How UK retailers can navigate inflation

While hyperinflation might be a new challenge for many UK retailers, there are strategies to navigate it, say Anita Balchandani and Richard Mayfield at McKinsey & Company.

Many executives who have worked around the world will be well-versed in the challenges of hyperinflation.

But leaders who have stayed in Europe and the UK are unlikely to have encountered the current environment, in which prices are rising at the fastest rate for 40 years.

Hyperinflation demands an aggressive response on both the customer proposition and costs. The best companies do this and invest for the future, as a result emerging fitter, stronger and ready for accelerating growth.

What does an aggressive response to inflation look like in practice? First, it makes sense to be realistic about the macro situation.

At the beginning of the northern hemisphere winter, many consumers are yet to feel the full force of spiralling energy prices, while central banks promise much higher rates in their new cycle of monetary tightening.

The highly likely conclusion is that pressure on disposable incomes and retailer margins will get worse before it gets better.

There are silver linings, however. Our experience of working with the world’s leading retailers reveals several strategies that can help companies navigate an inflationary environment, as well as reset for faster growth in future. There are four key areas in which decision-makers can act.

1. Boost commercial effectiveness

Several large retailers have taken action on the customer proposition, including making changes to assortments, pricing, promotions and communications strategy.

They have simplified assortments and reconsidered entry price points and private brands. On pricing, they have invested in known value items (matching market leaders) and taken an everyday low-price approach, holding prices on up to 1,500 lines across categories.

Promotions have been recalibrated to reflect consumer priorities amid a focus on straightforward reduction mechanisms and strategies to capture future purchases. In a similar vein, they have kept communications simple, reinforcing price and value messaging.

2. Optimise supply chains and sourcing

Table stakes is to focus on zero basing and procurement, especially in areas such as energy and real estate. However, some of the biggest exposures are in the cost of goods sold.

With that in mind, leading companies are focusing heavily on sourcing strategies. That means buying alliances, near-shoring and building long-term relationships with key partners.

Many have also considered measures such as moving production closer to home and repurposing space to reflect customer priorities.

3. Drive productivity in general and administrative expenses

Forward-looking retailers have shown that the biggest productivity gains come from a radical approach to automation.

Some have revisited every aspect of operations, from filling pallets based on store layouts to wholesale adoption of driverless vehicles, being piloted by some of the world’s leading businesses.

In-store innovations, meanwhile, include robotic cleaning and mobile scan-and-go. As decision-makers look to rethink the organisation from the ground up, the priority should be end-to-end simplification – from suppliers right through to the customer proposition.

4. Set up an inflation management office

Some companies have chosen to tackle inflation directly and, to optimise their response, they have set up dedicated inflation management offices.

These are tasked with overseeing initiatives across commercial effectiveness, resilience in supply chains and sourcing, and productivity in general and administrative expenses. Effectively implemented, their work can catalyse a 3% to 5% increase in sales, 5% to 10% in cost savings and 4% to 5% in cost reductions.

The above strategies can help companies weather the current crisis and prepare for the future. Indeed, antidotes to inflation and drivers of modernisation are often one and the same.

However, as they grapple with multiple challenges, retailers should not forget that the best companies invest for growth through recessions.

At a minimum, that means ramping up online offerings, guaranteeing faster deliveries, investing in data and digital, and elevating services – the collective impact of which will be to streamline the business and take the customer experience to the next level.

Anita Balchandani is a senior partner based in our London office, where Richard Mayfield is a senior adviser.

This article was originally published in Retail Week.

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