Offsetting Cost Increases and Keeping Customers Happy — is it Possible?

As the U.S. economy rebounds, inflation has become a significant concern for consumers as prices have soared across many sectors. According to the Bureau of Labor Statistics, inflation rose 8.5 percent over the last 12 months, with fuel, shelter and food driving most price increases. Energy costs alone rose 32 percent in the previous 12 months.

Inflation is obviously affecting consumers’ spending power, and the cost of doing business as an e-commerce retailer is also significantly increasing because of inflationary pressures. Can e-commerce brands and retailers protect their businesses and help offset inflation for customers without degrading the customer experience?

While inflation can be challenging for consumers in many different areas of their lives, it also presents opportunities for e-commerce brands and retailers. By focusing on operational efficiencies and cost-saving strategies that help protect margins and maintain high standards of quality and service, business process outsourcers (BPOs) and third-party logistics (3PL) providers can help brands cope with rising prices without sacrificing customers’ overall satisfaction with their products.

Impacts of Inflation on E-Commerce

In March, Adobe’s Digital Economy Index reported that consumers spent $1.7 trillion online in the last two years of the coronavirus pandemic. However, inflation was responsible for $32 billion worth of that spending rather than more purchases.

The trend continues. Consumers spent $138 billion online in the first two months of 2022 alone and are expected to spend a record $1 trillion online this year. However, Adobe predicts that inflation will lead consumers to spend as much as $27 billion more in 2022 on the same amount of online purchases.

Despite this increase in dollars spent, the Q1 2022 Consumer Trends Report from JungleScout says that 72 percent of consumers are placing fewer orders because of inflation, significantly cutting back on “fun” or impulse buys. Indeed, the big winner in online sales is grocery shopping (up 103 percent over the last two years), as fewer people took to grocery stores because of the pandemic and dialed back their discretionary purchases.

What's Driving Inflation in E-Commerce?

You cannot talk about inflation and not discuss COVID. It was the catalyst that started this inflationary path, especially when talking about the impacts on brands. It's the direct reason for some of the supply chain backlog we see now, and it’s driving up costs on the transport side.

The war in Ukraine has also had a significant impact on inflation by driving up the cost of fuel. This comes on the heels of supply chain and supplier shortages. Add it all together, and you get a situation where shipping costs worldwide have gone up seven-fold since March 2020. And when freight costs go up, everyone feels it. The International Monetary Fund reports that “when freight rates double, inflation picks up by about 0.7 percentage point. Most importantly, the effects are quite persistent, peaking after a year and lasting up to 18 months. This implies that the increase in shipping costs observed in 2021 could increase inflation by about 1.5 percentage points in 2022.”

Finally, wage acceleration has added another cost factor. As e-commerce spiked, distribution centers in Memphis, TN, Lexington, KY, and Ohio had to ramp up operations by hiring more people. That drove up the cost of labor in these regions, which helps put inflationary pressure all up and down the e-commerce chain from brand to consumer.

How Are Retailers and Fulfillment Providers Responding to Inflation?

But all is not lost. E-commerce BPOs and 3PLs are doing what they can to help brands and retailers offset the cost increases that give consumers second thoughts about any but the most necessary purchases.

This has primarily been through diversifying suppliers, warehouses and their labor pool geographically. When most people think about e-commerce, they think about placing an order on a website and that order going to a warehouse where someone picks, packs and ships it. Historically, in the U.S. that kind of activity has been concentrated at major distribution hubs in Memphis, Lexington and Ohio. (You can easily reach most of the United States population via ground shipping from these areas in two days.)

This encouraged clients to keep their inventory in one warehouse, simplifying their inventory management. There was little need to predict where a particular item might be needed.

Where we are today is more of the Amazon.com model. Amazon has warehouses all around the country and created a very sophisticated algorithm that determines how to get inventory into the right warehouse based on predictions of regional shoppers’ spending habits. However, not every online retailer has Amazon’s reach and capital to invest in multiple warehouses.

This is where BPOs are helping online retailers bridge that gap, providing a network of fulfillment centers combined with technologies that allow them to distribute inventory. Brick-and-mortar stores — now less frequented by customers but still full of stock — can now function as mini-warehouses and distribution centers to get products closer to consumers and enable faster fulfillment. This localized approach to inventory management, fulfillment and shipping is helping to offset the rising cost of fuel and resulting freight increases.

Conclusion

There’s no silver bullet to combat inflation. But technological efficiencies in logistics and operations, expanded distribution centers, and less expensive shipping methods can be powerful tools when dealing with inflation and keeping customers happy.

Jamie Saucedo is the senior vice president of business operations for PFS, an e-commerce order fulfillment provider, facilitating each operational step of an e-commerce order in support of D-to-C and B-to-B brands.