The Best Strategies for Australian Retailers Amidst Inflation and Rising Costs
Inflation is on the rise and back in the spotlight, and it's putting Australian retailers on their toes. As of November 7, the Reserve Bank of Australia (RBA) raised its key interest rate to the highest it's been in 12 years. This increase brought the rate from an already high 4.1% to 4.35%. This decision was made in response to the possibility that high prices, or inflation, might continue for longer than expected. The higher interest rates are influencing consumer spending habits, leading to more cautious purchasing decisions, which in turn could result in reduced sales and profit margins for retailers who don’t adapt.
As the economy feels the strain from China's slowdown, Governor Michele Bullock and the RBA have some tough calls to make. And retailers are not just bystanders. They're active players who are finding new ways to thrive.
A notable example is Kmart, part of the Wesfarmers Ltd conglomerate in Australia. Recently, Kmart has seen a significant increase in profitability, driven largely by cost-conscious consumers. In the year to June 2023, Kmart's profit grew by more than half. Overall, Wesfarmers reported a total profit of A$2.47 billion, which is slightly above analyst forecasts.
A key factor in Kmart's increased profitability during this period of inflation was their success in attracting cost-conscious consumers. This was achieved through an improvement in the quality of their offerings, which drew a larger customer base. Notably, more shoppers started buying clothes at Kmart, diversifying their purchases beyond the usual home products.
In this guide, we will lay out the best strategies for retailers during inflation so they can stay agile and successful.
Attracting Consumers for Big-Ticket Items During Inflation
The interest rate impact on retail sales is undeniable. Families are reconsidering where their money goes. This is especially challenging for retailers who offer premium or non-essential items, as they now face the task of making these products attractive in a market where 48% of consumers are buying less.
Interestingly, of those who have spent more in the past six months, 26% attribute this to inflated prices forcing them to spend more. Another concerning finding is that consumers believe it might take close to four years for inflation to stop rising in Australia, which indicates a prolonged period of cautious spending behavior.
High prices challenge both consumers and retailers, but smart strategies can turn these challenges into opportunities. Let’s turn our focus to practical approaches that retailers can use to keep customers interested in premium products — even when budgets are tight.
Building a Brand That Resonates
A brand that tells a compelling story can make its products irresistible. It is about creating a connection that goes beyond the product itself. For example, while smartphones from other brands offer elaborate features and advanced technology, people continue to choose Apple for what it represents — innovation, prestige, and a symbol of technological advancement. Despite economic fluctuations and the premium price of their products, customers often queue for hours to purchase the newest iPhone as soon as it is released, which highlights the strong brand loyalty Apple has cultivated.
This choice is driven by the emotional satisfaction these items provide, from a sense of accomplishment to an enhanced self-image and social perception. Despite inflation and high prices, premium brands like Apple maintain strong sales.
The video “The Psychology Behind Why We Buy Luxury Goods” on YouTube is a valuable watch. It sheds light on why people continue to invest in luxury goods despite economic challenges. It explores the emotional and psychological factors behind these purchasing decisions — for example the fact that “retail therapy” aka splurging on an expensive item, makes people feel good and raises their self-esteem.
Clear Communication and Consumer Trust
In times of inflation, maintaining consumer trust is key for retailers. It's not just about clear communication of product features. It's about consistently delivering on promises and managing expectations amidst changing market conditions.
Woolworths, recognized as Australia’s Most Trusted Brand in 2023 by the Roy Morgan Trusted Brand Awards, exemplifies this approach. They have built strong consumer trust through consistent quality, a clear focus on customer needs, and reliable service, even as economic challenges persist.
Their transparent communication about product availability, coupled with a proactive response to customer demands, demonstrates a successful strategy in maintaining customer loyalty and trust during periods of inflation.
Leveraging Opportunities Amidst the Crisis
In challenging economic times, retailers are actively seeking special opportunities. When money is tight for everyone, these opportunities may vary.
Take the direct-to-consumer model, for example. This approach is straightforward: retailers buy directly from manufacturers and sell these products to customers all over the world. It cuts out the middleman and often reduces costs. Online retailers, in particular, have seen the benefits of this strategy. It has allowed them to keep their businesses going and reach out to new customers, even when times are tough.
For instance, research has shown that 81% of consumers are expected to make at least one DTC purchase in the next five years.
Additionally, the apparel and accessory segment (a major part of the DTC market) now sees 77% of its companies operating under a DTC model. Furthermore, about 11% of DTC companies are achieving over $100 million in sales, which demonstrates the substantial financial success possible through this approach. This success is driven by various factors such as the rapid growth of e-commerce in recent years, personalized consumer experiences, innovative revenue models like subscriptions, and strategic marketing.
Investment in Technology and Talent
Investing in the latest technology and skilled staff can seem scary during times of inflation and with tight budgets, especially when there's no guarantee of immediate returns. However, such investments are essential for long-term growth. Why?
