Brexit – what does it mean for retailers? That’s a question that is being widely debated, while companies try to work out what the implications will be for their business. In the short time since the referendum, there has been a lot of speculation, forecasts, analysis and opinions on what may happen. The only sure thing is that the market is in a state of flux. In this article we discuss how pricing strategies can be used to tackle this new and volatile situation, and the new challenges that the Brexit vote introduced to an already pressured and rapidly changing UK retail market.
Retailers Must Streamline Buying and Logistics
One of the critical factors that retailers need to figure out is how to control costs as inflationary pressures from Brexit will enter the supply chains of UK-based manufacturers and retailers. According to a recent Planet Retail report, the more UK retailers rely on imports, the more vulnerable they are as the pound weakens and supply chains need to be adjusted. Nearly 40% of food sold in the UK is imported. In Grocery Retail, fruit & vegetable and dairy are often sourced from the EU, making them high-risk categories for potential price increases. UK retailers need to prepare and line up more localized suppliers to help combat this challenge and control costs.
The Forecast: Who Will Come Out on Top?
According to a recent report by Deborah Weinswig, Managing Director of Fung Global Retail & Technology, the EUI forecasts real-term retail sales (i.e., volumes) could fall by around 3% in 2017, compared to +2% if the Remain vote had prevailed. Ms. Weinswig’s team estimates that the Brexit vote could dent retail sales growth by between 0.7% and 1% in each of 2017 and 2018. Retail volumes are likely to be softened by macroeconomic effects of the exit from the EU. Yet increased inflation is expected to boost the value of retail sales in current-prices terms.
According to Planet Retail, the retailers that may have more challenges in regards to Brexit would be the hypermarket operators, which have higher exposure to big-ticket non-food items amid market and job uncertainty. Food service operators and non-food retailers may also face challenges as consumers will most likely do in-home cooking and stop buying non-essential products. On the other hand, discount retailers may do better along with grocery retailers with a strong presence in channels close to consumers as these consumers will have fewer visited to out-of-town big boxes to save on fuel and avoid temptations.
Pricing Strategically is Critical
Retailers are facing the need to address the rising costs at a time when consumers’ price sensitivities are at an all-time high. This could be a very challenging balancing act, as retailers need to protect their margins while ensuring they are pricing at a level that is tolerable to consumers during this time of uncertainty. Pricing strategically is critical, but when times get tough, it’s executing that strategy and finding the right balanced positions within it that also become critically important. Here are four critical factors to take into account when adjusting your pricing strategy in the coming months.
React quickly to changes. A mix of political and economic triggers are driving constant fluctuations in consumer demand, the Pound exchange rate, import costs, market shifts and many other influencing factors. Now more than ever, Retailers need to be able to gather and process pricing data signals on a frequent basis (weekly and increasingly daily and even intra-day), so that they can react quickly enough to every cost and competitive price change, using self-learning algorithms that monitor and evolve with changing competitive, consumer and market conditions. To operate effectively within uncertainty, Retailers must be able to react quickly, whatever the shift.
Make the right – and targeted – changes. What’s right for one retailer will be very different for another. Baby food, for example, could be a Key Value Item (KVI) for one retailer, whose price needs to remain competitive, and a profit generator for another retailer. As shoppers are more price sensitive, retailers need the ability to conduct analytics that focus on the changes that really matter to that retailer’s top and bottom lines, and eliminate those that only irritate shoppers. The key here is making the right decisions for your business, taking into account what your customers care about, and knowing which items require competitive response – and which don’t.
Strike the right balance. Focusing blindly on meeting competition results in a devastating race to the bottom, and is certainly not a sustainable long-term pricing strategy. Pricing needs to be determined by the right balance of influencing factors, so that you’re not relying solely on cost changes and ignoring competitors’ movements, and yet you know when it is important to your customers to react to competitive price changes on specific items. Your pricing capabilities need to incorporate factors such as shopper and competitive price elasticity and seasonality.
Adapt your strategy to the market. As conditions evolve, your strategy will also need to evolve. You may need to place more emphasis on margins, competitiveness or sales growth at a Department, Category, Product Line, Banner or Regional level to achieve your business targets in this volatile market. But Brexit isn’t just bad news – change brings with it challenges and opportunities. With the right strategy change retailers can even gain market share or alternatively improve their profit margins. Being flexible and responsive with pricing strategies is the key.