding may be an option for some retailers – substituting ‘A branded’ products with own branded alternatives which are often cheaper. This must be done carefully as these replacement branded products need to be of sufficient quality so as to not damage your reputation with shoppers.
  • Review supplier base/terms: Are you sure you are obtaining the best possible price, or the best possible terms?

 

Pricing

Invariably rising cost prices result in higher retail prices with businesses keen to retain their normal profit margins. However, this is easier when the inflation is fuelled by consumer demand. Furthermore, the high street is much more competitive, especially with the large online companies disrupting the market. Understanding pricing strategies is a key retail skill and you need to consider:

  • Increasing prices little and often: Customers will notice larger, more infrequent price changes so it is best to adopt a smoother approach to pricing. More work but worth it. A price rise to keep up with inflation may actually create more profit for the retailer.
  • Identify your Known Value Items: Adopting a balanced approach and know your ‘Known Value Items’ (KVIs). A KVI is often a popular sales line and the price is ‘known’ by the customer. For example, for supermarkets/ grocery stores KVIs often the cost of a pint of milk or a loaf of bread – items bought on a regular basis and often in isolation so the customer becomes used to the price. It is the cost of KVIs that often determine the perception of how expensive a shop might be in the eyes of the shopper. The strategy for KVIs should be to minimise the price increase on these products and spread any increases across the wider product range. Protecting the KVIs from significant increases the perceived value for money that you offer your customers. However, it is not always easy to identify the KVI in every retail outlet.
  • Smooth out the price increases: When setting prices, base the retail price on the replacement stock cost rather than the current stock cost. Most EPOS systems will do this for you but you need to set this parameter. If you know new stock orders will be more expensive, the retail pricing should reflect that reality and this approach also allows the retailer to ‘smooth out’ the increases.
  • The reaction of the shopper: Ultimately the retailer has to remain competitive in an increasingly competitive market, and so it is not always possible to retain the profit margins through price. Independents should know their local market but cannot take it for granted. If prices rise too much, demand may well suffer and the retailer is left with expensive stock on the shelves.
  • Price promotions: Use price promotions as a means of off-setting general price increases.

 

Changing Consumer Purchasing Patterns

In the last two years, we have seen massive changes in the way Consumers pay for their purchases. Card transactions have reached upwards of 58% of all retail transactions in the UK for Adults under 45 years old.

  • Review card charges: Review costs of taking payment by card, remembering it is the debit card rate you should be looking at as this, for most independent retailers, will be at least 75% of your card transactions. Ask for a review from your current card acquirer.
  • Look for alternative payment schemes: Look at new payment schemes such as Buy Now Pay Later for high-value purchases. Last year 1 in 3 Adults in the UK used a BNPL scheme to buy goods.

 

Overheads

Retailers are experiencing the same pressures as the suppliers in terms of rising energy and labour costs. All too often, people in general can be too apathetic when reviewing their costs. It is therefore equally important for the business owner to review all overhead costs, especially some of the larger costs such as:

  • Energy: Speak to your energy supplier and other suppliers to obtain the best rate possible. Some members have already saved significant amounts by doing this. Bira has an energy partner called Utility Options and it is certainly worth talking to them.
  • Insurance: Obtain a new quote rather than just staying with the same provider. Bira has a new insurance partner who can offer competitive quotes, and many members have already saved a lot of money.
  • Opening hours: Review opening hours in line with your sales trends – this may well save energy and labour costs.
  • Staff: Review staffing requirement for periods of the day – many retailers are now looking at revising working hours to reflect changing consumer store visits. You will need to take legal advice when changing staffing contracts, but flexibility is key more now than ever.

Running a business in an inflationary period is never easy but it is important to be proactive and consider all options. There are not necessarily any right or wrong answers – it is about finding the best pricing solution(s) for your business.