Retailers should brace for a shock: The real impact of inflation is coming

The biggest headlines in January focused either on Omicron or inflation. And while the former is thankfully fading away, the latter may not even have shown its full impact yet.

Omicron was likely a bigger factor in any same-store sales softness we might have seen in January than was inflation. If anything, inflation may have helped improve same-store numbers as many retailers beating expectations are doing so based on higher prices, not higher volumes. But as price increases flow through the supply chain to the shelf, inflation will become a much bigger factor. I talked about this with CNBC last week (you can watch the full interview here).     

Here is my reasoning: As you well know, non-food retailers tend to buy their merchandise a good five or six months ahead of time, even farther out lately given supply chain delays. Over recent months with supply chain issues plaguing the world, retailers factored that cost into their price equation. However, many suppliers had still not increased their prices, absorbing both input cost increases and even some of the supply chain costs on behalf of their retail customers. We’re hearing of suppliers now asking for double-digit increases, and as such retailers will not be able to hold back on price increases themselves. Next week, in part 2 of this mini blog series, we’ll talk in more detail about which suppliers are more likely to increase prices. We’ll also discuss how as supply chains improve scarcity will no longer be retailers’ savior.

Now some brands have the right pull through brand name or product innovation or quality, but not everyone does. So, in our opinion, there will be winners and losers.

Winners:

• Apparel and footwear: As things get back to normal and people return to work and social occasions, this increased demand will help counterbalance price increases
• Warehouse clubs: Their bulk pricing, combined with consumers’ continuing hoarding mentality, will help
• General merchants/grocery/mass: Particularly those with strong private label programs where lower prices are possible. Increasing in-person traffic frequency is also going to help
• Coffee, wine & spirits, specialty foods: In these categories, a 10%-increase in price still only means single-digit dollars

Losers:

• Home goods, particularly soft home given cotton's 50% Y-o-Y runup: Consumers are done nesting and are likely to shift spending away from these categories, even more so if prices increase
• Category killers and department stores: Any sellers of nonexclusive products or brands, particularly discretionary, fall here. As scarcity diminishes, price competition will increase, and vendors will pass through increases – a double whammy
• Higher ticket discretionary, where price increases will be that much more obvious as it translates to a much higher dollar value

So, what can retailers that are likely to face the brunt of supplier price increases do? The No. 1 advice is to be ruthless on non-merchandise costs. If they are to maintain profitability, retailers must only spend money on aspects that consumers value (product, services, experience) and be extremely efficient at things they don’t (back office, headquarters overhead, tasks that can be automated, etc.).

Look out for the next in this series next week.