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The Latest News on Inflation: How It’s Affecting Retailers

The lingering economic effects of the pandemic coupled with the anxiety surrounding Russia’s invasion of Ukraine have inflation running rampant, wreaking havoc on both supply and demand.

But while inflation remains high, the labor market remains tight, with wages up, and fuel prices are falling. As a result, consumer confidence remains high despite rising prices. Americans will be prepared to shop this holiday season, but they will be looking to save money wherever possible.

Though inventory levels are historically low across the retail sector, most retailers are carrying enough stock to avoid shortages. Speaking with Bloomberg, Matthew Shay, President and CEO of the National Retail Federation, said, “Normally, we’d hold about $1.45 in inventory for every $1 of sales. Now we’re averaging about $1.20 in inventory.” The extra inventory “does provide a bit of a cushion” against the possibility of shortages. It is low compared to historic numbers, but the numbers do represent a surplus of inventory, so retailers are not facing shortages even in the face of supply chain issues. He also expresses confidence that retailers know where demand will be coming from this holiday season given current inflationary pressures on household retail spending.

For the month of August, Shay reported that retail sales were up 7.5% over the previous August, which itself was up 14% over the year before. So even as inflation drives price increases, consumers are still spending. He expects to see more retailers running promotions as consumers look for the best value for their money.

This search for value means less brand loyalty, which can be a real opportunity for some retailers to grab the attention of new consumers. Holiday shoppers are going to be choosing free shipping, promotions, and other incentives over the brands and stores they might be more familiar with. In chasing the best deal, they won’t be going from store to store. They’ll be looking online. A recent SAP survey found that 15% of consumers will be looking for bargains in stores, while 39% will be shopping more online this holiday season.

The luxury market has historically been less affected by inflation, and that doesn’t seem to be changing any time soon. A dunnhumby study released in October found that while consumers are “trading down” to more affordable brands and cutting back on spending, even on essential items like food, luxury spending is actually increasing. This is likely due to the sense of security or happiness that these items provide people in uncertain times.

Luxury spending is being driven by older (35-44), wealthier Millennial consumers. A McKinsey survey showed similar results, with all age groups looking to decrease discretionary spending except for Millennials making more than $100,000 per year.

Luxury consumers may be willing to spend, but the cost of doing business remains a concern for retailers and suppliers alike. Shipping and fuel costs remain high, so retailers must accurately analyze their inventory needs for the coming holiday season to get their inventory levels right. Other strategies for cutting shipping costs include inventory management software (covered in last month’s newsletter), shortening the supply chain, and looking for the best deals, even if it means ending a relationship with a longstanding supplier. Customers are expressing less brand loyalty in search of the best value, and retailers may have to follow suit.

Consumers are still willing to spend money despite economic uncertainty, but where and how they spend their money is changing. While these changes are not expected to harm the luxury jewelry retail sector, retailers should use the data available to them to understand their customers and their spending habits, especially as it relates to wealthier Millennial customers.