DISCUSSION TOPIC: Inflation Rears Its Ugly Head
Another retro trend from the seventies is working its way back to retail. Unfortunately, it’s inflation.
Retail prices are expected to rise in many categories – e.g., apparel, footwear, toys and electronics – that have largely enjoyed a deflationary cycle over the last two decades. For retailers, many will be challenged to raise prices without irritating customers who have grown used to bargains.
The reason for the price gains are mainly due to higher manufacturing costs coming from China. Among the factors driving up the gains: rising wages in China, the devaluation of the dollar against the (RMB), escalating raw material costs such as steel, and rising fuel costs that are increasing freight costs and the cost of plastic. And many of these drivers – particular the weakening dollar against the yuan – are expected to get worse before getting any better. According to an article on Slate.com, some Chinese factories are now asking their American customers for price increases of as much as 20 percent to 30 percent.
That leaves American retailers to devise new pricing strategies to avoid overwhelming consumers hooked on $3 T-shirts and $30 DVD players. A manager of several discount stores confided to Slate.com that his company has started raising prices of certain goods while putting others on sale. Others are considering bringing in lesser quality goods to meet price points expected by consumers, or being more aggressive around opportunistic buys.
Longer term, suppliers will be challenged to find a manufacturing hub as cheap as China. Other countries seen as possible replacements, such as Vietnam and India, don’t have infrastructure to handle the volume production that the world depends on for cheap goods. Other countries expected to gain a stronger look include Indonesia, Mexico, Malaysia, as well as Brazil or Kenya.
Discussion questions: How can a retailer maintain its value proposition to consumers in industries facing inflationary pressures? Should they be raising prices sooner rather than later?
I predict the silver lining in the current situation will be the failure of several so-called retailers which are really private equity owned financial instruments (some of which has already started). When a retailer’s strategies are based on the basis of short-term financial results needed by short-term financial owners, a sustained downturn will frequently crush that retailer. The ability of a retailer to raise prices appropriately based on real market conditions depends on the level of trust built with their customers over time. Trust comes from strategies based on the customer and the brand vision. Retailers who have built trust can phase in price increases because their customers will trust that this is appropriate given the market realities.
Prices must be raised now vs. later to ensure the continued financial health of the enterprise. Those retailers with strong trust-based relationships with their customers will continue to thrive, and those that don’t, won’t.
Mike Osorio, your Dare to be Contagious! TM strategist
Go to the full discussion at RetailWire.com:
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