There’s no doubt that retailers have dealt with compounding pressures on their margins in recent years. Between the pandemic, changing consumer buying patterns, social instability, and the ever-fluctuating economy, retailers are facing an immense and continually uphill profitability battle. Factor in the increasing inflation rates — which trended to 9.1% in 2022 — and these challenging scenarios are working in unison to have potentially devastating consequences on margins.
Discounting is an often leveraged tactic to help maintain customer loyalty. Unfortunately, those lower prices naturally diminish inventory and drive down earnings and profitability, which is an unsustainable formula that won’t last through the inflation storm.
In order for businesses to protect their retail margins during times of inflation, they need to proactively assess their vendor partnerships — sometimes numbering upwards of 100 — to adopt more promotional strategies that address their customers’ discounting needs yet protect earnings in the long run.
According to Deloitte, 90% of retailers currently fail to effectively execute strategies like vendor promotions and reap their full benefits. These promotional strategies have the ability to create mutually beneficial outcomes as the customer gets a great deal, the retailer drives more sales, optimizes profit margins and creates deeper customer loyalty, and similarly, the vendor also sees increased sales and greater customer loyalty. Yes, these promotions can be challenging to roll out, but thankfully, there are technology tools readily available to manage them seamlessly.
While it can be a difficult high-wire act balancing the need to discount and stay profitable, there are several proven strategies and tools that can be implemented in these uncertain financial times. That’s why we’ve assembled five best practice tips when collaborating with vendors for partnerships engineered to help retailers combat inflation and protect their margins.
1. Embrace Promotions and Discounts through Partnerships with Vendors
One of the most effective ways retailers can combat inflation is by embracing promotions and discounts. However, this can lead to long-term negative effects on profit without the right tactic. By collaborating with vendor partners to offer sales and discounts, retailers can attract customers and drive sales without cutting their profit margins. SAP solutions can help retailers manage these partnerships and track these promotions and discounts, ensuring they are both effective and profitable.
2. Monitor Costs and Prices
Inflation can lead to rising costs, which, of course, cut into a retailer’s profit margins. By monitoring costs and prices, retailers can stay on top of inflation and make informed decisions about their pricing strategies. It’s key to leverage technology here — and SAP solutions allow retailers to track their costs and prices, providing valuable insights into how they can optimize their margins.
3. Optimize Inventory Management
Effective inventory management is critical for retailers looking to protect their margins from inflation. When retailers optimize inventory management, they gain the advantageous ability to reduce the risk of overstocking or understocking, which can negatively impact profitability as well. Again, technology is your friend and there are beneficial SAP solutions that streamline retailers’ inventory management, providing real-time insights into inventory levels and trends.
4. Leverage Data Analytics
Data analytics is a powerful tool for retailers looking to stay ahead of inflation and protect their margins. Retailers that leverage data analytics gain valuable insights into customer behavior, pricing trends, and market conditions, all of which can inform their pricing and promotional strategies. Some 60% of brands still only use spreadsheets to share product information with retailers, however, SAP solutions offer powerful data analytics tools, making it easy for retailers to gain insights and stay ahead of the competition.
5. Streamline Operations
Inefficient operations can eat into a retailer’s profit margins, particularly in the face of inflation. By streamlining their operations, retailers can reduce costs and improve efficiency, helping to protect their margins. A range of tools can be found in SAP solutions that help retailers effectively and strategically streamline their operations — from supply chain management to financial management — making it easy for retailers to optimize their operations and stay profitable. Further, by using digitization — a tool found in SAP solutions — in their agreements with vendors, the retailer can centralize their efforts, increase transparency, avoid paper waste and offer better control that both parties have over the experience.
Unfortunately, there is no “silver bullet” solution to fully protect retail margins from inflation. However, by embracing promotions and discounts through vendor partnerships, monitoring costs and prices, optimizing inventory management, leveraging data analytics, and streamlining operations, retailers can stay ahead of the curve and take steps to protect their margins from inflation. Leveraging the right tools, like SAP solutions, which simplify these efforts, retailers can position themselves to stay profitable, experience sustainable growth and weather even the toughest economic conditions to emerge stronger than ever.