Supply chain woes, inflation and the Ukraine conflict - are operators starting to feel the pinch?

At the start of the year, expectations were for inflation (CPI) to remain below 2%, subsequent forecast revisions have seen the figure revised up, and Oxford Economics now expect inflation to reach 7% this year. Based on Oxford Economics and Mintel data, we expect online retail spend to be down -7% in 2022 compared with 2021, with c.£112 billion of online spend, compared with a record £121 billion last year.

Despite a slight dip expected, this forecast is significantly higher than the £75 billion recorded pre-pandemic in 2019 and the removal of Covid restrictions was always expected to dent online penetration rates. Overall retail spend is expected to increase modestly this year, +1.3% in real terms (Oxford Economics).

Demand for discount retailers

Price will become a more important factor for shoppers. Discount retailers are expected to see an uptick in demand as inflation pushes consumers to tighten their purse strings. As shoppers look for lower prices, they are likely to turn to online for price comparisons. However, adoption of ecommerce has been slow amongst the discount retailers, their reliance on high volume and low margins can make it difficult to maintain profitability, particularly with delivery costs and returns denting margins.

Despite this, Poundland recently acquired Poundshop.com as they look to expand their business online, Primark have recently hinted they may introduce click & collect, while Home Bargains, Dunelm and Matalan all have a strong online presence and Amazon.com has historically reported strong sales growth in times of weaker economic growth.

Ukraine conflict

The war in Ukraine has added to inflationary pressures on fuel prices and this has pushed up the cost of transportation and shipping. Faced with higher transportation costs, distribution firms, shipping companies and parcel carriers are increasing their shipment charges and passing some of the higher costs onto consumers.

FedEx Express increased its peak surcharge for many international parcel and freight shipments in March. Lufthansa Cargo expect the air cargo market to suffer a 10% loss in capacity because freighters now have to fly around Russia to reach Asia from Europe after Russia. At the same time, the Russian invasion of Ukraine has had a dramatic impact on rail freight flows between Asia and Europe, and thus raised demand for alternative transport modes/routes.

Aside from higher transportation costs, the war will also push energy prices higher. Oxford Economics is forecasting gas prices in Europe to rise 92% this year. Natural gas is important for electricity generation and higher gas prices will be reflected in higher electricity costs. Energy prices were already rising and this new crisis may prompt greater interest in green energy and onsite power generation and storage as a way to reduce reliance on grid power and the impact of price shocks. Operators also face upward pressures on wages.

Maintaining profit margins

Rising operations costs mean operators must look to improve efficiencies to maintain profit margins. This may mean greener, more fuel-efficient fleet or facilities, optimising location, increased automation, better utilisation of warehousing space or it may mean reducing the length and complexity of supply chains, holding more stock, closer to the consumer in order to minimise freight costs. Operators are starting to pass costs onto consumers but optimising their facilities and distribution networks is now more crucial than ever and this will mean continued demand for well-located, high-quality facilities.