May 26, 2022
Sort the Assortment - Dealing with a Weak U.K. Economy
Why is inflation so high? Will there be a slowdown soon? Are high inflation levels dragging on U.K. consumer spending levels? What can be done? The good news is that there are plenty of ways small and medium sized businesses can tweak their supply chain strategies to handle a weaker sales environment.
Consumers Paying the Price for Inflation
Consumer spending power in the U.K. is being sapped by elevated price inflation. Annual consumer price inflation (CPI) in the United Kingdom reached 9.0% in April, the fastest rate of price increases since the series was instituted in 1988. The Retail Price Index (a simple, not geometric average that is more susceptible to shifts in commodities) reached its highest since August 1981.
The increase is being driven by long-lived, global drivers that started with increased global demand for goods during the pandemic. That was exacerbated by supply shocks which drove up commodity prices due in part to the conflict in Ukraine. Additional inflationary factors have included higher logistics costs and supply chain disruptions across Asia.
None of these drivers appear set to settle or reverse within the next few months. Indeed, the Bank of England has warned that inflation could rise to 10% before the end of 2022, leading it to start tightening monetary policy by raising its benchmark borrowing rate to 1.0%.
Meanwhile, wages have only increased by 4.0% in the past 12 months. The resulting drop in real disposable incomes has dragged global market research company GfK’s consumer confidence level to its lowest since they began the survey in 1974. That includes a slide in purchasing intent for large items.
As a result, retail sales published by the Office for National Statistics showed a 0.3% dip in weekly volumes sold in the three months to April 30 versus the prior three month period to Jan. 31, as shown in the chart above. That continued an eight-month downward trend established in September 2021 as shown in the chart above.
Household goods and apparel stores have yet to experience a downturn. Non-store (i.e. online) sales are in decline with a 6.4% drop in the three months to April 30, bringing the total decline from their peak in summer 2020 to 20%.
Active Supply Chain Management Can Help
The prospect of a protracted sales downturn can be daunting for businesses after a protracted upturn. The last decline in the trend sales figure for stores and online combined, as shown in the chart above, was during the Great Financial Crisis in late 2008.
The positive news is that there’s plenty to be done to deliver business success during the downturn. Many of the tools designed to support hyper-growth and deal with bottlenecks are just as valid during a downturn.
1. Optimize Assortment: Effective and timely inventory management ensures firms can maximize their market share in a declining market by ensuring the right products are available. That involves end-to-end supply chain visibility and intelligent order management, such as that provided by Flexport’s real-time platform, to improve agility.
2. Optimize Shipping Times: The right products at the wrong time are of little use. Effective booking and consolidation strategies can ensure the right SKUs arrive at the right time. Consolidation services can be useful here while flexible use of different transit modes and shipment sizes also add flexibility.
3. Optimize Shipping Costs: While reduced demand for shipping services should eventually lead to lower rates, there’s a lot of other factors at play. Make the most of your logistics dollars by ensuring containers are fully loaded, schedules are stuck to in order to minimize detention and demurrage charges, and that all tariffs and drawbacks are accurately accounted for.
4. Optimize Cash Flows: Retooling supply chains during an economic downturn may feel like the proverbial in-flight airplane maintenance. Taking advantage of trade financing opportunities can provide additional cash flow access at a time when every pound is needed to keep your business humming.
In conclusion: The U.K. consumer economy is already showing signs of slowing as a result of elevated price inflation as well as other disruptions. Companies have plenty of tools to deal with a slowdown, but above all they need a willingness to be proactive and adapt to new technologies and business processes.
Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.