During a time marked by unpredictability and constant change, it should come as no surprise that consumers are behaving outside the norm – particularly in response to rising prices.
“The typical outlook on inflation is that it’s going to depress purchases because it lowers consumer sentiments, but what we’re seeing is something very strange,” said Brian Spaid, assistant professor of marketing at Marquette University.
According to the Bureau of Labor Statistics, consumer prices rose 7% in 2021, marking the biggest annual increase since 1982. But at the same time, U.S. holiday retail sales reached a record high, jumping 8.5% over 2020, according to a Mastercard report.
Spaid cautions against getting too comfortable with that trend.
“I would not expect to see that level of enthusiastic retail consumption to continue, especially given inflation,” he said.
Looking into 2022’s crystal ball, he expects spending to slow across the board, potentially resulting in a year-over-year decline. That will be the case specifically in areas where inflation has hit the cost of goods hardest, such as fast food, which saw consumer prices climb 8% in 2021.
Independent of inflation, Spaid is certain online purchases will only continue to grow this year – “essentially cannibalizing” in-store sales – as some consumers solidify online shopping as their new norm.
The shift toward e-commerce is nothing new for the apparel retail category, which ended the year with consumer prices up 5.8%, the most significant increase since the 1980s.
“It was time,” said Mark Kohlenberg, chief executive officer of Milwaukee Boot Co., Moral Code Footwear and Accessories, and Well Dressed Men (WDM) Footwear and Accessories.
In the business of both manufacturing and retailing footwear, Kohlenberg is dealing with inflation on several levels, one being supply chain and logistics.
“We source raw materials like hardware, buckles, laces and different components for accessories from a variety of countries around the world, and you need 100% of those components ready to roll when production starts,” he said. “We’ve been affected both with delays and increased costs for all of those components.”
While bumping prices on the retail side may seem like the most effective solution from a business standpoint, the group has so far eaten the additional cost.
“We didn’t want to overreact and raise prices overnight just because we had a cost increase on our side, but it has persisted now for several months without much improvement,” he said.
Bulky shoes and boots aren’t usually cheap cargo, but shipping costs in the past year alone have in some cases quadrupled. If conditions don’t improve within the next few months, those costs will have to be passed on to customers as a $5 to $10 markup, said Kohlenberg.
However, a modest price increase won’t likely interfere with demand, which for direct-to-consumer brands Milwaukee Boot Co. and Moral Code has remained strong since July as people gradually return to the office and in-person activities.
“People are people – they want something new. They don’t want to be sitting around wearing the same old stuff forever,” he said. “If anything, right now, we don’t have enough inventory. We cut back significantly during COVID, and we haven’t yet recovered in terms of replenishing our own inventory to meet demand.”
Thanks to persisting supply chain disruption and skyrocketing freight costs on the production and fulfillment side, consumers will likely see prices get worse this year before they get better.
“Manufacturers are the ones that were eating those cost increases for a bit; now they just simply can’t. Manufacturers are truly the ones that are going to drive the price increases at retail,” said Jeff Peterson, co-founder and chief executive officer of Delevan-based Geneva Supply Inc.
The third-party logistics provider helps manufacturers grow their business through Amazon and other e-commerce platforms.
With bottlenecks likely to linger for a few more months, Peterson is telling clients to focus now on bringing inventory levels back up to where they need to be.
That way, if supply chain issues improve later this year, the remainder 2022 can be all about driving sales. But until then, it’s also important to hold down your customer base.
“Just because you’re out of stock, find a different way to engage with consumers,” Peterson said. “We’re in a situation where consumers realize that these challenges are broad based – all categories, all industries, all brands. … People are having a higher level of understanding of manufacturers being out of stock and the challenges of these price increases, so maintain that engagement.”