How Retailers Can Stay Profitable Despite High Inflation

With an inflation rate that’s higher than we’ve seen in years, retailers are grappling with increased costs, reduced pricing power, and decreased consumer spending — a perfect formula for declining profitability. How a retailer responds in these challenging financial times can set the course for its success or permanent decline, so the stakes are high. Digital tools and transformation play a key role in reducing time-to-value and improving profits. Retailers with an increased focus on the following areas will stay on the path to profitability:

Rethinking Ways of Working

Best-in-class retailers have embraced a product mindset, with a focus on outcomes and business value as opposed to fixed deadlines, fixed scope and cost. If teams are still doing annual budgeting, and focused on time and scope, retailers can save millions of dollars by moving to an agile mindset. The quickest way to do this is to bring in agile coaches and reorganize using an agile methodology. By improving development times and increasing digital product quality, new ways of working can reduce costs by millions and help identify and build multimillion-dollar new businesses and products (e.g., AWS, Walmart’s Mobile Apps, clienteling apps, etc.). Agile ways of working even improves retention of some of your highest-value employees.

Data Monetization

In these times, retailers must Identify new areas of revenue, particularly high-profit revenue. For example, many grocers today are building retail media networks. But that's just the start of the data monetization journey — retailers can buy, sell and combine data to improve accuracy of the models that run their business, and use this data to drive the creation of new products (especially private label) and inventory holding decisions. To keep costs down, retailers should consider monetizing other areas of data as well — from dynamic pricing and personalized promotions to credit cards offers.

Supply Chain Modernization

Supply chain digital solutions are critical for retailers to keep their cost basis under control. We’re seeing up to 10 percent savings in supply chain costs from digital investments into inventory visibility, control towers and returns optimization. We’re also seeing major new investments in micro fulfillment centers (MFCs) to make physical stores more productive. Target, for example, fulfills 80-plus percent of its online orders through its stores, keeping its costs under control while still fulfilling most products to the customer very quickly given its expansive store footprint.

Customer Experience

Research shows that digital experience leaders outperformed the S&P500 average from 2007 to 2019 by 106 percent, and outperformed customer experience laggards by 217 percent. Customer experience is correlated to revenue growth, likelihood to recommend (NPS), and even basket size. A digital commerce platform upgrade that includes superior content, enhanced storytelling, better customer journey management, and an improved mobile app are some of the foundational moves that generate significant return on investment — more than inflation, and they have short payback periods (most will see a return within a few weeks of the launch of the new experience). We’re also seeing more investment in livestreaming and customer support with chat to enhance the solutions.

Reimagining the Physical Store

The physical store — number of stores, size of stores, and how they interact with digital — must be rethought to optimize revenue and profit. Retailers must ask themselves: How can I leverage self-service technology and pickup to optimize the experience? How can I enable my sales associates to tell their story through digital clienteling apps? For example, retailers could have dedicated entrances that allow curbside pickup to operate more efficiently — perhaps even drive-through grocery curbside pickup that's fully automated. It already exists in portions of the world. We’re also seeing more available buy online, pickup in-store (BOPIS) solutions, such as Nordstrom’s Men’s 24x7 pickup in its Columbia Circle, New York flagship.

Retailers must use the headwinds caused by high inflation to their advantage, viewing them as an opportunity to rethink and reimagine their business. Many retailers have emerged from COVID strong financially and with a new set of capabilities. Now is the time to build on this progress to grow and scale for success.

Hilding Anderson is the head of retail strategy, North America at Publicis Sapient, a digital transformation partner helping established organizations get to their future, digitally-enabled state.