Rising Retail Pricing Pressures Mandate an Elevated Emphasis on Cost Reduction Strategies

Despite recent progress in reducing inflation, prices are still high and consumers remain under pressure. Excess savings accumulated during the pandemic have been depleted for a substantial part of the population and credit card delinquencies have reached record levels. We’re also seeing a reduction in job openings and wage growth, among other moderating indicators. As a result, consumers are beginning to tighten their belts, including pushing back on price increases.

As we move to a more cost-conscious climate, retailers will need to adjust their strategies. However, despite improvements in the global supply chain and efficiencies brought about by digital technology, avenues for cost reduction remain difficult given elevated input costs. Thus, this environment and the potential for a more pronounced slowdown will require retailers to take a deeper look at their operations to determine where they can drive greater efficiencies with the goal of reducing product pricing, while maintaining profitability.

Here are four key strategies retailers should focus on over the next year to protect margin and use this as an opportunity to grow market share:

1. Rationalize and optimize your inventory and purchasing. Retailers should be reviewing their inventory mix and levels to be optimized for a more cost-conscious, value-based consumer. Leverage inventory management software and historical sales data to gain insight into a better demand forecast, which will give you more confidence on what to buy, when to buy it, and keep stock levels optimized to meet your customers' needs while minimizing impact to cash flow.
2. Promote your premium brands. Premium and luxury brands tend to be less elastic than staples and generic brands as consumers typically create stronger brand loyalty over time to products with a higher price point. The perception that premium brands equate premium quality keeps those customers coming back for repeat purchases with less concern over the price tag, helping you maintain that margin.
3. Revisit your trade promotion strategies. This is always a good idea, but especially so as consumer buying patterns are changing. Meet with your manufacturer representatives to collaborate on how you can be a better partner, and vice versa, to help drive product volume in lower cost product categories. Your suppliers may have excess inventory they're trying to clear or have creative ideas on displays and endcaps, BOGOs and cooperative advertising.
4. Invest (more) in loyalty programs. When consumers become more price sensitive, they will go bargain hunting regardless of where that product is sold. Loyalty programs greatly increase the stickiness of customers. A BCG study that found 46 percent of loyalty program members in a well-run program would never consider another brand based on the membership program. If you don't have a loyalty program, start one. If you have one, promote it and expand its reach.

Retailers will need to double down on these initiatives and concentrate on employing the right technologies to optimize their operations as we enter a more cost-conscious environment. Finding avenues to reduce costs and build further efficiencies will support strategies to reduce product pricing, while sustaining margins. Furthermore, should we see a protracted decline in consumer purchasing activity in the months ahead, those retailers that make the necessary adjustments now are more likely to perform better in a less hospitable climate, while seeing greater benefits as conditions improve.

Ryan Swiderski is a Twin Cities-based technology partner who leads Wipfli’s Western United States manufacturing, retail and distribution practice.