How to continue to deliver value support to customers during the current cost of living crisis to ensure that they are still your customers when we emerge from this period.
- Against a backdrop of rising costs, retailers must protect customers from price hikes – a race to the bottom on pricing isn’t sustainable
- Retailers must become ‘masters’ of emerging technologies like AI and place customer data at the heart of their operations
- Retailers should also be clear on their purpose and values to win customer loyalty
- Profitability over rapid growth will be key during the crisis
As memories of COVID-19 lockdowns start to fade, retailers are now in the midst of a new challenge – the cost of living crisis.
Consumer confidence is falling and discretionary spending is down as growing numbers of households struggle to afford even the basics. Now retailers are faced with either taking a hit on their margins to retain customers by keeping prices low, or putting them up and potentially losing them. As with the pandemic, the public will remember how retailers respond during the cost of living crisis, and there will be clear winners and losers.
Members of the KPMG/Ipsos Retail Think Tank (RTT) are under no illusions about the challenges retailers are facing over the coming year. At the latest quarterly meeting, they discussed the impact of the crisis on the sector, and what retailers can do to increase customer lifetime value (CLV) and emerge stronger.
RTT members focused on how the cost of living crisis will impact retailers, their customers, and wider stakeholders, before discussing how the success of new initiatives should be measured and analysed moving forward.
A perfect storm
Rising food, fuel and energy price inflation – largely the result of COVID-related supply chain issues and the war in Ukraine – has caused inflation to soar to over 9%, and fears are mounting that it could rise to over 11% by the autumn as utility prices surge.
RTT members agree that applying a sticking plaster to existing retail models and strategies, hoping it’s enough to weather the storm, won’t work. The world has changed a lot since the ‘2007-09 Great Recession’, when online retail, and the fierce competition that came with it, had yet to explode.
Ruth Gregory, Senior UK Economist, Capital Economics, highlights the cost pressures bearing down on firms in Q3 – energy, manufacturing, transport, and wages – at a time when consumers are being squeezed. She comments: “This poses a big challenge for retailers to keep their costs in check, defend their competitive position and ensure prices for consumers remain competitive. With consumers becoming more price sensitive this provides a greater need for retailers to review their operating costs and focus in on increasing productivity to deliver value for money. Against this challenging backdrop, understanding and adapting to the changing preferences of consumers will be key.”
Her views are shared by James Sawley, Head of Retail & Leisure, HSBC UK, who says: “With the worst of the cost of living headwinds still in front of us, consumers will have to prioritise essentials, and discretionary product spending will come under increasing pressure.”
He goes on to say that those who survive or thrive in this environment will prioritise maintaining a healthy bottom line over growth and “do whatever it takes to shield customers from major price increases.”
What does the cost of living crisis mean for retailers?
There’s no doubt that retailers will have to fight for every penny over the coming months, not just competing with other retailers but other sectors too.
There may be a ‘softening demand’ in retail due to ‘revenge consumption’ following lockdown, where people are making up for lost time by spending more in the travel, entertainment and food and beverage sectors.
A race to the bottom on pricing will only damage margins further and isn’t sustainable over the long-term. Paul Martin, UK Head of Retail, KPMG, says: “Retailers can’t just reduce the size of goods, amount, weight or number of items in a pack to maintain margin. This mechanic has worked in the past, but they are ‘running out of runway’. It also raises questions about whether goods are too cheap anyway? The race to the bottom has resulted in a long period of historically low prices – and we have to ask whether 99p ready meals and t-shirts are sustainable?”
The RTT agreed that retailers should focus their efforts on better understanding their customers, especially as their circumstances change and vary their pricing and promotions accordingly.
Food retailers might be afforded some protection from the crisis, since people still need to eat, but the type of products people buy, and how much they spend, could change dramatically.
RTT members say that price, promotional activity and communications must be personalised for different customers or groups – but this only works if retailers know who their audience is in the first place. Many retailers have access to this type of data, but it requires investment (both human and financial) to organise and understand it, in addition to combining it with data from beyond their existing customer base to identify new opportunities.
In the non-food sector, retailers will have to work hard to increase their share of wallet, and it can be more difficult to achieve personalisation due to purchase frequencies, but the same principles apply – they have to get to know their customers better.
The RTT highlighted the success of independent retailers and e-commerce companies in creating highly-engaged customer communities. Premium watch sellers, for instance, have built long-lasting relationships with their customers by personally contacting them when a new model arrives, while online-only companies engage people with specialist products and targeted promotions.
Peter Luff, Managing Director, Ipsos Retail Performance, explains: “Specialist retailers are not chasing every customer; they’ve worked out who their customers are and have built a deep relationship. They pick up the phone and have conversations, so they know how they can best meet customers’ needs and when they’re ready to buy. This is more challenging for larger retailers and grocers, which is why segmentation and personalisation are so important.”
To overcome this, they’ll need to invest further in data analytics and other new technologies. James Sawley, Head of Retail & Leisure, HSBC UK, points out that many retailers are only at the start of their digital journey “AI (artificial intelligence) and big data are still in their infancy. We all get marketing emails but they’re not bespoke, they are miles away from what we want let alone being in a world where machine learning enables personal shopping in the cloud. Now is the time for retailers to invest in and become masters of them.”
Jonathan De Mello, Founder & CEO, JDM Retail Consulting LLP, agrees that preferential and personalised pricing is now key to building customer relationships: “We’ve seen retailers step up with offers on midweek dinners and kids’ meals, which can engender loyalty. Mining data generated from loyalty schemes will also enable them to offer preferential pricing. It’s a smaller pie but they all want a bigger piece of it.”
Whatever course of action retailers take, Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd, warns that they’ll need to maintain a healthy balance sheet above anything else: “It’s no good offering lifetime customer value if you go bust. Online pure-play retailers in particular will have to protect their cash position and ensure that any new initiative delivers value for both the customer and the business.”
What does this mean for consumers?
COVID-19 and the cost of living crisis might have brought unexpected challenges for retailers – but they also exposed weaknesses in the sector that have persisted for a long time.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ, comments: “Retailers have to find value for customers, and loyalty schemes now play an important role in driving frequency of visit. However, what we define as loyalty should change to reflect the fragmented retail landscape where people are more likely to shop around. The current loyalty schemes from Tesco, Sainsbury and Lidl for example, have been more successful in driving long term loyalty because they use digital communications to entice people into stores with relevant, targeted, and personalised offers.”
Maureen Hinton, Group Retail Research Director, GlobalData, also points to Tesco’s Clubcard scheme for setting a ‘benchmark’ for how retailers could get to know their customers better: “Tesco appeals to a huge amount of different customers, and they target them extremely well using the Clubcard. It creates compelling offers for its target customers because it understands their needs and behaviour. This is why it’s important to know your customer and invest in products that people actually want to buy.”
Service levels will also become a key differentiator as household incomes are squeezed – and RTT members believe the sector is in a strong position. Jonathan De Mello comments: “A number of retailers feature among the top 10 companies for customer satisfaction list including John Lewis, Waitrose and Apple. Compared to the airline industry, retail isn’t too bad. To promote customer loyalty, you need to build staff loyalty too through training and good pay. Sainsbury’s, for instance, has introduced more rewards and better pay for colleagues to help them feel valued.”
Members agreed that retailers don’t have to abandon their ESG agenda because customers have less money in their pockets; in fact, it’s an opportunity to cut waste in the supply chain, so prices can be kept low, and margins protected. Retailers should also be clear on their purpose and communicate it regularly because this is what customers buy into. Knowing which customers are value-driven, and which are focused on ESG policies, enables retailers to optimise their messaging towards them.
Ultimately though, the entire retail sector needs to be restructured to ensure businesses can continue to deliver on their ESG goals. Jonathan De Mello adds that retailers will also need to consider how ESG will impact their estates too: “Landlords have their own ESG targets, so they’re increasingly looking for environmentally-friendly brands.”
However, RTT members believe that changes in ESG within retailers’ operations will largely be driven by consumers and the government rather than capital markets. Retailers should therefore be proactive in order to stand out during the current cost of living crisis.
Of course, the cost of living crisis doesn’t only affect consumers and retailers but the wider supply chain and associated industries (including property and banking), as well as shareholders.
It’s likely that lenders and investors will exercise caution, opting for retailers with sensible long-term plans rather than chasing quick wins. Shareholders may also be willing to take a hit in the short-term if it means the businesses remain sustainable.
There was agreement that some brands have expanded too quickly in recent years, and that now the focus needs to be on quality products, customers and profitability not just ‘growth for growth’s sake’.
Nick Bubb also says there’s a need for greater transparency from retailers: “There has always been too much smoke and mirrors about promotions, and consumers are cynical about low pricing claims by retailers. Isn’t it time retailers were more transparent about their gross margin trends?”
Getting it right – impact on demand, margin and cost
It’s clear from the RTT’s discussion that retailers need to strike the right balance between managing demand, margin and costs in a climate of economic uncertainty.
According to the RTT’s Retail Health Index (RHI), consumer demand will improve performance in the sector towards the end of the summer despite rising costs, including salary inflation. Yet it could be short-lived. It’s predicted that by September, discretionary spending will fall as consumers are hit by a further rise in utility bills and higher interest rates.
RTT members agree that driving demand through personalised data-led communications and delivering value in their products and services is a necessity, if they’re to protect their margins as cost spiral throughout the remainder of 2022.
Measuring success, and moving from today to tomorrow
The current climate could also lead to a shake-up of how success is measured. Historically retailers’ reporting would centre around product and channel KPIs. The profitability of specific products, and the cost to serve and volume sold across physical and digital channels is how retailers would measure success – metrics concerning customers would very much be an afterthought or a footnote.
However, if retailers are going to place customers at the heart of their operations and restructure their businesses accordingly, KPIs and metrics directly linked to their customers will need to move to the very top of their reporting matrix. The retail sector can learn a lot from the technology sector, where platform-based retailers such as Amazon have long understood the lifetime value of a customer, how much they cost to acquire and how loyal they are to the retailer and specific brands.
Paul Martin, UK Head of Retail – KPMG emphasises the opportunities this will bring the retail sector: “Understanding customers and being able to measure and segment individuals into groups will give retailers the opportunity to be more specific with their pricing and communications. Promotional activity and the amount of marketing time and budget spent can be increased or decreased depending on how desirable a customer is to a retailer – if someone only buys on offer or is prone to returning items a lot, it may be that they are not the type of customer that a retailer doesn’t want to invest in.”
Investment in data and a new focus on measuring the customer will allow retailers to better understand their customers’ motivations to purchase. In the midst of the cost of living crisis, wielding a broad brush to increase prices or implement promotional activity will result in retailers either creating unnecessary bad blood with customers, or ‘giving away’ more margin than they need to. Not every customer group will be motivated by price, and identifying these people allows for other drivers such as the latest product, upgrades, convenience, or value-added promotions to be utilised instead.
RTT members agree that while traditional reporting metrics will remain important, ultimately, if retailers want to build loyalty with their customers, understanding the lifetime value of a customer will allow them to better serve customers and create more robust and profitable business models, especially during the cost of living crisis.
There are reasons for retailers to be optimistic: consumer demand remains high, at least for the moment, and leading brands are performing well in the customer satisfaction ratings. This is likely to change by September with rising household costs expected to reduce spend.
The current crisis underlines why bigger structural changes are needed to fix long-standing challenges in the retail sector. It’s not only an opportunity to stand apart from the competition but a necessity. RTT members agree that retailers must focus on digitisation, innovation of products and personalisation as they navigate the cost of living crisis.
Whether they work in the food or non-food sector, this is an opportunity to understand and meet customers’ needs in new and different ways. Retailers could look to the niche and online-only businesses by getting to know their customers on a deep level, using data-led technologies to segment their audience and personalise communications and offers.
Getting the products right is key, as is pricing. But simply paying lip service through empathetic marketing won’t cut it – instead, they’ll need to shield customers from price rises with tangible money-saving offers and change.
Martin Newman, The Consumer Champion, concludes: “While this will impact short-term profitability, it will if managed and communicated effectively, ensure that retailers come out of this period with a larger, more engaged customer base and will benefit from the lifetime value and increased market share this will deliver.”
PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members
Paul Martin, UK Head of Retail – KPMG
Currently the majority of our economic headlines are focussing on the cost of living crisis. With inflation reaching new hights of 9.1% in May (CPI), the likelihood of a recession looming and Consumer Confidence indices surpassing the lows of the “08/09 Great Recession” the outlook for the UK economy could be described as pretty grim.
The UK retail sector has now seen sales decline 4 months in a row after a strong start to the year (BRC- KPMG Retail Sales Monitor – June) albeit the declines have been modest and need to be measured against the growth rates experienced last spring/summer in a post-lockdown environment. Therefore it is important to point out that sales are currently not in line with the media headlines and consumer confidence scores and are in general more positive. Looking forward in the short-term retail sales should hold up ok/only decline marginally until the autumn of this year. More significant challenges are likely to emerge in 2023 though, especially in Q1.
This macro-environment is resulting in many businesses focussing on cost-optimisation strategies to address the margin dilution they are experiencing. Cost & efficiency savings will therefore be a priority for many and in this context it is easy to forget about delivering growth.
During the “Great Recession of 08/09” we witnessed a plethora of initiatives to reduce pack-sizes without changing prices, reducing overall inventory levels and de-layering management structures within stores to name some of these optimisation examples. These type of initiatives will no-doubt be repeated this time around although the “runway is shorter” with many of these levers having already been pulled in the past and their impact likely to be of diminishing return. Therefore the need to focus on growth initiatives whilst also supporting the consumer through these difficult times will be paramount. Doing this will require understanding consumers in a different and much more detailed fashion than ever before.
Over the next 10 years I believe we will need to invert the way we measure success and to do so understanding the value of each consumer to an organisation will become a foundational KPI in a channel agnostic and consumer-centric organisation.
Organisations should be measuring net acquisition and net retention costs of each consumer they are interacting with. Which consumers do you want to have as “customer for life” and what economic value do they represent to you? In many cases the answers to these questions are not known and as a consequence many metrics like loyalty, price and promotional elasticity is badly understood.
Especially during economically difficult times, when value features (KPMG Consumer Poll: Impact of rising cost of living on Consumer Spending) as the most important purchase driver for many, differentiating to which shopper price vs other attributes like source of origin matters is critical for manging profitability and delivering growth.
There is also an important link between knowing the lifetime value of your customers and the purpose of an organisation. Are you “doing the right thing” especially during a crisis and how do you communicate this to your customers could represent a competitive advantage.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
The grocery supermarkets are at the forefront of the cost-of-living crisis, given the weighting of non-discretionary spending on food in the average household budget, so the recent row between Tesco and big suppliers like Heinz and Mars Petcare over price rises was instructive
Having empty shelves and a lack of well-known brands are not good ways to endear supermarkets to their customers, but Tesco rightly calculated that the short-term cost here was trivial in relation to the PR win from being seen to be the consumer’s champion.
In terms of the Tesco share price, the stockmarket barely noticed the row with Heinz, but then one thing is sure and that is that mighty Tesco is not going go bust, which is more than can be said of some of the hard-pressed Online “pure play” retailers…
Hopes that much of the Online retailers gain in market share during the pandemic would be retained post-lockdown have been dashed, to the disappointment of many of the investors in the 2021 IPO’s of many of these companies. You can’t have lifetime customers if you go bust, which is why the banks are no doubt keeping a close eye on the financial health of many Online “pure plays”.
For the better-financed Non-Food retailers with a multi-channel approach there are opportunities to grow short-term market share, as the pandemic-driven channel shift in 2020-2021 reverses, but, just as a return to integrity and trust is a big theme in UK politics at present, retailers need to show integrity in the way they promote value to customers
For too long there has been too much “smoke and mirrors” about cutting prices, with supermarket shoppers used to seeing some prices do down one week and other prices go up the week after to compensate. This kind of approach only breeds cynicism and resentment, not loyal lifetime customers, but it is hard to really prove to customers that retailers really are trying to help them with their household budgets.
At a time when customers may suspect that retailers are exploiting the cost-of-living crisis by adding on more to prices than they need to, in order to boost profits, perhaps now would be a good opportunity for retailers to be more open and honest with stakeholders about the trend in their underlying gross margins and be proud that they may be taking a hit, in order to communicate a real and transparent focus on value.
Maureen Hinton, Group Retail Research Director, GlobalData Plc
In the GlobalData June Consumer Sentiment Tracker 73% of UK consumers expect inflation to worsen over the next six months and, as a result, 64% say they will spend less in retail. The impact is on non-food – they expect to spend more on food because of its essential nature and higher prices.
The outcome is that to spend less, consumers will buy less, volumes will fall, and spending will be spread across fewer retailers. Consumers will also be looking for value, the combination of price and quality, resulting in trading down to lower price ranges and/or switching retailers.
To keep customers loyal to the brand, retailers need to offer compelling reasons not to switch, and in this respect, Tesco has become a benchmark. The overarching message it delivers is of helping the consumer through difficult times.
Along with other supermarkets it is price matching Aldi on a huge range of brands and essentials, stemming the switch to discounters, and providing meal solutions for budget-stretched consumers with the contents of a family meal at very low prices. But its big advantage is the Tesco Clubcard. Unlike many competitors’ loyalty schemes this is very easy to use and offers further price reductions across the whole Tesco range as well as money back vouchers and partner rewards. It also produces a vast amount of data that the retailer uses to personalise offers.
Moreover, Tesco’s recent refusal to accept and pass on price rises from Heinz and Mars promotes it further as the champion for consumers in keeping prices down.
Others are using similar tactics, but Tesco has the advantage of scale to support lowering prices, and of the investment it has made over the years in developing its Clubcard.
For non-food specialists it is more difficult. Consumers are cutting back on big ticket items such as furniture, and cutting down on discretionary items such as clothes, therefore retailers need to be top of mind when consumers do shop. Existing brand loyalty, which comes from having attractive products at the right price with service delivering a good customer experience, is essential, but retailers can also adapt ranges to their customers current circumstances. For instance, lower priced, more basic, products, that customers can trade down to but not compromise on quality and service. In this respect John Lewis’ Any Day range is a key advantage for it in homewares. And offering products that will help in winter when the heating bills will have the biggest impact, will also keep consumers buying.
The ability to adapt to current consumer needs is reliant on knowing the target audience well, but also having the funds and the flexibility to make changes needed. Unfortunately, the pandemic has left many retailers in a weak position in terms of cash and, with volumes falling and costs rising, there will be more casualties to come in the retail sector.
Mike Watkins, Head of Retailer and Business Insight UK – NielsenIQ
In food retailing it is location, omnichannel and now low prices that are stable stakes for attracting shoppers as we navigate falling disposable incomes and a likely shopper recession by the end of 2022. However supermarkets have never struggled to gain new shoppers in the UK, as nearly all of the `top11` retailers have high awareness, consideration and shopper penetration (source: NielsenIQ. The challenge has always been keeping shoppers and encouraging them to spend more and with the current squeeze on disposable incomes this is the key battleground. Whilst other factors are still important such as range, quality and for some customer service, it is digital customer engagement (primarily mobile) and within this personalisation of prices and offers that will now make a food retailer distinct and cements loyalty.
However loyalty also needs to be redefined as the crude metrics of share of wallet or shopper penetration are less relevant today as shoppers are more promiscuous, expect more and are inherently less loyal. This is because the retail landscape has fragmented with new fmcg shopping opportunities across different platforms, third parties, direct to the consumer aswell as at traditional `bricks and mortar` retailing. Instead `lifetime` loyalty is now achieved by growing the frequency of visit and in a way that is aligned with the changed lifestyles of households, in particular for younger shoppers.
It`s perhaps no coincidence that the 2 retailers with some of the most consistent trading performances over the last 12 months – Tesco and Lidl – have both led with digital communications that give shoppers a compelling reason to return sooner than they may have otherwise done. Clubcard prices which are now c.100% of all Tesco promotions has been a game changer as has Lidl Plus with personalised offers and discounts on larger baskets via the scheme, such that over 75% of all Lidl shopper spend is made using the Lidl App (source: NielsenIQ Homescan). Sainsbury has also been successful on this same journey but other retailers with analogue loyalty schemes have fallen behind, become less relevant or in some cases, have relaunched with digital schemes that are frankly too complicated and don’t address the key strategy of driving frequency of shopping.
This shift feels sudden, but in reality, it has been simmering for three decades in physical retail and boiling fast for several years across the omnichannel realm. Two powerful change drivers are in play today that make this customer conversation essential for retailers: firstly shopping has been permanently, digitally transformed post pandemic and secondly, cookies are being displaced by consumer privacy so the industry must define new ways to efficiently reach and motivate consumers to spend. So it’s not just the digital activation of relevant price cuts that will drive spend, it is also retail media and both have the potential to recalibrate the economic model for retailers. Brand marketers are already accustomed to investing in trade marketing and consumer promotions, media advertising, and digital/social media to achieve their goals. And they can now access shopper loyalty programs to deliver these relevant personalized deals.
So adopting new methods which make shoppers` sticky` by engaging, rewarding and encouraging frequency is now the holy grail for food retailers looking to deliver sustainable and long-term growth in spend from their shoppers. Build and activate now and they will come and they will probably stay post-recession.
James Sawley, Head of Retail & Leisure, HSBC UK
The leading retailers at maximising lifetime customer value (while also delivering shareholder value) share a number of commonalities.
- They measure – they say what gets measured gets done. The best retailers use statistical tools and complex models to measure the cost of customer acquisition (marketing cost, initial discount, store footfall, conversation etc) and the projected revenues associated with that customer, based on historical buying trends, to calculate the return on investment of acquiring that customer in the first place. This process is an ongoing feedback loop which informs decisions on marketing spend, store footprint, product development and pricing. The more data, the more accurate the algorithms are at predicting the future!
- They understand their customers – data is used to categorise customers into a number ‘tribes’ (3 – 5 is optimal), depending on age, affluence, lifestyle, shopping and product preferences. Marketing and product development is tailored to these tribes for maximum impact
- They know what they stand for – they focus their efforts on developing core products and ranges that customers really love and are willing to pay for, without getting distracted by product extensions
- Community – they encourage communities of customers who, through social media and events, create a feeling that shopping the brand is a way of life, placing you the customer as part of something bigger, rather than simply a transactional relationship.
- They are Omni channel – 90% of consumers shop multi-channel and want to interact with brands both digitally and physically. The best retailers fine tune their optimal mix of store and digital investment, utilising other more creative ways to also engage with customers such as pop ups, gorilla marketing and collaborations, which in turn drives loyalty and builds brand equity.
With the worst of the cost of living headwinds still in front of us, consumers will have to prioritise essentials, and discretionary product spending will come under increasing pressure. Retailers who will survive or even thrive in this environment will stay true to core principles, and prioritise a healthy bottom line over revenue growth. This will be challenging in a market obsessed with growth, especially for PLCs. I believe the long term winners through this period of inflation will be those who do whatever it takes to shield customers from price increases, even if this means destroying some short term shareholder value. Those who have come through COVID and maintained a healthy Balance Sheet will be best placed to take advantage of this opportunity to win customer loyalty, market share and build longer term shareholder value.
Martin Newman, The Consumer Champion
With the cost-of-living crisis being so pervasive and affecting so many people in the UK, from those who were already below the bread line to the squeezed middle, retailers must re-think their customer value propositions.
‘We’re all in this together’ has never resonated more than it does today, and consumers need retailers to play an active role in helping them in their hour of need. Sad to say that this hour is more likely to be another year to eighteen months of pain.
Paying lip service through empathetic marketing won’t cut it. Customers need help and that means reducing prices, bundled products that provide added value, not passing on costs through price increases and other areas of support.
In June, consumer confidence fell to a record low for a second consecutive month, falling 41% according to the GfK consumer confidence barometer.
Judging by this factor alone it is clear that confidence is lower than it’s ever been. Lower than it was during the 2008 global financial crisis and lower than the early stages of lockdown and the pandemic.
However, what we’ve seen in recent months is revenge consumption in travel, entertainment and food and beverage sectors as consumers make the most of their new- found freedom and the pick-up me up so badly needed as we lurch from one bad news story to another! Whereby we are undoubtedly seeing a softening of demand in core retail categories.
Therefore, while retailers will find it a challenge to convince consumers to spend more, what they can do is look to gain market share by driving greater levels of loyalty and frequency through an authentic effort to support customers. How can they achieve this?
By reducing prices across both staple and every-day items as well as on those considered now to be more of a luxury purchase.
By bundling together products that will enable customers to get real added value be that meal deals or across other categories.
By solving customer service issues first time rather than the usual ‘computer says no’ response you get from a contact centre, if in fact you’re even able to reach a human being in the first place rather than wasting your time with a chat bot.
By focusing not on the cost to serve customers, but by providing the levels of convenience they seek.
By rewarding their loyalty with a meaningful form of loyalty programme be that points, free goods when certain spend levels are reached or free services.
By not passing on increases in costs to consumers. For example, M&S are protecting the price of School Uniforms to ensure customers have access to them at an affordable level without passing on any additional costs M&S must take on in their supply chain.
While the actions above will impact short-term profitability, it will if managed and communicated effectively, ensure that retailers come out of this period with a larger, more engaged customer base and will benefit from the lifetime value and increased market share this will deliver.
Jonathan De Mello, Founder & CEO, JDM Retail Consulting LLP
As the cost of living crisis continue apace, it is clear that the age of ‘Covid-forgiveness’ is over, and customers are – rightly – demanding high customer service standards in order to part with discretionary spend that is becoming increasingly hard earned given ever-rising inflation.
According to the Institute of Customer Service, service or product problems are costing UK businesses £9.24bn every month in lost staff time – the highest level since records began in 2008. Many businesses – not just retailers – were forced to cut staff during the pandemic, and have struggled to recruit new staff to meet rising demand in a post pandemic world. An extreme example of this is UK airports – with Heathrow and Gatwick in particular cancelling hundreds of flights due to staff shortages. Whilst the retail sector has thankfully not seen this level of decline in customer service standards, some retailers definitely have work to do, in order to maintain customer loyalty in light of the increased cost of living.
The retail sector performed well in the most recent UK Customer Satisfaction Index (UKCSI), with 5 entries in the top 10 – John Lewis, M&S, Ocado, Waitrose and Apple. Other retailers would do well to follow the example set by these retailers. These and other retailers have adopted multiple strategies in response to the cost of living crisis, in order to build customer lifetime value – ranging from investment in staff, freezing or even lowering prices, and providing new deals/offers and concepts to customers:
Investment in staff:
- John Lewis opened its ‘School of Service’ last year in its Stratford store, to provide employees “with the tools and training to provide exceptional customer service in-store and online”. So far around 1,600 staff have attended.
- Currys has invested almost £25m in skills, wellbeing and reward programmes for its staff during the past two years.
- Sainsbury’s has invested in colleague pay, claiming to be the first major supermarket to pay the Real Living Wage and London Living Wage to all store colleagues.
- Morrisons is set to pay its store and manufacturing colleagues a minimum of £10.20 an hour
- M&S has vowed to keep the prices of its school uniform static, and have launched a 20% off back-to-school promotion
- Boots own label lines will be price locked until at least the end of the year and will include everyday essentials such as toothpaste, shampoo, nappies and shower gel.
- Though it ended a few months ago, Iceland launched a 1p online sale on all vegetables
- Morrisons has introduced midweek dinners for under £5 in its cafés
- Asda has revealed that children will be able to eat a hot meal at its cafes for £1 with no minimum adult spend between July 25 and September 4
- Iceland has slashed its threshold for free delivery services in stores and online
- Customers are increasingly turning to such schemes, and the discounts they provide, in order to save money. The success of Tesco’s Clubcard scheme highlights the benefits such schemes can bring, and more retailers are investing in their own loyalty schemes than ever before. Not only do such schemes work well, but they provide great data and insights that retailers can use to further drive customer loyalty and therefore spend.
Whilst the above strategies all come at a cost – directly impacting gross margin in the form of lower prices, or overall profitability in the case of staff training and pay, retaining customers and engendering customer loyalty will ultimately create significantly greater long term business value. In this new world of lower customer service standards generally, great customer service can strongly differentiate a retailer from those that do not invest in their customers. Customers have long memories, and will remember bad service and act accordingly. Far better therefore to invest now in good customer service, and reap the rewards longer term.
Ruth Gregory, Senior UK Economist, Capital Economics
The coming quarters will undoubtedly be challenging for retailers. The cost pressures bearing down on firms are set to intensify at the same time as consumers become more reluctant to spend.
External cost pressures that retailers can’t control, which feed into direct energy and transport costs and the cost of manufacturing goods look set to remain intense in the coming quarters. Another round of utility price hikes, perhaps of 45%, will hit firms in October. Meanwhile, wage growth is at a 10-year high across the economy whichever way you slice and dice it. In April, the 3myy rate of average earnings was 6.9%. That’s more than double the 3.0% average of the last 20 years. And if we ignore the distorted rates during the pandemic, the 4.2% rise in earnings excluding bonus payments is the biggest in 14 years. And with the possible pool of replacement workers running dry (April’s unemployment rate of 3.8% is close to a 47-year low), workers have a lot of bargaining power. According to XpertHR, the annual pay settlement of 4.0% across the economy in May was the biggest since September 1992.
This poses a big challenge for retailers to keep their costs in check, defend their competitive position and ensure prices for consumers remain competitive. With consumers becoming more price sensitive this provides a greater need for retailers to review their operating costs and focus in on increasing productivity to deliver value for money.
That said, with productivity (output per hour) in the retail sector in Q1 2022 already 5.8% above its Q4 2019 pre-pandemic level, outperforming the 1.6% gain for the UK economy as a whole, further significant productivity gains may be harder to achieve. The sector has already reaped big gains from the rapid increase in online shopping during the pandemic. This has meant that fewer workers have been required to generate more sales.
That is not to say that firms won’t be able to make savings in some areas. Some supermarkets are already looking for savings by installing more self-service checkouts, cutting labour intensive areas such as hot food counters and delicatessens, reducing higher paid night working and opening hours. And there may be an increased focus on providing a wide range of product options and budget offerings to allow value conscious consumers trade down.
In the coming months, there will be an even greater need to balance rising cost pressures and maintain value to consumers. Against this challenging backdrop, understanding and adapting to the changing preferences of consumers will be key.
Peter Luff, Managing Director, Ipsos Retail Performance
Building customer lifetime value during reduced consumption and delivering value and support to customers as we all face the cost-of-living crisis will be based on two key factors, knowledge of the market and its movements, and relationship with customers as valued individuals allowing developing knowledge of their needs.
For the market overall we know that it will be in decline, as is the nature of a recession. However, a market does not move in a linear line. Within any market movement there will variations some which accelerate and some that decelerate the overall market movements. Therefore, investing in market knowledge becomes key to identify positive micro needs. This activity should be done centrally and closely linked to the operations central ability to react to these needs as they occur.
As a simple example, we are suddenly faced with a heat wave, this occurred relatively quickly and will be with us for a short time. This drives an instant demand from the market for certain products, be that fans, lightweight clothing, ice cream etc. Understanding the market how it moves and what nuances it may have so you are ready to react and meet the customers’ needs is critical.
Customer relationships will be the other area to work on. Encouraging store teams to develop interactions with customers and personalise the service that adds the maximum value to them. Being seen to be helpful, as customers have needs that spring up, and despite the economic down turn there will be needs, after all life does not stop.
Managing these two aspects knowing the market and your customers is not knew but perhaps the level of focus and detail required will be in these difficult times.