Amid rising inflation and critical operational challenges––including supply chain issues, worker shortages and rising freight and labor costs––retail success in 2022 demands striking a balance between business needs and an increasingly cautious consumer, according to a new white paper released by global consulting firm Berkeley Research Group (BRG).
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Drawing on extensive economic and consumer data, the white paper, authored by BRG’s Retail team, delivers a comprehensive picture of the retail landscape in 2022 and offers actionable guidance for management teams. The bottom line? Retailers facing global disruption, mounting costs and the specter of softening consumer demand and declining sales must focus on reducing impact on their margins.
“Even as sales remain strong, consumer confidence has dropped to new lows, largely as a result of rising inflation, particularly fuel costs, and geopolitical uncertainty,” said Rebecca Feygenson, a director in BRG’s Corporate Finance team.
Yet initial indicators suggest consumers may not be able to continue absorbing rising costs, which may curtail retail demand. In February, the Consumer Price Index (CPI) increased 7.9 percent year over year, the largest 12-month increase in nearly 40 years. Reductions in COVID-related subsidies, massive stimulus from federal bond purchases and interest rate hikes also threaten to reduce consumers’ discretionary spending. Meanwhile, cost increases—in raw material/inputs, labor, packaging, shipping and logistics, and distribution centers—are making it difficult for retailers to keep prices affordable.
“Our analysis indicates a need for retailers to adopt a series of cost-mitigation strategies,” said Darren Morrison, a managing director in BRG’s Corporate Finance team.
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These approaches might include controlling and offsetting certain expenses; eliminating unprofitable growth and reducing high-cost-to-serve, low-margin customers; aligning strategy, marketing and operations around key supply chain decisions; measuring and managing the cost to serve; streamlining stock keeping units (SKUs) offered; and redefining pricing approaches.
“If the last two years have taught us anything, it’s that the notion of a traditional retail business model is gone,” said Keith Jelinek, a managing director in BRG’s Retail team. “In 2022, rising inflation, supply chain disruption and ongoing labor shortages will pose significant cost challenges. To withstand these challenges, retailers will have to be agile in mitigating the impact on their bottom lines—all while continuing to address shifts in their business’s needs.”