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As the Supply Chain Heals, Retailers Ail From Rising Inflation

By: FRITZ FINLAY

Image courtesy of Target

 

The worst of last year’s supply chain crisis is over, yet shipping delays and port bottlenecks during the latter stages of 2021 continue to leave retailers with limited supply. 

At the same time, inflation rates have risen by an average of 7% over the last year and temporary fixes to the supply chain haven’t cooled rising prices. In fact, the price of goods is expected to rise for the rest of 2022 even if factories completely reopen and the effects of the pandemic subside.

“In the last two years, we’ve seen retail sales grow by over 21%, so to put that in perspective, that is like adding 50 million Americans to the retail economy in terms of demand, and it is really, really, really hard for the supply chain to keep pace,” NRF VP of Research Development and Industry Analysis Mark Matthews said on the “Retail Gets Real” podcast.  

And if that wasn’t enough, Russia and Ukraine’s geopolitical conflict in Europe has driven record-high oil prices and a turbulent retail market exasperated by brands pulling their businesses out of Russia. 

For industry leaders in the U.S., learning how to navigate these challenges has never felt so important. 

 

Retailers that’ve been through it before 

In February, Walmart reported that its supply chain costs were $400 million more than expected—and in March, Target said its cost increases will impact the entire first half of the year, at least.  

“During periods of inflation like this, middle-income families, lower-middle-income families, even wealthier families become more price-sensitive,” said Walmart CEO Doug McMillion. 

There is, however, reason to believe companies as large as Walmart, Target, and Amazon were prepared for supply chain shortages as well as the recent hike in inflation. Each of these retailers experienced significant growth in 2020, so when disruption came last year, their immense scale and improved financial resources allowed them to absorb most of the damage. 

“We’ve been through this before. And we run with inflation around the world all the time. Inflation is a different environment in the U.S. right now than it has been in recent times for sure, but we’ve [dealt] with inflation [before] and understand what that looks like,” McMillion added.

In Amazon’s case, meeting supply chain challenges head-on looked quite the same. Brian Olsavsky, Amazon’s CFO, argues their team was able to anticipate supply chain issues, work with vendors to secure inventory, and expand port and vessel capacity before bottlenecks hindered the rest of the industry. 

 

The upside for retail giants

As it stands, retailers that have the financial resources to scale upwards are capitalizing on increasing prices, so long as they can keep their shelves stocked. When families across the country became more price-sensitive at the onset of rising prices last year, Walmart recognized that the effects were to its “advantage,” according to McMillon. 

“With an additional $27 billion in sales over the last two years… It’s time to expand our network. We opened two new distribution facilities, one in New Jersey and one in Chicago,”  said Target COO John Mulligan during a quarterly investors’ call last month. 

“Today, we have four more currently in development that will open over the next few years with plans for several more to follow.” 

 

target location
Target’s first small-format store in the state of Georgia (opened April, 2021).

 

At the same time, retailers that operate at scale like Walmart and Target will need to rely on their value proposition to customers while walking the fine line between price gouging and giving away too much. So far, consumers should be thankful that Walmart hasn’t hiked prices up substantially, and has even found areas to roll back prices.  

“Walmart has elected to eat a portion of supplier price increases to maintain low prices for customers,” said RBC Capital Markets analyst Steven Shemesh. 

But for other retailers, keeping prices low just isn’t an option.

          

The early stages of inflation

Stronger-than-expected demand raised retail sales by 3.8% in January, almost doubling the forecasted 2%. Americans are still spending big, or as Mark Matthews put it: “Demand has broken supply.” 

As expected, the Federal Reserve intervened during the pandemic and gave consumers the ability to save. In fact, consumers in the U.S. and Europe saved $2.7 trillion more during the pandemic than they would have in years prior and most of that is still in consumer accounts.  

But now that consumers are spending, the Fed hiked up interest rates in an attempt to remove economic support and cool inflation. 

“The effect of that will be that it’ll be more expensive for people to borrow, for corporations to borrow, and interest rates will increase, and that will limit the amount of funds we have to spend on goods and services,” Matthews revealed. 

Despite fairly immediate government action, analysts including Alex Lin, a senior US economist at Bank of America, argue it’ll be a while before the public feels the effects. During an interview with INSIDER, Lin compared his outlook on inflation to the supply chain: “It’s improving,” he said. But not quickly. 

Moreover, Lin and his team expect inflation to stay “fairly elevated” for the rest of the year and through 2023, as well. 

      

The state of retailer-supplier collaborations

Full-stop solutions to inflation and continuing supply chain disruptions are few-and-far-between, but that hasn’t stopped industry leaders from problem solving. One of the ways retailers fine-tuned operations during the height of port and transportation shortages was by collaborating with suppliers

For most, this required sharing data in real-time between parties and communicating transparently. Data sharing for years has been a point of tension between retailers and suppliers, but that’s got to change if the industry wants to come out of a turbulent period unscathed.  

In fact, a 2020 Coresight report found that 70% of retailers and 58% of suppliers say better collaboration yields added responsiveness to market and shopper trends. 

Furthermore, retailers that are knowledgeable about product availability and manufacturing issues tend to avoid last-minute planning, maintain stocked shelves, and reduce wait times for in-demand goods—all of which decrease tension in the supply chain and allow retailers more pricing flexibility. 

Even so, fully stocked goods and flexible pricing options won’t halt inflation on a national scale. Matthews, McMillon, Lin, and others expect the price of goods and services to rise for the foreseeable future—and consumers are going to need to grapple with this reality. 

         

Inflation through a different lens

For retailers that operate at a much smaller scale than giants like Walmart, Target, or Amazon, maintaining the same price points may not be possible and adjustments to the customer experience must be made so that value propositions are kept. 

Nevertheless, it’s unlikely we’ll ever see price points that work for everyone, and always-rising prices aren’t going to help. Taken individually, our demographics, geographic residence, and spending habits all contribute to how we feel about and understand the marketplace, inflation, and our role as consumers.

Paying 7% on average more for the goods and services we’re used to won’t feel like a dealbreaker for some, but retailers have a responsibility to meet every customer where they’re at and treat them equitably.