The inflation problem: how did we get here?
The digital shelf is no stranger to the evolving global economy. Inflation in almost all economic sectors and markets is affecting how consumers shop online and the reality of e-commerce in recent months, a sector in constant transformation -even more so after the Covid-19 shock.
Simply put, inflation is the increase in prices of a group of products over a continuous period of time. Another way of defining it is as a loss of purchasing power for buyers over the same period.
The rate at which prices have been rising — inflation — has now cooled for six straight months. But inflation is still high. By 2023, prices are expected to continue to rise, albeit at a slower pace (+6.5%).
Although recent price developments vary across regions and industries, the causes of inflation generally have common origins. Also on the digital shelf.
The growth in demand for online products following the outbreak of the pandemic had a direct impact on supply chains, which came under unprecedented pressure. In addition, social isolation measures made it difficult for businesses and retailers to meet this demand, leading to the dreaded out-of-stock situation for many online retailers. The imbalance against available supply was exacerbated because many suppliers of raw materials or essential parts to assemble other goods - such as microchips - were unable to operate at full capacity for months.
As a result, supply cycles have lengthened considerably since the pandemic. The main problems come from maritime trade, where the cost of sea transport has skyrocketed, due to the shortage of available containers.
Another decisive factor in understanding the inflation problem is the war in Ukraine. The conflict has caused an energy crisis in European countries and other regions of the world, increasing the costs of production and distribution of goods.
It should be noted that e-commerce inflation is somewhat of a novelty. In fact, in recent years, prices in e-commerce have been falling continuously - a phenomenon known as deflation. We are therefore facing a new scenario that is difficult to predict.
Price sensitivity on the Digital Shelf
One question many online retailers are asking themselves today is how the current inflation is affecting conversion in the digital shopper. The answer to this question is not simple and requires us to consider several factors.
The lifting of social restrictions and the general rise in prices have occurred in parallel in recent months. This forces us to be cautious: it is still too early to draw clear conclusions about how much weight each of these factors has had on the changes in shoppers' habits.
One of these habits is a gradual return of shoppers to physical shops. After the explosion of e-commerce in sectors such as grocery during the pandemic - online sales of these products in the US increased by 43% in 2020, according to the United States Census Bureau - a high percentage of consumers are returning to old consumer habits.
As mentioned above, inflation implies a reduction in the purchasing power of buyers. However, the real impact of this price increase on the digital shelf varies greatly depending on the level of household income.
We have to bear in mind that the average online shopper has a high purchasing power. So in principle they should feel the impact of the price hike less. However, if inflation continues to rise as expected, distribution costs will also rise and will hit the pockets of households that have not been hit so far.
A logical trend in middle and low-income households is the search for cheaper or private label products, generally offered at lower prices. This is an important element for retailers to bear in mind: a well thought-out discount or promotion can have an even greater impact at a time of stressed prices.
How does inflation impacts shoppers across the different categories on the Digital Shelf?
The evolution of the different categories on the Digital Shelf is, however, variable. And this has to do with what kind of spending shoppers prioritize in a context of inflation.
The numbers show that many households are tightening their belts on most expenditures, except groceries. In the US, 57% of consumers say they are eating out less often due to inflation and 55% have cut back on clothing, according to a study by The Food Industry Association (FIA). Other expenses that consumers are cutting back on are gifts for family, car use and holiday spending.
As a result, online grocery sales in this market grew by 6% year-on-year, according to some studies.
However, this does not mean that inflation does not have an effect on online retailers. In the UK, digital retailer Ocado recently justified its annual fall in profits (-5.7%) on the back of higher prices for some materials and processes.
Online sellers themselves are now very uncertain about how to modulate their prices and in which specific digital shelf categories the current price increases will have an impact.
In the US, the Adobe Digital Economy Index, which analyzes 18 different product categories across multiple ecommerce portals, provides clues to these developments.
According to the November data, groceries prices have grown the most in the last year, with an increase of 13.69%. The second category with the highest price increase is products for pets (+11.09%). Below them are tools & home improvement products (+8.93%) and non-prescription drugs (+6.11%).
Other important items in the ecommerce market such as personal care products have suffered more moderate price increases (+1.80%). Toys, on the other hand, have seen a considerable drop in prices over the last year (-7.68%).
What’s next? Inflation predictions for 2023
As we said, experts point out that in a situation of stressed prices, shoppers usually go back to their old shopping habits, which they trust. They are also looking for products that adapt to their declining purchasing power. We will cover some trends and what types of action can eCommerce managers do given this scenario:
Inflation is therefore already having a direct impact on how consumers shop online. After the explosion of e-commerce during the pandemic, retailers are facing a new and changing landscape, where purchasing decisions will be more thoughtful and heavily influenced by price.
In this context, categories such as groceries seem to be resisting the onslaught of inflation better. Even so, promotions and offers on certain products can make the difference between a successful sales strategy and a failed one.
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