Just as the retail sector began to recover from the impact of Covid-19 lockdowns and other public health measures, spiralling inflation has presented a daunting new challenge. Retailers are having to contend with higher stock costs, rising overheads in key areas such as energy and staff pay, and increasingly cost-conscious customers.
“There have been challenges with cost inflation recently, particularly with energy and labour costs,” says AIB’s head of retail sector Alan Makim. “The energy price increases have impacted those heavier energy users, such as grocery retail, the most, but it is a challenge across all businesses. It certainly affects those on finer profit margins which could be challenged with further increases. The availability of labour is also affecting some, and this has driven up competition for resources and costs. Feedback suggests these availability issues are most pronounced in the cities and large urban areas where the availability of affordable accommodation has made it difficult for many retail workers to live close to where they work.”
All of the delivery companies have increased their shipping charges
KPMG has carried out research into the impact of inflation on consumer behaviour. “The rising cost of living is causing consumers to rethink their spending habits,” says Keith Watt, head of retail at KPMG. “In a recent survey of Irish consumers conducted by KPMG, a majority of customers in all areas except food and groceries stated that they have reduced their spending. However, with food prices having increased, it’s evident that rather than spending less, consumers are purchasing cheaper, own-brands more frequently or purchasing fewer non-essential items. We’ve seen a significant growth in competition between the supermarkets and a growing emphasis on price promotion and the marketing of special offers in some sectors as consumers have begun to shop around more for deals.”
Becci Harrison is managing director of Fishers of Newtownmountkennedy and is a council member of both the Small Firms Association and Retail Excellence Ireland. She says rising inflation has had an impact on her business in four key areas: cost of stock, delivery, energy, and staff pay.
“A lot of our stock is ordered six months in advance at a price that we don’t expect to change,” she explains.” In fairness, it hasn’t changed but we are seeing significant price increases for the goods we are ordering now for delivery in six months’ time.”
The cost of delivered goods has increased, however. “We are seeing prices going up and surcharges being levied,” she adds. “All of the delivery companies have increased their shipping charges.”
The dramatic increase in energy costs will only manifest itself next year due to the company’s policy of regularly switching providers. “We are very good at changing suppliers and getting the best rate on offer every year. We changed back at the beginning of the year. The cost has gone up so much since then that we are facing into a significant increase next year. We had given our staff a pay increase a year ago and there is now pressure to put it up again. In fairness. their costs have gone up as well.”
She describes inflation as a spiral. “As one thing goes up another has to go up. We try to absorb what we can. But there is only so much we can do. People see the gross margins in retailers and think we are coining it. But the net margin is only about 5 per cent at the end of the day when our costs are taken into account. We have also negotiated discounts for early settlement of invoices. We can do that at the moment because we have the cash flow but if that dries up for any reason, we won’t be able to continue.”
Retailers have been passing on at least some of the cost increases, according to Makim. “We have seen retailers pass on additional costs to the consumer for the most part, protecting their margins. This is a finite option as consumers can only absorb price increases for so long before sales volumes start to be reduced by value-seeking consumers. Second quarter retail sales have been relatively stable, but it is definitely worth keeping a close eye on consumer demand as we enter the autumn and winter period, particularly with the uncertainty if increasing energy costs will dampen consumer spending.”
The KPMG study found that demand is being hit in discretionary spending areas. “Non-essential retail is also being hit by reduced spending, with over three quarters of customers stating they are spending less on clothing (78 per cent) and household DIY budgets (74 per cent),” says Watt. “Meanwhile, getting the best price continues to be the number one priority for almost two thirds of consumers (64 per cent).”
When it comes to mitigation measures, the bigger players tend to be at an advantage. “Larger retailers have greater negotiating power, which supports negotiation with suppliers, but the challenges for large retailers in respect of labour and energy are very similar to those of smaller operators. There does seem to be a greater stress on the labour market for city centre retailers than regionally based ones, but it remains an issue across the sector. Ensuring efficient rostering of staff and operating hours can help mitigate the impacts of inflation. We are also seeing an increase in inquiries about investment in cost reduction measures, such as energy-efficient equipment.”
Stock and range management represent other options. “There are certain brands and products that people expect from us,” says Harrison. “Magee of Donegal is a great Irish brand. But we might not be able to get the higher cost pieces in. It’s a case of giving people what they want in terms of brands and quality but going for better value pieces. There is also the education piece. We talk to our customers. We are not a low-cost fast fashion store. We sell quality pieces that will look as good on their 100th wear as on the first. We try to educate our customers in relation to that.”