Sunday, August 10, 2008

How Retailers Should Deal With Inflation

Here's some useful tips from University of Pennsylvania's Wharton Business School on how retailers should deal with inflation. Trust me, this applies equally to Malaysia as it does the U.S. I have extracted some key passages for your edification. I have taken the liberty to place sub-captions and, done minor editing to make the reading more user-friendly:
... the current inflationary period, if handled carefully, may actually be a business opportunity for some retailers, especially if they make selective changes in inventory management, pricing and promotions.
Watch the inventory
That new thinking can begin with inventory.
In fact, some retailers may want to start holding much more inventory than they did in the past as a way to hedge against future price increases.
Review supplier contracts and logistics costs
... contracts with suppliers include some agreement on how to handle future price increases. For example, include fuel-cost adjustments "so that both sides are sharing the risk." Company buyers, he says, can also look for more local products to cut down on transportation costs.

As energy costs continue to rise, retail chains' distribution plans are likely to be driven by fuel efficiency rather than labor or location of physical assets.
In addition, operations and marketing departments will need to work much more closely to successfully navigate the new environment.
Review pricing strategies
The problem is not only that there are inflationary pressures but that aggregate demand is going down.
Retailers typically try to pass through their costs by adding their margin to the supplier's higher price. By itself, such cost-plus pricing can be a profitable strategy in an inflationary time if consumers have accepted the idea that prices are rising in a given category.
Increasing prices in some cases
A price hike to keep up with inflation may actually create more profit for the retailer. ...if the retailer's overall costs--such as labor, shipping, marketing and other products--remain static, that extra penny of margin can flow to the bottom line. But with rising product costs and consumers worried about their jobs, marking up the price of goods becomes a delicate business.
...retailers (should) try to promote sales in a product area in which prices have not increased. At the moment, prices of electronics and clothing have not risen but food and energy have.
Reducing prices in other cases
Retailers can also try to cut prices in an important category as a way to boost market share, as Costco does by selling gas at a relatively low price. Others have cut prices as an opportunity for running promotions or special sales, recognizing that with their customers facing an inflationary crunch, It might be an opportune time to run some deep discounts as a way to try to capture some volume.
Don't abandon advertising
Other strategies for succeeding in an inflationary environment may require some counterintuitive thinking. While companies typically slash sales and marketing budgets during tough times, some studies have suggested they would do better to turn up the advertising volume.
So if the competition is buying less advertising, the merchants who spend more get a greater share of exposure.
Watch the customer service levels
Retailers shouldn't overlook other aspects of their business, particularly service. Retailers need to go out of their way to provide friendly customer service, because everybody's going to be out there screaming value.
There will be some new winners among the retailers who can adjust quickly.
The points highlighted above are based on an article in Forbes. You can read the full article here.

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