It may not have been a long time in the making, but the effects of the past two years on the global economy have been undeniable. As consumers learn to adjust to the "new normal" of a post Covid landscape, businesses are learning to adjust to new needs, new demands and new restrictions—not the least of which includes businesses online.
While 2021 saw the emergence of relatively new eCommerce business models, it also saw a considerable decrease in consumer spending as the result of an increase in global inflation.
2020 may have been the year in which analysts trumpeted that electronic commerce came of age. But as we all enter into 2022 with no small degree of uncertainty, eCommerce businesses have begun to ask themselves what impact will the inflation rate have on online shopping.
The Impact of Inflation on Consumer Goods and Services
Despite the reported boost from the temporary relief federally issued stimulus checks provided in 2020, the US economic landscape hasn't fared too well in 2021. The consumer price index saw a 5.4 percent increase in September 2021 for all goods and services compared to the year prior, with eCommerce representing only 13 percent of all retail sales in the US—a trend that remained relatively consistent compared to the boom online shopping saw during the early months of the pandemic.
It's not that the honeymoon is over for the average online retailer. But they will have to contend with an entirely unexpected spike in the overall cost of living.
In June 2021, the Federal Reserve raised its personal consumption expenditure (PCE) inflation rate to 3.4 percent for 2021, considerably higher than its initial forecast of 2 percent. The announcement resulted in a subsequent 210 point loss in the Dow Jones Industrial Average; a significant blow for many manufacturers already reevaluating their own infrastructure processes in light of the rising cost of materials.
But the impact of inflation on the future of retail is a critical one. While online sales may have seen a 9.3 percent increase during Q2 of 2021, physical retail sales grew by almost 20 percent as pandemic restrictions lessened and vaccinated customers began returning to physical storefronts with a vengeance.
Yet that same retail growth was short-lived. The overall demand for consumer goods in the US decreased in just three months, with total retail sales dropping by 1.1 percent between Q2 2021 and Q3.
There's no need for a disconnect between an online store and a physical retailer. Both have existed in relative harmony for the better part of the past three decades and tend to share a mutually beneficial relationship. However different the ethos of both business models might be, they're not necessarily exclusive. Any perceived gap is largely the result of differences in delivery and marketing strategies. And success in both eCommerce and brick and mortar affect the whole of the retail economy.
2020 may have been a watershed year for retail sales overall. Sadly, that momentum may not necessarily last much longer.
Inflation and Global Retail eCommerce Sales
According to recent data from Adobe Analytics released as part of their Digital Economy Index, online prices saw an increase of 3.1 percent in August 2021 compared to the previous year and a 0.1 percent hike from July.
In spite of an estimated prediction of $4.2 Trillion in sales by the end of this year, August marked the fifteenth consecutive month of online price increases; a sharp contrast to pre-pandemic costs which decreased an average of 3.9 percent each year from 2015 to 2019.
The spike in prices was nowhere felt more acutely than in the apparel category, which saw a staggering increase of 15.5 percent in costs between August 2020 and August 2021.
But it's not merely the overall demand which is raising the cost of online consumer goods.
Commodities, Raw Materials and the Global Supply Chain
The price of commodities rose by over 19 percent year-over-year in August as global supply chain disruptions continued to surge with little relief in sight, with an estimated $4 Trillion in losses being reported in 2020.
But in China, the supply chain crisis has already taken on critical proportions. A five year high of 300,000 units were exported from the nation's factories in September of 2020, despite an increasing scarcity of raw goods and labor shortages, with import restrictions exacerbated by new regulations.
Inventory management, eCommerce and inflation
Yet eCommerce is particularly vulnerable to the increased cost of raw materials by relying on a “Just in Time” (JIT) business model of management where production output and delivery is predicated strictly on sales volume forecasting.
For many small businesses selling online, inventory management can be a tightrope walk demanding a balance between efficiency and consumer price advantage. Vendors can begin to adapt to the current turbulence by reviewing both immediate and long term projections of growth and adjusting their processes to suit increased demand, utilizing third party logistics providers when possible.
Automation and account management
Both automation and outsourcing account management can seem like a risky investment in times of uncertainty. But the amount of time and frustration saved can ensure survival in a climate that's far from accommodating.
There's one glimmer of short term hope in the face of rising costs. As prices rise and current delivery times for domestic manufacturers are at record highs, recent data from the Federal Reserve suggests manufacturers may have already begun to adjust output and delivery processes for the next six months to meet the ongoing pressure on supply chains.
Six months may not necessarily be sufficient for some sellers currently facing the effects of the supply chain crunch. But it is an indicator that digital commerce is no longer an outlier in retail. It's a tangible driver of economic growth.
That means being aware of just how quickly circumstances can impact that growth.
Why Brands Should Prepare for Online Sales Beyond 2021
Preparation isn't only applicable to Q4 sales. It's applicable at all stages of your business life cycle. But it's Q4 which may ultimately ensure the survival of online businesses in particular through 2022.
It's not just your marketing strategy which will define your brand, but your delivery. The rising demand for mobile commerce, for example, reflects a greater consumer demand that brands need to tailor personalized experiences which are accessible, flexible and responsive—even in spite of a decrease in discretionary spending.
Customers were already discerning in their online purchases prior to 2020. And they'll continue to be discerning, regardless of the inflation rate. They're not only demanding innovation. They're demanding adaptation to their needs. And those needs aren't always answered by larger businesses.
There's countless examples of companies who failed to adapt to changes in the marketplace. Selling online is no exception. Don't let your business become just another statistic.
Your eCommerce brand needs trusted management even in the most uncertain times. Find out more at Color More Lines.
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