From Supply Crunch To Supply Glut: How To Navigate Uncertainty?
Retailers might have thought they’d seen enough disruption these past two years to last a lifetime. If only this was the case. The industry must once again confront a new set of economic headwinds. From high inflation to eroding confidence to ongoing supply chain issues, pressure on the global economy is growing — and the effects are weighing heavily on both consumers and businesses.
Consider the recent decline in consumer spending and sentiment. Retail sales have contracted since 2021, and consumer sentiment is down significantly, nearing levels we last saw at the time of the 2008 financial crisis.
Clearly, inflationary pressures are a factor here. High and persistent inflation is eating into incomes and consumer purchasing power. Discretionary spending is pulling back as a result. However, Accenture’s
Take the fact that consumer spending on durable goods is flat or down by 2% (three-month moving average), whereas spending on recreation and hospitality services is actually up by 3%. This suggests we may be witnessing a pivot back to some pre-pandemic behaviors. People are becoming more comfortable returning to offices, hospitality venues, and public spaces. And that’s reflected in their spending.
At the same time, those who are still willing and able to spend on discretionary goods are shifting their shopping away from “home purchases” (sweatpants and home electronics and so on) to categories like makeup, dressy attire, and travel-related items.
This combination is creating a classic case of mismatched supply and demand. Retailers have excess inventory in categories that simply don’t align with what consumers want right now. What’s more, this has been exacerbated by widespread overstocking because of recent supply disruption.
Recall that just a few months ago all the focus was on surety of supply. Shipping containers were backed up and demand was outstripping supply. Many retailers looked to mitigate this by placing earlier and larger orders than they would otherwise have done. But now the supply pendulum is swinging the other way, and they’re loaded down with inventory they don’t need.
How should retailers respond? Under pressure to remain competitive on price, many will be looking to increase markdowns and cancellations to reduce excess. That’s logical. But with margins already taking a significant hit from higher costs on labor, materials and shipping, there’s a limit to how much discounting is feasible over the long haul.
Others may be tempted to batten down the hatches, control costs, and simply wait for the headwinds to pass. But this, too, is not a viable or sustainable strategy for the long term. In fact, it could be highly counterproductive for companies that need significantly more, not less, investment in new digital and data capabilities.
Take data-driven organizational agility, for example. With consumer buying habits liable to keep shifting quickly, retailers need a highly attuned understanding of customer needs more than ever. They have to be more agile, able to rapidly and repeatedly reset the business as the market changes. And that can’t be achieved purely through cost cutting and eliminating inefficiency.
Rather, it needs investment — in a solid data foundation, in machine learning capabilities, in modern cloud infrastructure, in streamlined omnichannel experiences, in future-focused modular store layouts, and so on. It’s this investment that will ultimately deliver sustainable long-term growth on both the top and bottom line.
An example? Think of the potential for “intelligent pricing” using advanced data analytics and artificial intelligence. This technique looks to continuously track and analyze multiple customer and market variables, test price points (or even entire pricing models), and use the insights generated to adjust prices in real time.
Done right, it’s a very powerful capability. Right now, for example, it could help retailers re-price their excess inventory in such a way as to boost sales, win new customers, ease working capital, and bring down the number of products sitting in warehouses. Then, when the algorithms pick up increased customer interest in any particular item, the price can immediately be adjusted upwards in response to that demand, boosting margins.
In fact, Accenture research found intelligent pricing can help companies increase revenues by as much as 5 to 15% overall. And, what’s more, consumers are happy with the concept. The same research found that about two in five consumers (42%) want companies to use their data securely and responsibly to customize pricing and promotions. And more than three in five (61%) believe that the use of advanced analytics could result in them getting a fairer price.
The catch? Many retail businesses still lack the mature data and analytics capabilities needed to make intelligent pricing work at scale. And that reinforces the overarching point here. Retail needs to invest, not simply focus on cost. That’s the most effective way to navigate today’s economic headwinds and find the path to sustainable growth.