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Rising inflation and falling consumer confidence are tricky problems for retailers. But those that take steps to understand their customers better, stay relevant among their buyer group and diversify where possible, can rise to the challenge.
Since hitting a record high in July 2021, consumer sentiment has seen a remarkable reverse. Our own retail spend data shows that the six months between Feb-Aug 2022 saw real essential spending (inflation adjusted) reduce by 5%, driven by lower food and drink spend1. The same data shows a decrease in retail spending, especially on clothing (which accounts for approximately 9% of total non-essential spend).
As consumer confidence underpins the entire retail sector, how can retail businesses deal with the ‘consumer optimism’ gap and stay competitive?
1. Lean into the ‘lipstick effect’
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“A fall in consumer discretionary spend will likely hit big ticket items the hardest,” explains Marc Ward, Area Director SME Banking, Lloyds Bank. “But equally, consumers do often purchase small pick-me-ups during difficult economic times.”
This is the well-documented ‘lipstick index,’ coined by Estée Lauder’s Leonard Lauder2, which is as evident today as it has been during previous downturns. While people may not buy an entire outfit or other big-ticket items like a sofa, they might treat themselves to small beauty luxuries, like a lipstick or mascara, or upgrade elements of their food shop, buying posh chocolate or coffee, for example.
Are you able to tempt shoppers with small-ticket premium products that might satisfy that need? Could you stock more of them or make them more prominent?
2. Continuing to understand your customers
It is important to stay relevant to your customers, so keep the feedback momentum going. What do they like about your product or not? What do they want to buy more of and how much are they prepared to spend given the economic downturn? Are they sustainably minded eco-shoppers for example, willing to pay a premium for ethically sourced products or those made of recycled materials?
3. Diversify your offer
Another way to shore up your retail business is to diversify. Increase consumer dwell time by adding services that will encourage shoppers to hang around. For example, many bike shops now serve coffee. Consider what else you could do or sell that would encourage shoppers to spend more time in-store or on your website.
Marc Ward notes: “Think, too, about methods to drive repeat purchases – through online stores, delivery services, email marketing and social media presence, for example.”
Subscription services are also increasingly popular with consumers whose expectations and attitudes to deliveries have changed since the pandemic. Naturally, this happens in food and drink, but it is also becoming more prevalent in fast-moving consumer goods sectors like razors and cosmetics. Do you have a product or service that could be packaged and sold on a recurring basis?
4. Price evaluation
Higher energy and transportation costs are among the biggest costs to the retail sector, compounded by supply-chain challenges.
You may have already passed these cost increases onto customers, but another price revaluation might need to be considered to remain competitive. Even in tough times, there are plenty of people willing to pay for quality and experience, so consider carefully where to increase prices and to what extent.
Where you do pass on increases, communicate clearly with your customers to help them remain loyal. For example, a bout of avian flu last year created egg shortages. Prices had to go up, but it was well communicated by supermarkets and covered in the media, allowing customers to make an informed decision without too much ill feeling towards vendors.
5. Seek advice
Your bank may be able to help. You can always contact us to discuss any ideas for growth you may have, or indeed any difficulties you are experiencing. We also have a range of insights, ideas and guidance within our Business Resource Centre.
The Local Enterprise Partnership (LEP) network is another great source of help and support. There are 38 LEPs across England, championing local economic growth and prosperity, so you could contact your local growth hub through them.
6. Embrace the big picture
Finally, it is important to recognise that it won’t last forever. Markets predict that inflation is likely to peak in the coming months, along with a settling of the labour market and easing of wage pressures, which, Marc Ward comments, would provide business with more certainty and consumers with more confidence and greater spending power as time progresses. “This confidence should translate into higher demand for retailers – therefore it’s important to manage your current challenges as best you can, so you’re ready to benefit from a better economic outlook in the months and years ahead.”
1 ‘Retail Data Insight Report 2022’ produced by Lloyds Bank Market Intelligence.
Originally published at: Lloyds Bank
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