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Inflation: The Impact on Retailers & Consumers.

It's no secret that millions of households are currently struggling with the cost of living crisis and the rapidly growing rate of inflation. In this blog, we delve into the current rate of inflation, how it's impacting retailers and consumers, whilst mentioning some of our favourite retailers who are helping consumers to manage during this difficult time.

The last 24 months have been some of the most stressful months in recent memory for the UK retail sector. Just as retailers shake off the repercussions of the global pandemic's restrictions, they are now facing a cost of living crisis that is already putting increasing financial pressure on their customers as well as their own operations.

UK inflation soared to a 40-year high of 9% back in April as food and energy prices spiralled out of control, which has escalated the country's cost-of-living crisis even further.

What Is The Cost of Living Crisis?

The cost of living crisis refers to the fall in 'real' disposable incomes that the UK has experienced since late 2021. It has been caused predominantly by high inflation outstripping wage and benefit increases, whilst also being further exacerbated by the recent tax increases.

In early February, the government had announced some measures to respond to the high energy prices, which was labelled as a particular flashpoint of the crisis. At the Spring statement, the chancellor had announced some further measures - however, even after accounting for these policies, inflation is still expected to increase further and at a faster rate.

How Is It Affecting Retail Businesses?

The retail industry is a pretty large umbrella that covers many different categories, with the likes of electronics, clothing, personal care and much more. The effects of inflation on a specific retail business will usually depend on the market where they operate, their size and other factors.

However, most retailers will experience negative similarities with inflation rising drastically, like the ones below:

Customers - If you have to raise your prices in order to offset inflation, this will result in pushing burden of inflation onto customers, which only leads to higher prices and much less consumer value.

Employees - most retailers pay their employees on an hourly salary, which is a fixed rate that is determined before the inflationary period. Since employees pay isn't tied to the inflation rate, the value of their pay-check will decrease as inflation rises - this could lead to staff pushing for higher wages, or even less retention in the company.

Business Owners - Unless retail business owners make strategic decisions to try and combat inflation, they may run the risk of it impacting their financial stability, affecting the company in the long run, creating a domino effect.

Supply Chain Partners - Supply chain partners are also experiencing inflation within their business and this runs the risk of passing on those added expenses to other businesses. For example, if a retail store has a fulfilment partner, you may have noticed increased expenses due to higher petrol costs. If it costs more for partners to deliver products, this will only lead to increased fees.

How Is It Affecting Consumers?

British consumers are reacting to the cost of living crisis by trading down in both stores and products, as they're switching from supermarkets to discounters, and from their normal branded products, to own brand and lower priced items.

In a recent survey conducted by McKinsey, they had found that 64% of UK consumers say that they have responded to price increases by adapting their shopping behaviour in the last four to six weeks, along with noticeable channel and brand shifts as they search for value for money.

Their survey had also found that a net 22% of consumers shopped more at discounter stores, with a net 9% less at supermarkets and a net 32% less at convenience stores, which tend to have higher prices. Along with trading down on household products, snacks, confectionary and frozen foods - there is also evidence of UK consumers cutting back on eating out less, reducing car journeys to save money on petrol and even cancelling subscription services such as Netflix, following their own price increases. (We discussed consumer behaviour in further detail in a previous blog that you can read here.)

What Are Retailers Doing To Help With This Issue?

As the cost of living continues to spiral, consumers are having to adapt their behaviour in order to cope - with many preparing to switch to cheaper brands and reducing spend on non-essentials. Right now is crucial for brands and retailers to help their consumers navigate the cost of living crisis, as this will be able to set themselves apart from others within the sector. Here are just some of the retailers helping their consumers manage the current crisis:

Aldi & Lidl - Shoppers are turning to cheaper own-brand food products and discount retailers like Aldi and Lidl as they continue to battle rising grocery prices. These two supermarkets are emerging as the big winners from the cost of living crisis as shoppers trade down amid the soaring supermarket prices.

The German discounters are the only supermarkets seeing market share growth on the last year, along with record expansion at Aldi. Both of these retailers have grown their market share by 3.6% leading up to March 20, even as the overall market share shrank by 6.3%.

Aldi and Lidl sell almost exclusively own-brand products, which is a great tactic that has been proven to be extremely popular with budget-conscious shoppers.

Asda - Another supermarket that is helping their consumers greatly is Asda. They are one of the supermarkets that have since dropped the price of hundreds of products in a bid to help their customers with these rising costs, whilst also gaining much loyalty from doing so.

Asda have launched their new line 'Just Essentials by Asda', which claims to be the largest budget-friendly items in the market. They have since invested in a staggering £45m to continue developing this brand new range.

They have also announced that they have invested over £73m in tackling the cost of living crisis for its customers, whilst giving thousands of their employees a significant pay rise to help them during this time.

M&S - While some may be surprised to find M&S on this list, shoppers who are cutting back on eating out may end up visiting the upmarket grocer for a treat whilst dining in from home. Their infamous meal deals are popular for a reason, offering premium dining experiences without having to break the bank.

Meal deals aside, the retailer has been working extremely hard to reinforce its value credentials over the past couple of years, with their 'Remarksable Value' campaign, which not only reinforces the quality of it's products, but it's offered to their customers at an everyday low price.

High quality items at a low price are extremely likely to resonate for customers that are looking for products that last in this environment - which is why M&S are helping their consumers to manage the inflation crisis.

These were just some of the companies that are all working tirelessly to help their consumers manage their spending during such a high rate of inflation. The current cost of living crisis is only the beginning, and it's only expected to continue rising as time goes on. However, it's only temporary. As consumers, we need to work out our spending budgets - and as a retailer, figuring out ways to help your customers spending, will make you stand out from others whilst helping to retain those loyal consumers.

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