As the economic recovery from the pandemic-induced recession continues, consumer demand is high and the opportunity exists for a strong holiday retail and restaurant season. But these sectors are facing two significant headwinds: inflation and challenges finding qualified labor.
During the recession, there were many signals that demand would be strong including historic personal savings rates as well as a spike in retail sales each time that stimulus checks hit bank accounts.
Recent import data suggests that consumer demand is indeed still strong, setting the stage for strong sales in the second half of the year. Strong sales, however, are only one half of the equation. Retailers and restaurants need to balance the cost side of the equation to remain profitable.
While inflation has increased in recent months, the macroeconomic picture has been strengthening, which has kept the Federal Reserve quiet. Based upon the current economic situation, the Fed is not likely to act in the near term. Yet costs are rising across many categories and having a significant impact on profitability, which means the consumer ecosystem has to plan for an inflationary environment, albeit most likely short term in nature.
In addition to rising costs, there’s a significant shortage of labor throughout the consumer ecosystem, some of which is speculated to be at least partially because of unemployment benefits.
This has wide-ranging implications on the industry. The most obvious is the direct impact resulting from a shortage of customer-facing employees in stores, at restaurants, and in warehouses and fulfillment centers.
The indirect impact is the snail’s pace at which the U.S. supply chain has been moving. Even as more products are reaching U.S. docks, shortages of labor at the docks, as well as the lack of truck drivers, pickers and packers have contributed to a sluggish re-start to the retail and restaurant sectors hoping to capitalize on consumer demand.
How to respond?
Retailers and restaurants, especially those businesses in the middle market, should consider the following ways to counter current inflationary and labor challenges.
1. Increase pricing
With costs rising, retailers and restaurants must consider increasing pricing to pass on some of the cost increases to consumers. The RSM US Middle Market Business Index for the second quarter of 2021 found that 70% of respondents expect to increase prices in the next six months. The key will be finding, and staying at or below, the breaking point at which the increased cost outpaces the strong consumer demand. Those retailers and restaurant operators with access to data and a process in place to analyze that data will have the best opportunity to accomplish this.
2. Be aggressive and persistent with hiring tactics
When pandemic assistance expires, millions of Americans will likely return to the job market. Retailers and restaurants looking for labor should consider their search a “long sales cycle.” Some companies have indicated they intend to hire more labor than they need to ensure they are properly staffed for the upcoming holiday season. In addition to offering strong wages and benefits, being persistent in the marketplace with efforts to make job openings widely known may start to pay off as unemployment benefits return to pre-pandemic levels and help some to win the competition for talent.
3. Monitor financial and accounting implications
After a challenging 2020, the headwinds facing the industry will result in missed forecasts this year for some. Consideration should be given early to the impact of any budget shortfalls to debt covenants, asset impairment, liquidity and inventory valuation, among other things. Companies should speak to their banking, audit and tax advisors early and often to prevent surprises and distractions at year-end.
4. Execute on digital strategy
If some retail and restaurant holdouts didn’t have a digital strategy before the pandemic, they almost certainly do now. An important lesson was learned by many middle market consumer companies last year: Technology can be implemented quickly and in some cases, it can be done for much less than expected. Small but smart investments can have an immediate and significant impact on the ability of a retail store or restaurant to manage through the challenges presented by rising costs and a difficult labor market. These investments can range from customer-facing technology solutions to enable and strengthen alternative sales channels, to back office solutions that allow existing management to focus on business operations. It’s time to stop thinking about technology as an expensive and time-consuming distraction and to start thinking about how solutions can position an organization for success, both in the short- and long-term.
This is a critical time in the retail and restaurant sectors. For those that have survived the pandemic so far, the work is not yet done. While we anticipate that the inflationary and labor-related challenges faced by the consumer ecosystem are relatively short term, many of the strategies being used to address these headwinds can result in longer-term improvements that will lead to more sustainable profitability for years to come.