A New Challenge For Retailers?

Even large retailers are feeling the effect of competition as global trends increase pressure on prices. Some retailers shy away from on-line competition and lose ground to more digitally savvy operators. But there are deeper issues at play.

A Global Trend

Low wages and the cost reducing effects of technology are leading to a low or no inflation environment and a low or no growth economy.

The irony is that economies are usually damaged by high inflation as it raises prices, reduces the value of money and increases the cost of living for customers.

But on this occasion and in spite of numerous policy efforts to support growth and increase inflation, it persists at a standstill or veers toward the negative.

And therein lies the problem as low inflation generally means the economy is weak and struggling, jobs are scarce and growth stutters to a halt.

As a result, businesses and retailers in particular find it difficult to increase prices as customers delay their buying decisions in the belief prices will keep falling.

And such behaviour leads to a reduction in the level of economic growth and therefore customers are less motivated to spend money.

A Difficult Time

For some retailers there are additional difficulties as they have wage and other contractual commitments based on higher inflation and therefore need higher sales.

They also need to invest in ecommerce and develop their on-line presence to meet new shopping habits and customer expectations, not least because a dissatisfied customer will go elsewhere.

The making of such investment at a time of low or no inflation coupled with low or no growth leads to a toxic squeeze on profits and profitability.

Technology too is causing turmoil, as retailers are forced to compete on-line and off-line in an attempt to retain customers and defend market share.

Technology alone is a significant and growing factor in creating zero inflation as it hollows out margins in ways only noticed by the most efficient operators.

Such change is happening in parallel with a slow down in the global economy, not least because China’s economic growth decelerates from its recent breakneck speed.

The slow down helps reduce the price of food and commodities like oil and gas but makes it more difficult for retailers to raise prices or increase wages, as the market becomes sensitive to any movement in price.

The most worrying element of the trend is that predictions for future years are similar, as inflation remains historically low and stubbornly persistent.

The difficulty for employees is that any reductions in prices as a result of low inflation are negated by an equivalent or greater freeze on wages.

The difficult for employers is that a freeze on wages reduces the amount of money in circulation and therefore creates greater numbers of customers with lower levels of disposable income.

SO, retailers are adapting to new technology and embracing on-line competition but low inflation is causing a fresh and dogged challenge.