Every retail CIO faces the same challenge: how to counter the economic downturn and high inflation without asking for significant new investment. The problem is that CEOs need to see evidence of the top-line or bottom-line benefits required to outpace a recession to justify ongoing investment.
But the challenges of high inflation are not going away in the short term, even as budgets shrink. In the UK, shop price annual inflation accelerated to 8.4% and grocery price inflation hit a record 17% in February. And a 2023 Gartner report found that the top enterprise priorities for the retail industry are growth (35%), customer/user experience (27%) and technology modernisation (20%).
So, how can retailers drive growth without making large investments?
According to Gartner, the answer is for retail CIOs to distinguish between digital optimisation and digital transformation. The current economic downturn is the ideal time for CIOs to identify the potential for efficiency gains and short-term returns within their existing operating models. Then, digital initiatives can be leveraged to manage economic uncertainty and deliver technology-enabled business outcomes.
Rising Inflation has Changed the Retail Industry
In 2015, supermarket price wars and sharp drops in oil prices supported consistently low inflation. Add in that the Consumer Prices Index (CPI) fell to 0.5%, the joint lowest level since records began, and the importance of consumer spending in driving the UK economy for the last decade becomes clear.
It's no surprise then that in January 2015 Danny Alexander, the Chief Secretary to the Treasury, said the fall in oil prices was acting like “a giant tax cut for the economy, putting more money in the pockets of hard-pressed consumers”.
However, today's retail economy sees retailers facing the reverse scenario, where inflation is taking away from consumer spending power.
The cost of living increased rapidly in the UK during 2021 and 2022. The annual rate of inflation was 11.1% in October 2022, the highest in 41 years. Even as inflation began to ease, it rose again in February 2023 to10.4%, pushing up the prices of goods and services for households.
Source: House of Commons Library
High energy and fuel prices have reduced the spending power of consumers in the UK more than in comparable European economies. Although the government's Energy Price Guarantee has helped households and businesses to keep their costs predictable, this will end in July 2023. And the OBR expects real post-tax household income to fall by 4.3% in 2022-2023, the largest drop since 1956.
Source: House of Commons Library
The problem is made worse by the fact that forecast reductions in inflation won't necessarily convert into reduced prices for consumers. As spending falls against rising prices, the retail sector will be left struggling to persuade consumers to spend more for less.
In this context, retailers need to be aware of the potential pitfalls of judging success based on overall profits in an economy hit by inflation. A 2023 report by Retail Economics shows that "Steep price rises will lift retail sales in value terms, flattering top-line performances, but will overlook the reality of fewer purchases as consumers cut back on non-essentials from squeezed budgets." It warns that "After stripping out the impact of inflation, European retail sales volumes will decline by 3.2% on average."
To overcome the challenges of inflation, retailers must protect margins and prepare for continuing volatility. Kevin Bright, Partner at McKinsey, says, “Looking to the long-term, retailers can explore opportunities to improve productivity, review their relationships and network of suppliers and take an intelligent approach to pricing and promotions.” To do this, companies can develop technology strategies that prioritise efficiency gains.