Fundamentals of the Retail sector and the importance of marketing

  • May 11, 2020 AEST
  • Team Kalkine
Fundamentals of the Retail sector and the importance of marketing

The retail industry has witnessed widespread disruptions over the past decade, be it a change in consumer behaviour, a swing in demographics or even a technological breakthrough. The dynamic nature of the industry calls for players to be on their toes all the time and come up with innovative solutions when the situation demands. Amid the COVID-19 turmoil, the retail industry has been adversely affected, perhaps worse than most barring travel and leisure. However, a rapid switch to the online platforms has saved the sector some blushes.

As a consumer-focused sector, the businesses need to keep up with the rapidly changing fundamentals, including taste and preferences. Besides, companies are always at the risk of competitive pressure.

Retail industry includes a range of businesses from car dealers to food retailing. The industry is widely categorised into discretionary retail and staples retail. One can further segregate retail segment into fashion retailing, electronics, and jewellery, among others.

Let us look at some of the critical points that shape the industry, and have an impact on how the retailers review and modify their strategies:

Consumer spending patterns are akin to predicting the levels of potential retail sales. When consumers are living on Government support, it is highly likely that retail spending would suffer as a result. Explicit data from consumers is vital to ascertain the end-level satisfaction of the consumer concerning a product.

Consumer fundamentals enable retail companies in planning for the future, including supply chain, inventory management, pricing points, optimal discounts, potential demand of products etc.

Product pricing affects consumer behaviour. When consumer fundamentals like wage growth, unemployment are deteriorating, retailers would likely adopt more value-based products that are generating maximum utility at minimum prices.

A classic example of how a change in prices impacts consumer behaviour was noticed when Australians preponed purchases of goods as GST implementation was approaching in June 2000, taking the monthly sales to a record level.

Nevertheless, the two-decade old record was recently broken in March 2020 retail sales as the COVID-19 pandemic forced Australian households to buy in bulk and stay at homes; this also indicates that it is not only the price that impacts consumer behaviour.

Moreover, the changes in the economy and consumer fundamentals will likely impact the product pricing by the retailers. Retailers shall also consider the level of CPI at a given point in time when considering pricing changes.

Credit availability has a significant impact on consumer spending. Increasing lending standards of the lenders may deprive consumers of cheap and affordable credit, while also force them to opt for costly sources of credit. The expensive sources of credit will eventually deteriorate consumer spending as debt servicing cost increases.

At the same time, credit growth also indicates the buying power of consumers. When credit growth is booming in the consumer credit space, it will likely lead to higher spending by the consumers.

Leverage in the economy reduces the capacity at a consumer level as well as the producer level. In a country, when debt servicing cost is increasing while wage growth and GDP growth is decreasing, it would impact consumer spending as well as production growth.

Interest rates also play a vital role in the retail environment. Perhaps interest rates are one of the most critical indicators in an economy. Interest rates are administered by the central bank of a country, which usually seeks to maintain employment and stable price in the economy.

Fluctuations in the interest rates affect the interests paid by households as well as a corporation on their debt. Interest rates also impact the credit availability and credit flow in the country, thereby affecting the consumer spending behaviour and investment patterns of corporations.

Employment and wage growth are drivers of retail sales. An optimal level of employment means households have sufficient liquidity to spend and repay existing debt. Rising unemployment indicates that households may face difficulties meeting their obligations, and thus, spending would be lower.

Likewise, wage growth is also an essential factor that allows offsetting the impact of inflation, which deteriorates the purchasing power. If wage growth is stagnant and inflation is rising, the consumer would be able to make fewer purchases with the same amount of money.

Deterioration in these two factors impacts the consumer fundamentals, and consequently, the retail sales and economic growth.

Fiscal policies of the Government could impact the retail industry and thus, sales within the space. Let us consider the tax rates, personal tax as well as corporate tax. When tax rates are higher, the disposable income left with the households and corporations is lower. Similarly, when tax rates are lower, the disposable income is higher.

Another example of fiscal policy could be trade policies, which include tariffs and quotas. When a country imposes tariffs on specific goods, it effectively raises the cost of those goods for the end-user.

Marketing, competition, and price wars mean margin erosion

Since competition grows and intensifies each year, the retailers scramble with each other to get the large pocket share of the consumers. Marketing plays an essential role in engaging with customers or potential customers.

Advertisements enable a business to connect with the customers effectively and induce a response that can lead to sales. Retailers also use in-store promotions to make customers buy goods even when they were not supposed to buy as a hefty discount on the product may lure the customer into spending on the item.

Point of sale marketing is crucial because it enables the seller to convert a prospective customer into an actual customer in the store. Whereas in advertising, the customer would need to visit the store after the customer has become aware of the product.

It is only marketing that delivers results. The business has to take care of its employees to get the best out of them. A motivated employee could be the best marketer of the products and investing in employees is as important as investing in advertisements.

Since promotions include discounts, the profit-making capabilities of the business faces pressure as a result. Moreover, the companies that offer substantial discounts and promotion often witness margin erosion.

At the same time, the companies are forced to undertake massive promotions and discount because the competitor has been providing such discounts. Unable to match the discounts could lead to customers opting to buy from the competitors.

As economic contraction is inevitable due to COVID-19, the consumer sentiments are pegged to deteriorate sharply. It is because of numerous factors, including rising unemployment, sluggish wage growth, GDP contraction etc.

When a consumer is under stress, the level of spending would be far lower. The retailers would have to introduce products that reflect the value at the given price due to the reluctance of consumers to spend on goods that are expensive.

Online businesses have gained significant traction over the recent past, and they will likely have additional penetration as consumers look to stay at home due to the risks of infections.

Investment decisions of the retailers would facilitate in improving margins as the use of technology is likely to deliver better results. Understanding the rapidly changing customer fundamental through technology-based solutions would allow retailers to improve margins.

While marketing has always played a significant role in the retail sector, its importance has grown further with the unprecedented situation created by the coronavirus pandemic and the ever-increasing competition.

 


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