Business
Overcoming the economic challenges facing the retail industry in 2023
Global Banking and Finance Review
Company
By Tony Preedy, Managing Director of Fruugo
The beginning of a new trading year is predominantly seen as a fresh start within the retail industry, where sellers have the opportunity to set new targets, reach new audiences and reassess their business strategies. Undoubtedly, 2022 has been a challenging year for retailers, with inflation hitting a 41-year high of 11.1 percent and consumers managing the effects of the ongoing cost-of-living crisis. These challenges look set to remain in 2023, with predictions from the Autumn Forecast from EY ITEM Club suggesting the UK economy will be in recession until June, shrinking by around 0.2 percent each quarter until this period.
For retailers finalising their 2023 business strategies and growth targets, they will need to factor in the economic pressures faced in 2022 and the unpredictability of the current retail climate. It is therefore important that retailers understand and manage unit economics to help build a considered, profitable selling strategy.
Analysing unit economics
Whilst the Autumn Forecast predicts the UK inflation rate will begin to fall in 2023, it is still set to average 5.5 percent throughout the year – 3.5 percent above Bank of England’s target. To overcome this period of high inflation, businesses will have tough decisions and will need to make trade-offs between short-term profits and long-term growth. Many will be forced to increase prices to reflect the rising costs, while others may be able to weather another challenging year of high costs and low margins in return for customer and brand loyalty. Either way, it is vital for retailers to analyse their data closely to ensure the correct pricing decision is made for their business.
Online retailers can be highly agile in how they price to optimise how they sell through their inventory, and they can also be savvy about how they target discounts to encourage purchases. However, retailers need to be wary of indiscriminate use of discounting to drive volume because if they improperly calculate the impact of reduced prices on gross margin and the massive growth in units required, they will struggle to keep their income stable, let alone growing.
Instead of primarily focusing on a pricing strategy for the local market, online retailers should consider their brand awareness and reach on a wider scale. To prompt more sales, businesses should focus on growing the visibility of their products by selling to international customers as well as local ones. Using marketplaces to increase reach can be a highly efficient and profitable sales strategy if retailers turn outwards and focus on increasing the number of potential buyers of their products, instead of solely relying on local demand. Diversifying channels to market also helps to reduce the risks associated with being dependent on one.
Leveraging existing business assets
Budget restrictions will inevitably form a part of 2023 plans for most businesses as they seek out alternative ways to tackle the ongoing economic challenges. Many retailers will consider cutting marketing spend with the belief that it is a lower priority compared to sales and customer experience. Whilst this may provide short-term profit and loss (P&L) gain, it will also bring with it significant medium-term pain, especially for digital retailers.
Those with a physical presence can partly rely on passing footfall to gain brand exposure, however online-only retailers do not have this option and need to work hard to generate traffic to their platform and attract customers through visibility on social media and search platforms. As such, any cut in marketing spend can have a domino effect that will impact customer acquisition and long-term growth.
Another consideration for home shopping businesses is their sensitivity to economies of scale. Due to their high fixed costs, any minor changes in sales volumes can have a large bottom-line impact in either direction. Sales volumes for any brand are a function of its mental and physical availability – being present really matters. With this in mind, reducing marketing spend is a strategy that organisations should try to avoid.
Instead, retailers should look to leverage existing assets such as infrastructure and inventory by expanding their reach on a global scale. With local demand expected to fall due to the high inflation rates, the solution to retailers selling more is to place their brand in front of international customers as well as local ones with the help of marketplaces.
Building customer loyalty
Other important metrics that retailers must review are the costs of customer acquisition and customer lifetime value. High-growth online retailers that have been over-focused on customer acquisition will need to switch to customer activation to drive repeat orders.
Ultimately, customers will buy again if they are contacted with timely, relevant, personal communications, and if they experience delightful service. Retailers must be more mindful of this when reassessing their business models.
The marketplace model works to optimise the user experience and utilise search algorithms to target an existing audience with personalised preferences, as well as to promote products to a wider target audience. Sellers gain access to a whole new world of data from millions of consumers across the globe, which they can use to enrich their own insights with varying consumer trends from different demographics. What’s more, marketplaces remove a lot of the technical work from sellers, – such as product translations, calculation and remittance of sales taxes, fraud detection, currency conversion and so on – so sellers have more time to focus on enhancing the customer service and making other improvements to their business.
Overall, by selling on marketplaces – particularly ones that specialise in cross-border e-commerce and that operate on a no-sale, no-fee basis – retailers can attain local and global growth in 2023 with minimal risk. Marketplaces take on much of the legwork and offer dedicated account management which helps to massively simplify the execution of an international business strategy. Sellers benefit from boosted brand and product visibility without having to decide between short-term profits and long-term growth in an increasingly complex economic climate.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically measured annually.
Unit economics refers to the direct revenues and costs associated with a particular business model, helping businesses understand profitability on a per-unit basis.
Customer loyalty is the tendency of consumers to continue buying the same brand or product over time, often influenced by positive experiences and satisfaction.
A business strategy is a plan that outlines how a company will achieve its goals and objectives, including how it will compete in the market.
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