Retailers these days are being hit with a double whammy – the pandemic and the war in Ukraine – which are both creating supply chain challenges and driving up their costs.
Those two punches are also hitting the consumer as the flow of goods is interrupted and prices are increasing to meet those rising costs.
But one retail expert said certain parts of the supply chain are still making a lot of money.
“Inflation itself, it’s not you and I buying more products. It’s profiteering and greed that is actually driving inflation and the consumer is about to be punished by higher interest rates because there’s no other control on inflationary pricing that is being put on product to be brought across the ocean,” said George Minakakis, Principal of advisory firm Inception Retail Group Inc., and author of The New Bricks & Mortar Future Proofing Retail.
“I was reading an article on the weekend that said if you bought a container ship today and you filled it with containers, one voyage will pay for the ship. That’s how much money these guys are making.”
“So there’s no suffering on the part of the supply chain distributors, the logistics of it. The brokers are making money. People who have containers are making money. Everyone seems to be making money along the food chain when it comes to bringing product over but the retailers aren’t. I’ve heard crazy stuff – that retailers are being asked to pay as much as 19 per cent more for product. How do you justify 19 per cent more when inflation is 5.7 per cent? It doesn’t make sense.
“So in order to stay in business you’re going to have to pass this along to the consumer. But how do you successfully deliver that to me as a consumer and now tell me my barbecue is going to cost me 19 per cent more if I want to buy one than it did a year ago? I’m going to put that sale off unless you bring that price down to a reasonable level. Most of the rational retailers are saying they’re going to have to price product slightly under inflation in order to be able to move it. I still have to make up my costs but I’m going to have to price it under inflation. Retailers are going to have to respond to this with higher prices and consumers are going to make choices.”
Minakakis said his company did a survey in the middle of March asking consumers what changes they were going to make to offset inflation and 41.9 per cent said they were going to cut back on everything and save money while 24.8 per cent said they were going to cut back on going out, 18.3 per cent said they would make no changes, and 15 per cent were going to spend less on vacations.
This is going to impact every retailer. They’ve had two rough years already of opening and closing because of health restrictions and now they’re open again. But questions remain about the pandemic with a new variant out there now. Also, how confident are consumers to be going out with mandates on mask wearing lifted. Minakakis said it’s going to be a tough year this year for retailers.
He said government money has kept many businesses from closing permanently but we need to keep in mind that we don’t know how many businesses actually failed without filing for bankruptcy because bankruptcy costs money and many small businesses can’t afford it.
“The big failures will either happen this year or there’s enough small businesses that have failed that will offset that,” explained Minakakis. “It all depends on how bad inflation gets.”
Retailers will have to discount prices to keep consumers spending, price their products correctly, and cut their costs down to compete.
“If you want that higher price, you better back it up with great value and great service because how else are you going to retain customers? They’re going to have to feel it was worth that 5.7 per cent or eight per cent higher price they paid,” said Minakakis.
Gary Newbury, Chief Supply Chain Officer On Call and Founder of RetailAID.ca, said it’s a very challenging situation for retailers today.
“Just stepping back and thinking about who will survive, I suspect it’s the luxury organizations that already have brand loyalists, they already command pretty heavy margins or pretty high margins, and at the other end the discounters, the Walmarts, the dollar stores. Their consumer base has got stretched budgets already so they’re in a good position to capitalize on those people being constrained on their budgets,” said Newbury.
He said the retailers in the middle, the mid-price point retailers, should be very, very concerned at this point in time because their ability to get stock has been constrained over the last two years and it’s not going to get much better.
“And the costs of getting that stock to them through a global transportation system is going up and up and up and there doesn’t seem to be a ceiling for it to come down. It just keeps going. We thought it would stabilize and contain the price but it went to about tenfold increases and that’s still going up and we’re adding the energy costs to actually physically move things. There doesn’t seem to be a ceiling to any of this,” said Newbury.
“So they must be worried that they’re faced with a situation where they can’t put the price up and it’s highly understood. They have to continue to wear some of these excessive costs but they haven’t got a consumer base that’s particularly loyal to them beyond what the price is on the shelf.’
He said old strategies in the retail sector and ways of doing things need to be rethought as retailers need to get back to the basics and if that means they have to lose a lot themselves to try and get a much closer idea of what the consumer is, try to build loyalty within that smaller segment, that’s what they need to do.
How much could they boost prices by, lose say 40 per cent of their business, and still be profitable?
“I’m not sure how many retailers are thinking in that way because we’re just talking about the basic economics in how to run a business,” said Newbury. “I think they’re still stuck in we’ve got stores, we’ve got e-commerce, we’re running promotions, we’re doing this, we’re doing that, which wasn’t particularly working in the 2010s, but they have to untick some of these things and re-imagine them as to what 2022 will look like.”
Newbury said he had thought that the fourth quarter of 2021 would have been a defining period with a massive shakeout for retailers but coming into January of this year nothing happened – and that’s most puzzling to him.
“This is almost illogical and all I can assume is the arrangements around the leases and the landlords being cooperative, maybe they got money from the government . . . it’s just been enough to get them to now. If that’s true and they haven’t started to do that rethink of their business and how they’re going to compete for 2022 . . . I think we’re going to find a situation where we’re going to see a reshaping of the retail industry during this year in Canada,” said Newbury.
Partially agree with the concept of profiteering here, but ONLY with regard to where this ‘greed’ is taking place. That SOLEY lies in the hands of the Ocean freight companies. That’s it. For the most part, factory costs, with some basic commodity increases which are seen every season, have remained reasonable. Ocean freight costs, pre-2020 a container from the orient was around $4000, on a vessel … today its over $17,000 .. and the larger/heavier the item, the more you are effected by cost. So the retailer AND distributor are being beaten down while the freight companies are making cash hand over fist.