Tackling Supply Chain, Inflation, and Fuel Costs
World economies are in a poor state right now.
Successive global crises and geopolitical upheavals including the COVID-19 pandemic, the Russian invasion of Ukraine, Brexit, and many more besides, have transformed the way businesses around the world interact with one another, the cost of goods and services, and the ability to move products from one country to another.
Naturally, as an industry which relies on all these factors in order to remain effective and competitive, the retail business has been hit by these challenges more than most and is seeing costs rise in almost every corner of the sector.
Meeting these challenges and effectively managing increasing costs is going to be the main factor which determines the success or failure of retailers over the next few years.
Supply Chains
The global COVID-19 crisis had a significant impact on supply chains as restrictions on movement, reduced workforces at ports, warehouses, and in factories, and many other factors significantly reduced the ability of companies to move products around the world and increased the cost of doing so by a large amount.
Unfortunately, the fallout from COVID-19 is still being felt around the world and now being compounded by the Russia/Ukraine conflict, and factors such as Brexit. Moving products around the world is more expensive than ever and retailers need to manage these costs as best they can.
One method of achieving this is to source products from domestic suppliers wherever possible. COVID should give us all pause to reflect on how vulnerable our reliance on global just in time supply chains leaves us and a renewed focus on domestic manufacturing should now be a priority.
Fuel Costs
Oil prices were already skyrocketing by the economy rebounding from a pandemic induced slowdown, and the Russian invasion of Ukraine has only added more fuel to the fire. According to the Wall Street Journal, as of April 1st 2022, the war has resulted in some three million barrels of oil being pulled from global supply.
In the US, record prices of over $4 per gallon are threatening to hamper economic growth and further lift already high inflation. President Joe Biden has pledged to tap into 180 million barrels of strategic oil reserves in an unprecedented move designed to temporarily alleviate some of the pressure being felt.
"President Biden has said his administration would release millions of barrels of oil from the US Strategic Petroleum Reserve, which has a capacity of 727 million barrels," reports the WSJ. "However, experts say that is unlikely to move the needle very much on the price of gasoline. Some state and federal officials are also weighing state and federal gas-tax decreases to ease consumers’ pain at the pump. Business groups are pushing back on such moves, saying they could jeopardize infrastructure improvements."
The retail industry, especially in ecommerce where packages need to be shipped out to customers stands to feel the impact of these rising more than most and will need to factor increasing courier costs into its ability to offer free or discount shipping.
Strategies such as increasing the sales threshold to unlock free shipping options may be worth considering as a method of meeting these costs without directly increasing the price of delivery or removing them entirely.
Inflation
In January, the consumer price index report indicated a higher rate of inflation than many experts had predicted – advancing by 0.6% month over month. This is being driven by price hikes in retail goods brought about by many of the factors we are discussing in this very article.
In March 2022, prices had increased by 8.5% compared to March 2021 according to the 12-month percentage of change in the consumer price index and the Bureau of US Labor Statistics. This represents a 41-year high in the US annual inflation rate and, while the rate did slow slightly in April to 8.1% this shouldn’t be taken to mean we are out of the woods.
It is likely we are yet to see the full impact of the Russia/Ukraine conflict on inflation, and we could be heading for even more product shortages, price increases, and economic turmoil should other countries be drawn into the war.
For example, global prices for some grains have soared since the onset of the war, with both Russia and Ukraine contributing a sizable portion of the global supply for commodities such as wheat.
"Immediately after the invasion, financial conditions tightened for emerging markets and developing countries," said the IMF. "So far, this repricing has been mostly orderly. Yet, several financial fragility risks remain, raising the prospect of a sharp tightening of global financial conditions as well as capital outflows."
Final Thoughts
With the so-called permacrisis continuing to challenge global industry and drive up costs, retailers need to find ways to offset these increases whiling trying to avoid passing them on to the customer as far a is possible.
These crises will also impact the disposable income available to customers meaning retailers – especially those who deal in non-essential goods – will see a reduction in business if prices increase too much.
The increasing cost of doing business is set to be a hot topic at eTail Canada 2022, taking place in September, at the Hyatt Regency Toronto, ON.
Download the agenda today for more information and insights.