The time is now to optimise product and pricing, as inflation in the EU hits 5.8%

Across the market, consumers are paying noticeably higher prices for purchases online as a result of inflation. January marked 20 consecutive months of year-over-year online inflation. So, while consumers watch prices continue to climb, online retailers are watching consumers. With the continuing war between Russia and Ukraine, it has further exacerbated inflation across much of the world, with Europe reaching a high of 5.8% at the end of February. This has caused a ripple effect on food, utilities, energy prices, and the manufacturing of goods around the world.

Energy prices in the EU rose a staggering 31.7% in February, while the prices of fresh produce rose 6.1%. 

Inflation is expected to continue to move beyond 6% throughout the month of March as the Euro continues to weaken against the US dollar, falling to its lowest value in almost two years.

The sharp increase in inflation surpassed the predictions of economists at Reuters, who originally predicted that inflation would rise to 5.4%, 0.4% less than the end result. The European Central Bank (ECB), whose inflation targets were at a safe 2%, was also in shock over how high inflation rose.

Growth vs stability

Beyond the shock of the Russia-Ukraine conflict, a growing stressor for the ECB is how the war and the subsequent inflation will affect monetary and fiscal policy. Council members of the ECB are torn between whether to implement the EU’s “budget rules” in 2023, which essentially force governments from across Europe to work together when putting together their spending plans. They also limit how much debt a country can get into for the fiscal year.

While some ECB members and finance ministers suggest such rules should be implemented to offset the damage of the Russia-Ukraine war, others feel monetary policies shouldn’t be tightened while the situation is ever-changing and volatile. If EU’s budget rules are implemented, this could also slow down the continent’s post-covid recovery, which was just starting to gain momentum. 

An additional spanner in the works is the fact that Germany and France, Europe’s two biggest economies, are on opposing ends of the argument to impose budget rules. Germany’s finance minister Christian Lindner says he is in favour of limiting a country’s debt and reminded the EU in talks that “fiscal rules are crucial to maintaining the credibility of governments.” France, on the other hand, believes growth is more important than stability. “It must be a growth pact first. Growth comes before stability,” said finance minister Bruno Le Maire. 

As continued sanctions on Russia cause an impact on gas and oil prices in Europe, which is the continent’s top foreign gas supplier, EU leaders are expected to meet in March to decide whether budget rules will be implemented or not.

The impact on e-commerce and retail markets

To avoid the rising costs, suppliers of raw materials raise their prices to the manufacturers; manufacturers raise their prices to the retailer, and so on. Prices in e-commerce over recent years have actually been trending down (deflation), as proven by the below graph.

So, with few historical models to look toward for reference, especially in a post-pandemic world that is now conflict-ridden, what are retailers to do?

In the past, the key principle was to maintain a safety stock, or at least healthy inventory levels, and drive bundling or percentage-based pricing on existing dated stock while holding out until your competition is sold out of more up-to-date products; then gently increase pricing. However, with tight inventories and a global lack of stock, this means that retailers will have to look for alternative solutions. Whether retailers like it or not, they will either have to absorb the added costs, reduce profit margins or raise prices. A positive is that there’s a good chance that your competitor is thinking about the same thing.

Possible shopping trends in the face of high prices and inflation

An increase in cart abandonment

Higher prices across fuel, food, medication, electricity, rent and more will likely impact shoppers’ behaviors and as prices rise and deals and discounts disappear, online retailers may notice higher cart abandonment with the cost of shipping as a leading factor in cart abandonment. 

According to The Checkout Benchmark report, checkout completion rates average 56% on desktop and 45% on mobile devices when shipping is free. Cart abandonment increases when consumers are asked to pay more for shipping. A 10% increase in the cost of shipping results in checkout completion rates decreasing 6% on desktop and nearly 4% on mobile.

Decreased willingness to spend more to meet discounted thresholds

Oftentimes shoppers will spend more money - adding items to their online cart - so they can meet the threshold for free or reduced shipping. In short, they’ll buy more to save on shipping. However, that could change if shoppers stick to purchasing only the items they need. Shoppers choose slower, less expensive shipping options. Whether shoppers value cost or speed of delivery most is a long-standing debate. In reality, Amazon conditioned consumers to expect shipping that is both fast and free. But as consumers are burdened with inflation and look for ways to cut costs, some may choose to wait longer for deliveries so they can save money.  

Brands can offer options to help ease inflation’s strain

Retailers can offer customers some relief, and help their own cause, by optimizing shipping experiences. In the current environment, offering shoppers a variety of affordable shipping options at checkout is a smart first step. And it can help satisfy the wants of consumers with a range of cost and speed preferences.

Online retailers with brick-and-mortar locations can offer BOPIS (buy online, pick up in-store). These are significantly cheaper fulfillment options than residential shipping. Another option is to offer BOPA (buy online, pickup anywhere), which is also cheaper and can be used by e-commerce brands that don’t have physical stores. BOPA enables shipping to commercial locations such as pharmacies and grocery stores. Consumers select the location where they want to pick up their order making BOPA not only a cost-saving option, but also one that is convenient. In most cases, BOPA is around 30% cheaper than traditional delivery.

Keeping the consumer in mind

Inflation is becoming a bigger concern for online shoppers, and in some cases a barrier to purchase. When customers click the checkout button, it is important that they see at least one delivery option at a price point that is attractive to them. Giving customers options helps them feel more comfortable with shipping costs and confident enough to complete their purchases. 

In uncertain times when politics, warfare and pandemics affect inflation and pricing on a daily basis, it is important for the retail market to consider the consumers and to offer ways to incentivise shopping.