Consumer retail profit at risk as inflation bites

With inflation set to rise even further from its current 30-year high, retailers are faced with looming losses. However, by downsizing costs and offering consumers a way to continue spending in spite of inflation, some companies may be able to turn the crisis into an opportunity.

The Consumer Prices Index (CPI) indicated an inflation rate of 5.5% in the 12 months to January 2022. This represents the highest CPI 12-month inflation rate in the National Statistic series, which began in January 1997. The last time it was higher in the historical modelled series was March 1992, when it stood at 7.1%.

With Russia’s invasion of Ukraine, and the subsequent sanctions imposed on Russia in response, jeopardising Europe’s gas and oil supplies, the price of energy is also booming at the start of the year. As a result, inflation may spike further later in the year, with energy prices further decreasing consumer spending power – as wages continue to stagnate.

According to new research from Inverto – a subsidiary of Boston Consulting Group which specialises in strategic procurement and supply chain management specialists – the deepening crisis poses major risks to consumer goods and retail sectors. The situation could be severe enough to impact profits by as much as 10%; something that the UK’s retail sector simply cannot afford after a tumultuous 24 months.

Inflation is currently forecast to hit at least 8% in April, and in that context, Inverto has placed a value on the warnings which businesses have been raising. Every listed retail and consumer goods business reporting at the start of the year has sounded alarm bells, alerting shareholders and investors to inflationary price rises and the corresponding risks of lower gross margins over the course of the year.

Thibault Lecat, Managing Director and Regional Leader for Western Europe, Inverto, commented, “We have not seen this level of inflation for a generation, and it is safe to say that it has caught many businesses off guard. Companies are now in the difficult situation of trying to claw back rising raw material and production costs by passing them down their retail chain – eventually hitting consumers. This is a mistake.”

Lecat warned that simply “passing the buck” is the wrong approach for retailers to take, as consumer confidence will fall if customers are left to suffer the costs of inflation alone. Instead, UK retail and consumer goods companies who balance costs and offer attractive prices will gain competitive advantage on their peers, and “have the opportunity to turn this crisis into an opportunity.”

Lowering costs?

Inverto recommended five key steps for retailers to lower their costs, in order to open up these opportunities. They should be looking to replace contracts that do not have fixed or lower prices; before ensuring they sign multi-year contracts if it makes it possible to negotiate lower supplier prices.

Firms should meanwhile negotiate with existing suppliers or find alternatives to source at best cost; and if they are purchasing raw materials, consider whether it is possible to switch materials if a certain index is steeply increasing, or production location if freight costs negatively affect profit.

Finally, companies need to be creative on margin improvement, for example by selling additional marketing slots to suppliers to generate more revenue.