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After spending up during the pandemic, shoppers are now keeping a tighter grip on their wallets as rising costs eat into their disposable income.
While the overall value of retail spending may be holding up, people are getting less for their money due to inflation, with sales volumes down. And it’s going to get tougher with more homeowners about to feel the pain of higher interest rates as they roll off their current fixed rates.
That’s putting the squeeze on many retailers who are stepping up promotions, offering discounts, bundle deals, vouchers, gifts with purchase, and other incentives like free shipping to drive sales.
Retailer Diane Hurford is among those offering deals. She isn’t expecting her sales to increase this year as demand softens, and she’s not expecting much profit either, as her costs are escalating.
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Hurford runs Brolly Sheets, which supplies waterproof bedding and related products directly and through retailers. She founded it 17 years ago, so has experience through economic cycles, including recessions. But Covid has added an extra complexity to her business.
As she and her staff went through their annual stocktake this week, Hurford says she has never had so much inventory.
Most of her products are made in China and supply chain disruptions through Covid which impacted the key Shanghai port, means she now holds more stock than she used to.
“If you don’t have it, you can’t sell it,” she notes.
But the company’s warehouse is now 98% full at a time when sales are definitely softening, she says.
“We’ve got a lot of stock because we’ve been stocking up because of Covid for the last two years, and now everything’s coming back we’ve got a lot of excess stock – it’s gone the other way,” she says.
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Brolly Sheets founder Diane Hurford is discounting products to reduce her inventory, which has never been so high.
That’s put pressure on the company’s cash flow, and Hurford has for the first time had to get trade finance from the bank, racking up interest costs of 8% to 9%.
“We’ve never had to do that before,” she says. “Our cash flow is normally pretty good, but because of the amount of stock we have, we’ve got more than what we’re selling through, so we’ve had to go to the bank and get trade finance facilities just to help with that cash flow.”
She is hopeful inventory will reduce over the next year, ending her reliance on trade finance, although notes it depends on how the recession plays out.
Hurford says her shoppers are being more thoughtful on what they spend their money on, taking advantage of bundle deals on essentials like sheets to save on shipping and not adding extra products like books.
To stimulate demand and reduce inventory, Hurford is offering 15% off selected overstocked colours and products on her website this month, after discounting the entire site by 25% last month.
While she wants to ensure her products are affordable, she says she won’t offer massive 50% discounts like bigger retailers because her margins are already tight and she wants to continue to offer good quality and support the small ethical factory in the Chinese countryside that makes her products.
“We are overstocked so that is really affecting cash flow. But at the same time, we don’t want to slash and burn that stock, because we know that we’ll sell it and it’s all about our margin.
“If we reduce it to a low cost to clear it, then we’ve got to buy more of that stock in eight months’ time, at full price, so it’s really quite a balancing act.”
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Hurford says she is honing in on costs, with every line in her budget for the next financial year coming under scrutiny, including how much she pays for supplies like boxes, and services like rubbish collection, and looking at whether others can offer a better deal.
She is bringing some services like photography in house, reducing the number of baby shows she attends and is looking at cutting slow selling lines, although she notes that will take time as her factory holds big stocks of fabric inventory.
“We’re really looking at our margins and trying to concentrate on what are our core things.”
While she has heard of other companies trimming staff, Hurford is planning to retain all 11 in the family business and increase everybody’s salaries to keep up with inflation.
“We have been through this before and I’ve got total confidence that we’ll get through it with the team intact,” she says.
The company has been absorbing increased costs, including a switch to cloth product bags and compostable courier bags, but Hurford says you can only do that for so long and she is putting up her prices slightly which she expects may impact sales volumes.
She is hopeful sales will match last year’s levels but says that could be wishful thinking and a 5% drop may be more realistic.
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Lucy Wildman of merino children’s clothing brand Little Flock of Horrors says shoppers have become more sales driven as they count their pennies in a tougher economic environment. (File photo)
Merino children’s clothing brand Little Flock of Horrors is also expecting sales to be down this year.
The company sells at its own store, through other retailers and online, where it’s offering 25% off site wide.
Co-founder Lucy Wildman says she sold excess stock on discount shopping site Onceit in January at close to wholesale prices and is considering running another promotion through the site.
She is awaiting the arrival of her new 2023 range in a matter of weeks, but says it will be down on last year because forward orders from retailers last August were quite soft and she didn’t want to order too much extra stock in case it wasn’t needed.
“There’s some interesting consumer buying, or not buying, patterns coming into play that we need to be considering,” she says.
Christel Yardley/Stuff
Retailers are stepping up their sales activity to attract shoppers. (File photo)
Merino kids clothing has in the past sold itself all year round at full price, but Wildman says shoppers have become more sales driven as people count their pennies in a tougher economic environment.
“When we send sale emails, people snap up stuff and it doesn’t have to be a huge discount, it just has to be an offer like free shipping even,” she says.
She’s noticing behaviour changes in store as well, with shoppers more focused on whether something is on sale rather than what colour it may be.
Bargain hunters are also quick to snap up discounts on the private Facebook page for Little Flock customers, she says.
“Whenever somebody puts up something for sale, it gets snapped up in a minute, so people want Little Flock, but they don’t necessarily feel comfortable buying it at full price,” she says.
Wildman, who started the business in 2014, says she hasn’t previously seen such aggressively cautious behaviour impacting spending patterns.
“It’s kind of scary, but at the same time, it’s a challenge that you have to lean into I guess.”
When her new range launches, she is planning for the first time to offer bundles such as pants and a top for a discounted price, and is also upgrading her website’s payment platform to make shopping easier and considering starting a loyalty programme.
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Auckland University associate professor of marketing Bodo Lang says retailers need to be careful not to fall into a sales promotion trap. (File photo)
Auckland University associate professor of marketing Bodo Lang says it’s not surprising that businesses have intensified their efforts to get sales.
“It’s a very traditional response to declining spending for a retailer,” he says. “It’s a logical first response to say we’ll step up sales promotion.”
Still, he warns there is a potential massive downside that retailers could end up in a sales promotion trap where competitors also discount prices and it becomes a merry-go-round.
“The danger of that is that consumers get used to consistently lower levels of prices and then when retailers wish to charge full prices again, they just can’t charge them because nobody’s having it, basically,” he says.
“Retailers have to be really careful with it that they don’t fall into a sales promotion trap and then when they want to increase prices to normal levels again they lose customers entirely.”
Westpac acting chief economist Michael Gordon noted this week that consumer spending was likely to come under more pressure this year as households absorbed a significant rise in mortgage rates.
Household savings and income growth had provided many households with a buffer from some of the headwinds they are now facing, he says
But over the coming year, increasing numbers of borrowers would roll off lower interest rates and have to refix at the higher rates now on offer.
“This rapid rise in debt servicing costs will take a big bite out of many households’ disposable incomes,” he says. “Consumer spending is likely to bear the brunt of the downturn.”
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