Negative inflation - is it here to stay?
Negative Inflation is something that has emerged in the Retail sector quite recently. However, many retailers have struggled to come to terms with the fact that it is no longer acceptable to pass cost increases on to customers.
In 2006 for example, it is estimated that total retail sales growth will be about 2.6% and total cost growth will be about 4%. “It doesn’t take a genius to work out that is clear that Retail has a major problem; you’ve got to sell more product and you’ve got to be able to keep your costs under tight control” quotes Hyman. Is Negative Inflation here to stay, or is it a passing phase? Whatever the answer, it’s one of the major challenges that retailers face today, and one of the key things that is sorting out the men from the boys.
Richard Ratner feels that negative inflation is here to stay, believing that the issues are structural, not just cyclical. He cites monthly O&S figures and makes the point that in October, the figure was up 0.6% yet we’re seeing inflation. The split between food and non-food, general merchandise is still -0.4% and food was up 2%; and the gap is widening.
It also leads to further pressure on non-food sales because the higher food price inflation goes – and people have to eat, then the less spend there is going to be around for non-food. Indeed 3.8% up as cash take according to the O&S, and that’s forgetting the seasonal adjustment, ignoring the volumes that is straight cash, but in fact food was up 4.8% and non-food up 2.9% so you can see the gap widening.
As Ratner pointed out, “It would appear that it will be difficult to increase prices at the moment. The strength of the pound against the dollar is helping retailers – eventually most things seem to be dollar denominated.” If that situation changes then there will be problems because there is so much capacity at the moment, particularly at the commodity end. At the moment, on commodity general merchandise, there seems to be little hope of raising prices significantly.
One of the sectors where negative inflation has had the biggest impact is in the clothing sector. Retailers like John Lewis spend a lot of time trying to take cost out of value chain and demand chain while thinking about capacity planning, raw material planning, range planning and balancing everything around ultimate cost price deflation and flexibility in reaching what customers want.
Whether it’s transportation savings or raw material purchasing, clothing retailers are looking to engineer cost savings. With ethical trading and social responsibility to take into account, it isn’t easy.
Richard Jones made the point that clothing retailers need to balance desirability of product versus the price and creating a value equation that is acceptable to customers.
