With inflation’s impact, so many people, both buyers and sellers, are paying high prices for goods, commodities, and services. Spending could be tight this holiday season.
Here's what you need to know about will SMBs thrive or fail in this inflation-threatened holiday season? Here’s what reports show:
- It’s probably no surprise that inflation is the number one concern across the globe.
- This year, inflation and escalating prices could change how consumers select and buy goods and services.
- More buyers will do their shopping in person rather than online.
It’s November. And your business is probably already gearing up for the holidays. If you have reservations about how well promotions and sales will do during this holiday’s inflation-threatened season, you have every reason to feel uncertain.
The holiday season — usually retailers’ most profitable time of the year — could be financially troublesome for businesses in 2022. Based on various reports, the U.S. is in, or is about to face, an economic downturn that could financially cripple some companies, especially small businesses (SMBs).
The economy, like the weather, is never a sure thing. Economic growth continues despite inflation. But the current economic conditions are drafting an unsettling picture of what SMBs can expect this holiday season.
Inflation is driving the overall economy
No one needs reminding that inflation is high. It’s now at its highest level in about 40 years — an astronomical 8.2% — and people are paying the price through the high cost of food, goods, services, and energy.
Here’s how the U.S. Bureau of Labor Statistics October Consumer Price Index Summary broke down the cost increases during the past 12 months, ending in September:
- The all-items index (inflation) rose to 8.2%.
- Adjusted all-items indices (minus food and energy) rose 6.6%.
- Energy indices increased 19.8%, down from the 23.8% increase ending in August.
- Food indices increased by 11.2%.
With so many people, both buyers and sellers, paying high prices for goods, commodities, and services, spending could be tight this holiday season.
What forecasters are predicting
Economic news flashes are like moving targets — don’t bet on them in the morning because they could flip by noon. But they also can help businesses prepare for the best or the worst of what’s to come this holiday season.
The Conference Board report
Where’s the economy headed in this last quarter (Q4) of the year? Downward, at least for now, according to a report from The Conference Board. Here are its predictions:
- The economy will weaken and spread wider during the upcoming months.
- A recession will kick in before the end of 2022.
- Inflation will continue, possibly forcing more hawkish action from the Federal Reserve.
- The gross domestic product (Real GDP) will hit the 1.5%-mark year-over-year in 2022 and grow slowly to 0% year-over-year in 2023.
The Conference Board disagrees with the view that the U.S. economy has been in a recession for months. It ruled out an earlier rise in the recession because of the tight labor market and slight upswings in the GDP in Q3.
Economic news flashes can help businesses prepare for the best or the worst of what’s to come this holiday season.
From here, the news on the economy remains in free fall. With inflation so high, the U.S. could be in what the Conference Board calls a “stagflationary environment,” or broad-based recession, by the end of this year and into 2023.
U.S. Chamber of Commerce
It’s probably no surprise that inflation is the number one concern across the globe. The quarterly Metlife and U.S. Chamber of Commerce Small Business Index found that the highest number of SMBs to date — 90% — are “concerned” about the impact of inflation on their organizations.
And of the 90% of SMBs, 54% are “very concerned,” a claim that just 31% of SMBs made in Q1 2022.
Tom Sullivan, vice president of Small Business Policy at the Chamber, said that SMBs felt confident about how their companies were doing in recent months. Still, inflation is eroding their confidence and ability to recruit and hire, invest in their companies, and grow as an enterprise.
After inflation, SMBs’ most significant concerns are:
- Supply chain problems
- COVID-19 safety protocols
- Rising interest rates
SMBs’ weakening confidence has extended to the U.S. economy. And 70% of them expect the economy to get worse.
In their Oct. 24 weekly global economic update, Deloitte reported on ongoing supply-chain disruptions. This means in-demand goods and parts will move slowly, causing long waits for SMBs, businesses in general, and consumers to receive them.
Specific categories in short supply are:
- Cars and auto parts
- Skilled pilots
- Copper inventories (used in construction, solar power, electric vehicles, etc.)
This imbalance between supply and demand for goods and services is pushing up prices. So, no relief from inflation is expected soon.
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What SMBs can expect in Q4
Based on the Conference Board report for the upcoming quarters, businesses can expect to see:
- A severely tight labor market, which could push up the unemployment rate from its current 5% to 4.4%.
- Extreme labor shortages, especially in the service sectors.
- Rising interest rates from the Federal Reserve.
- Lower prices in the housing market.
- A short and mild recession that the U.S. could recover from in 2023.
Meanwhile, inflation remains at an all-time high. Consumers and sellers will have to wait and see what actions the Federal Reserve, governments, and other market overseers will take to normalize the economy.
How SMBs are coping with the economy
When the chamber report asked SMBs what was more important, reducing inflation or avoiding an economic downturn, 59% chose reducing inflation over avoiding an economic turndown (41%).
SMBs also revealed how they’re handling the economy in the chamber report. They’re adjusting their business practices due to inflation by:
- Raising prices (70%).
- Taking out loans (40%).
- Cutting staff (37%).
- Lowering the quality of their products or services (31%).
- Relying more on local suppliers than last year (51%).
Here are SMBs’ views on other economic-related issues in the report:
- More (42%) rated their local economy as poor than as good (31%) for the first time since Q1 2020.
- Most (61%) think the economy changes faster than it did in the past.
- 40% are “very concerned” about the effect of rising interest rates on their businesses.
- Fewer are concerned about COVID-19 this year, down from 23% in 2021 to 13%, as worries about the economy rose.
All the data points to a less-than-stellar holiday season for doing business. Still, a slow ride toward an economic recovery is possible in the upcoming months.
Will inflation mar this holiday season?
This year, inflation and escalating prices could change how consumers select and buy goods and services. Salesforce’s data collection on consumers could help you prepare for rises and falls in buying habits this season.
Inflation will likely drive down spending
Salesforce recognizes inflation as the force behind consumers’ decisions. The data it collects on consumers shows that:
- In Q1 2022, the average selling price (ASP) rose by 11% in the U.S.
- Next quarter, Q2 2022, the ASP increased by 7% in April and May, on top of the 17% rise in ASP for Q2 2021.
With a steady increase in prices, consumers are expected to buy fewer goods from fewer retailers.
Salesforce has more data to back up the reasons for inflation-driven unrest among buyers:
- Double-digit surges in the cost of goods from a year ago continue to push up prices.
- Costlier fulfillment and returns for goods are expected due to rising gas and diesel prices.
- Inventory surpluses (along with shortages) are leaving businesses with too many products on their balance sheets.
- Consumption is down, with 51% of consumers expected to buy fewer holiday gifts this year.
- Consumer optimism is at its lowest since 1970, which means buyers are likely to cut back on discretionary spending.
The high cost of goods won’t guarantee how buyers spend their dollars. However, it is an indicator of what SMBs may experience this season.
Early in-person shopping is expected
There’s one guarantee when it comes to holiday shopping: buyers will spend money, but where, when, and how much is speculative.
The number one change in consumer behavior this year: Shoppers will start buying earlier
Here are a few predictions on how buyers may shop this season:
- Shoppers will start buying earlier — this will be the number one change in consumer behavior this year — to avoid spiraling prices.
- With physical stores now open after being closed due to the pandemic, more buyers will do their shopping in person rather than online.
- 15% of U.S. shoppers and 7% of shoppers worldwide may not buy gifts at all this year.
- Half of the shoppers worldwide (about 2.5 billion) will switch brands to buy from a competitor at a lower price.
With these predictions in mind, SMBs can adjust their promotion and marketing strategies to accommodate buyers’ needs.
Get ready for the holiday season
These tips can help you make the holiday season more profitable despite looming high inflation:
- Don’t dismiss Amazon’s Prime days. You don’t have to be an Amazon seller or Prime member to get in on the mega-sale bonanza. Buyers shop on various platforms during Prime days for the best deals.
- Avoid knee-jerk discounting. Instead of engaging too often and too early in discount price wars, focus instead on the exclusiveness, rarity, and high quality of your goods or service. Buyers will likely hold out until they can get the best deal for their money.
- Start promotions early. Buyers are expected to start shopping early this season to snag the best prices, and you’ll want your goods or services on their gift list.
- Be prepared to offer buy-online-pickup-in-store service. Cyber Week has increased the demand for this service from early November through the end of December. So, make sure your site is ready to handle the demand.
Salesforce offers a Holiday Planning Guide for Retailers. Click here for a copy.