How inflation is turning retail on its head.
Everywhere you look it’s easy to see that inflation is causing drastic consumer spending cuts across the retail industry—from home goods, to fashion. But, what are the long term effects of these cuts and their potential influence in consumer behavior?
Our latest retail benchmarks report, Adjusting for Inflation, sought to answer these questions and more as we looked at a combination of anonymized data from the Quantum Metric platform and third-party survey results of UK and U.S. consumers aged 18+.
The biggest takeaway? A shift from the spontaneous shopping culture, curated by big box stores and Amazon, to more planned purchases.
Data from the Quantum Metric platform shows that consumer spending cuts have driven shoppers to think a lot more about their purchases and make multi-item purchases in one checkout. This is a major behavioral change that counters the culture many big box retailers have created through expedited shipping (e.g. same day, next day) that minimizes the need for planning.
It also puts considerable pressure on “value.” In fact, our findings show that consumers are more focused on value than ever. This poses new challenges for retailers, since value is fairly subjective and the value judgment takes place, pre, during, or post purchase. There is a lot of room for retailers to test ways to deliver different kinds of value that matter most to specific customer types.
How consumer spending cuts change seasonal shopping.
Not surprisingly, consumer spending cuts will put more limits on the major shopping seasons such as back-to-school and holiday gifts. Rather than the emotion-driven shopping we saw in 2021, we are seeing a specific focus on only the essentials, with 71% of parents limiting school supplies and 80% of consumers limiting even the number of gifts they buy this year.
This could add another wrench to the already complicated inventory challenges retailers face today, as products previously in demand take more of a back seat. Technology purchases for back-to-school are a great example. Unlike previous years, our report shows that new tech, such as laptops or tablets will make up less than 10% of consumer school supply budgets.
Consumer electronics had major growth during the COVID years and consumers had to upgrade their tech to ensure kids could learn remotely. In tough economic times it is an easy consumer choice to push out an upgrade in order to save money. On the flip side, however, we will see an increase in warranties, parts replacements, and other accessory upgrades to enhance/improve or make the core purchase last longer. Unless there is a major innovation for the holidays, the same could likely be assumed for Christmas shopping.
The evolution of checkout.
The other consideration for consumer spending cuts? Just how customers are choosing to pay for their purchases. Our report shows that the majority across the U.S. and UK are leaning into Buy-Now-Pay-Later (BNPL) programs to manage costs.
Increases in BNPL make sense since the payments are interest free, but it does require consumers to be way more budget conscious and to remember that they have more monthly payments hitting their budget. There are already concerns that BNPL usage over the summer could have lasting effects on fall and holiday spending.
If they aren’t leaning into BNPL, Americans are looking to credit cards. In fact, 39% of Americans plan to apply for new credit cards ahead of the holidays and more than half (54%) will reserve their credit card points or rewards to redeem for holiday gifts.
This could be good news for retailers looking to build customer loyalty. Credit card programs are a great way to capitalize on a new customer that’s invested in your brand. However, the majority of credit card rewards are earned when opening a new card, not retaining. Retailers should consider adjusting these programs, especially in the face of consumer spending cuts, to consider how rewards for long-term customers could drive spending when budgets are tight.
How retailers can respond—the truth about retail efficiency.
In tough times, like the rising inflation and consumer spending cuts we are experiencing today, focusing on efficiency will always be a winning strategy. But this doesn’t mean just cutting costs. There are opportunities to be innovative in the approach to efficiency that can be outlined in four key approaches:
- Retaining a customer is cheaper than acquiring a new one. That’s marketing 101. But, are you making it easy for customers to stay? Simple things like improving account sign in and authentication are critical. Sign-in frustrations are a top source of customer frustration and impact brand perception and likelihood to buy.
- Reign in marketing costs. Marketing is usually seen as the growth engine but marketers need to focus on ensuring they are getting the best return on their advertising spend and marketing campaigns.
- Time is money and senior level escalations are painful. Retailers and product owners will need to think through how they become more efficient with their time, de-escalate issues quicker and find and fix customer pain points faster.
- Don’t overlook your customer experience. Consumers are prioritizing value, pre, during and post purchase. As stores reopen, how can you build a hybrid experience that stands out? Retailers that will win this year will make online shopping an innovative experience, one that customers plan to attend, spread the word to their friends and hype up afterwards.
We can expect the next six months to bring new challenges and new approaches to the retail sector as efficiency becomes the primary goal. However, data can help to fuel customer-driven decision making that keeps customers loyal and innovation moving forward.
Take a look at the full report on inflation behaviors to better anticipate and plan for your customers’ next pivot!