4 business issues and challenges shaping retail

From the importance of maintaining agile business operations to addressing a tight labor market, there’s plenty for retailers to consider this year.

Anticipating constant change

Retail sales data in 2021 demonstrated that consumers were very quick to change their shopping habits to adjust to the ebb and flow of the pandemic. This consumer flexibility forced retailers to focus on operational agility. Whether providing more products and services through improved digital experiences or adjusting the SKU mix to respond to changes in demand and supply chain challenges, successful retailers over the last two years have learned to quickly adapt to the current state of the consumer ecosystem to meet the needs and wishes of their customers. Many lingering effects of the pandemic will continue to make predicting consumer behaviors more challenging than ever in 2022. As restrictions ease, consumers will likely crave the social interaction and overall experience of shopping at stores, but that trend may or may not persist. As we emerge from the pandemic, the challenge for retailers in the coming year is pivoting from short-term agility to longer-term agility. In many cases, this will require difficult decisions and significant changes to the overall business model. The use of data analytics will become more widely leveraged in 2022 to assist with making these critical decisions.

Consumers have gotten used to a variety of channel offerings, from online and social to in-store experiences. Even with the increase in e-commerce over the last two years, retailers should look to leverage physical stores as both a showroom experience and sales channel as consumers return to in-store shopping. Middle market retailers will need to offer a unified and seamless experience across all channels to compete effectively in this environment and deliver what consumers want. Businesses must optimize their operations across their entire supply chain and through to the customer to adapt to these changes in the channel mix. This includes smarter inventory management based on data analytics, supply chain organization to optimize product availability, shortened lead times and lower transportation and other operating costs, and the use of technologies and emerging platforms to reach customers and build loyalty.

The data generated across all sales channels enable retailers to understand their customers’ behavior. As a result, organizations can create strong, long-term relationships with consumers by building differentiated brands with value beyond price competition. At the same time, increasing data collection and utilization technologies create additional risks. Businesses must be vigilant with their cybersecurity strategies to address vulnerabilities and counter threats.

Who will do the work?

Throughout 2021, the labor challenge continued to evolve with the changing dynamic of the pandemic ranging from difficulty finding labor to significant wage increases and last-minute call-outs or even resignations. The labor issue is not going away and will continue to evolve in 2022. While staffing stores and fulfillment centers will still be a challenge, especially earlier in the year, the bigger challenge in 2022 will be re-training staff to meet the continuously increasing expectations of consumers. Today’s tech-savvy consumer expects a seamless experience across all channels. Customer-facing technologies like self-checkout and mobile checkout can help, as well as technologies in warehousing and distribution centers. However, labor is still a critical component of delivering a robust experience to consumers.

Rising supply chain and inflationary costs

Trouble sourcing inventory, long lead times and significant increases in shipping costs will continue to create challenges for retailers in 2022. The decision between buying early to have sufficient stock and purchasing just in time has become increasingly more complicated due to supply chain challenges and uncertainty surrounding consumer preferences. Retailers will focus on managing their inventory better to improve sales and defraying significant cost increases. An inflationary environment could further compound Increased shipping costs. In 2021, consumers showed a willingness to accept price increases, which allowed retailers to pass along some of the cost increases created by the supply chain shock and inflation. However, inflation will likely continue in 2022, perhaps reaching as high as 10% depending upon the outcomes of certain geopolitical events. But the willingness of consumers to continue to pay price increases may not keep pace. A significant premium will be placed on managing costs and optimizing pricing.

Acquisitions that fit

As we emerge from the pandemic, conditions are ripe for an increase in deal flow closer to pre-pandemic levels.

There will be no shortage of buyers in 2022. One thing that didn’t change during the pandemic was the amount of dry powder that exists with private equity firms. In addition, those retailers that thrived during the pandemic have more capital than ever, and consolidation is a viable path to growth in certain sectors.

On the other side, the pandemic took a toll on many privately held retailers. Navigating the complex environment was a physical and emotional drain for many family-owned businesses. In addition, many private equity firms which invested in retailers that were late in their investment cycle and were able to emerge from the pandemic are also looking for an opportunity to exit.

Despite these seemingly ideal conditions, any expectations of a significant spike in deal flow beyond pre-pandemic levels may be kept in check by investors looking for the right fit. Those retailers with a strong digital presence will draw the most interest as investors look to minimize the risk associated with building a digital presence from scratch.

Want more consumer products insights for 2022? Read our industry outlook.