The 9 factors that will make or break your retail business in 2023

January 26, 2023
What, why and how things will happen in retail this year. And a silver-lining.
Unpredictable 2023
Radu Țoncu

We are already 1 month into 2023 and it is the right time for us to have a short overview of the key factors that will drive performance in retail this year.

2023 is expected to be the tipping point of a long cycle of crises and uncertainties that pressured traditional supply-chains and classic retail models to their breaking point.

This cycle started in 2020 with the COVID pandemic, characterized by home lock-downs and difficulties to reach customers through traditional sales channels. To survive, all businesses needed to switch to online. The heroes of the period were remote working tools, e-commerce platforms and delivery services that kept things going. Retailers that were already experimenting with online sales found themselves in the pole-position and gained market share, some of them have even opened their sites to the less prepared brick-and-mortar retailers and turned it into marketplaces. It was the moment when a significant number of players in 3PL, e-commerce platforms, marketplaces and delivery emerged. With people confined into their homes, product categories such as fashion lost their former glory and were replaced by new heroes like home cleaning and toiletries, furniture and deco, DYI, electro-IT, or books.

To this context, 2021 added unparalleled disruptions in supply-chains. The unexpected demand for products required to turn homes into offices and schools and places for leisure at the same time, overlapped with the continued lock-downs in China, that led to the semiconductors crisis, the overload in naval freight and the container shortage. This created an opportunity for cross-border, long freight parcel trade, but also forced companies to rethink their logistics and adopt shorter supply-chains. Even if more expensive, local manufacturers started to be considered, as they have proven to be safer and more reliable than remote suppliers.

By the end of 2021, the low interest policies and the helicopter money used by states across the EU, North America and Asia to support companies and keep them afloat during the lock-down started to backfire, and the inflation rate jumped from 1.2% in 2020 to 4.7% in 2021 worldwide. Nevertheless, with effective anti-COVID vaccines, better prepared health services and more resilient economies, people and companies were expecting for the crisis to end and things to get back to the usual, keeping the good things and habits that emerged from the challenges left behind.

And then, 2022 came. It brought a war in Ukraine that gradually involves the entire world, with energy and raw materials disruptions, financial sanctions, trade bans, humanitarian and military support and, above all, a deep sense of unrest across societies. Traditional supply-chains for gas, oil and energy needed to be replaced fast, leading to surging costs. As a result, the International Monetary Fund predicted that the worldwide inflation rate at the end of 2022 would reach 8.8%. Interest rates grow abruptly in an attempt to slow down the inflation surge. Money are more expensive to get and this deteriorates the investment environment, especially after the unrealistic projections and evaluations of tech, logistics and retail companies during pandemics.

On one side, this affects people across the globe who see their real wages decreasing by an average of 8.8%. They become less willing to spend and consume, they prioritize their purchases and delay buying products that are not really needed. And they look more and more for deep discounts and special offers.

On the other side, inflation affects companies, who see higher operational and labor costs, and an increased competition in a flat or shrinking market. Add to that higher interests they need to pay to finance their activity and investment programs. With low margins that get even lower, retailers, especially, need to balance between their customers’ need for low prices and their expectations for the high quality they experienced and got used to during pandemics.

All the above factors are not sequential, but each of them added to the previous ones and, now, they overlap in different degrees depending on the market, type of activity, or product category.

Here we are, at the beginning of 2023, in this melting pot of crises and uncertainties, hoping for them to end soon. Hope comes not necessarily from the signals we get from the market, but from the fact that people, companies and governments are now prepared more than ever to expect the unexpected and deal with it. As seen from the past 3 years, each problem turned into an opportunity for change. Luckily, the know-how and the tools that will help you prevail are within your reach.

Last year, in our Business Re.Invented webinar series, we invited local and international experts in logistics, retail and transportation to share their experience. Based on their valuable input, we identified 9 key factors which you must take into account in 2023. Let’s take a look.

1. Rising costs

The inflation will keep influencing the world economy, with a bigger impact on less developed markets and companies with limited reserves. In retail, where the margins are small already, the most impacted cost categories are related to labor, customer acquisition, operations and supply chains. With the last mile delivery representing 53% of total shipping costs, retailers need to increase efficiencies not only in direct costs such as fuel consumption, fleet management or courier fees, but also in the indirect costs occasioned by data input and processing errors, labor inefficiency, bad customer experience, or parcel returns. Logistics systems integration, carrier diversification, process automation, data driven decisions and real-time management keeps all such costs under control.

2. Degrading investment environment

Inflation also led to growing interest rates, which in turn made it costlier for companies to finance their operations and investment programs. Furthermore, after the steep decreases in IT, retail or logistics sector valuations seen in 2022, investors and VCs are waiting for the market to settle and they keep their money to buy more for less at a later stage. Fortunately, with open platforms such as Postis, advanced technologies, know-how and best practices become available as a service, while the R&D cost is syndicated and new features become available constantly to all customers, with no additional costs.

3. Decreasing customer loyalty

People saw their real wages eroded by inflation by 8.8% in 2022, or even 16% in developing countries such as Romania. More, layoffs in the tens of thousands as those seen across the IT sector induce a sentiment of uncertainty related to job safety. If it happens to those that drive technological advancement, it can happen to anyone, right? As a result, people's willingness to spend has decreased significantly, they postpone non-critical purchases and look more and more for bargains.

But there’s a trap here: during the pandemics, customers benefitted from improved customer experiences, customized services, premium services which they took for granted. Retailers offered for free multiple delivery options including express, next day, in-store pickup, remote collection, parcel locker delivery. Also free returns. Now, shoppers expect the high level in service quality to remain the same, but they are willing to pay less. Retailers need to find the right balance between higher costs, decreasing margins, fewer customers and increased expectations. Once again, carrier diversification, process automation and AI enabled decision making allows you to have the best option for each customer, with every order you deliver. And real-time status updates on delivery via SMS, e-mail or the Parcely by Postis mobile app provide full transparency and predictability, keeping the customer close to your business.

4. Increasing competition

The advent of e-commerce during pandemics allowed retailers to expand to new sales channels, and increase the territorial reach. While this was an opportunity for growth, it was also a threat from players coming in from other countries.

Even if you are better positioned in your home market and you developed a long term relationship with your customers, you cannot bet just on loyalty. A better positioned product or a lower price will make your customer go away. So, at the same time you keep an eye on your customers, you have to focus on your competitor’s, too. As a result, product portfolio diversification, cross-border expansion, the implementation of an omni-channel approach and the adoption of new sales channels such as marketplaces are no longer growth strategies, but survival pre-requisites. With Postis Platform available across the Europe, you can scale the processes you are familiar with and take them to any market, test new solutions adapted to specific markets or products, scale if successful or replace it with new ones, all possible without unnecessary risks and costs.

5. Lack of differentiation

Customers are focusing on price. The media landscape gets cluttered with messages coming from an increasing number of competitors. The costs put a pressure on the services you can provide to differentiate. It looks like it is impossible to further build a brand and drive long term loyalty. Don’t despair. While you invest significant amounts of money in your presence and communication in all the sales channels where you meet your customers, be is your e-shop, a list of marketplaces, a hypermarket or your brick and mortar store, you have an opportunity to use last-mile delivery customization as an effective brand differentiator. With multiple delivery options including express, next day, scheduled or in a parcel locker, real-time status notification and a frictionless click-to-door experience, your shopping cart conversion increased, refusal and returns rate goes down, and your customers return to your shop more frequently.

6. Operational complexity goes wild

The customers want more, but are willing to pay less. You have to offer top quality, differentiating product, service and experience, but keep the costs in control. You scale into new territories, product categories or sales channels and need to do it gradually and in control, but fast at the same time. You expand your logistics partner eco-system to provide the best quality, for the best price, for every expectation. New competitors from across the border enter you traditional territory every day. So, as a retailer, your life got even harder than before.

But there’s hope, as the Postis Platform is already integrated with all relevant sales and e-commerce platforms, business management systems and carriers. Your processes are automated, data is orchestrated seamlessly across your eco-system, and optimal decision making is enabled by advanced AI algorithms. As a result, you eliminate errors, boost you productivity, improve customer experience and optimize your costs. And most of all, you are in control, no matter how complex your logistics become.

7. No more time to wait

The market continues to be unpredictable, and companies need to stay alert and be agile. Decisions have to be made fast, but based on historical and contextual data. Organizational and structural changes need to be implemented as soon as possible, but in control. New features and options need to be tested fast and without significant costs, and scaled when proven right. To cope with such a business model, you need to have in place an IT eco-system that would provide seamless integration, high flexibility, low time-to-market, fast scalability.

This is the kind of eco-system we developed with the Postis Platform, that connects your WMS, CRM, e-shop or marketplace with all the carriers you need, in no-time.

8. Data is hard currency

The relationship with your customers and the chance to sell relies heavily on your data related to process, performance, customer profiles and expectations. It becomes even more important when you have to fine tune and find the right balance between costs, service quality and brand experience. Therefore, your IT eco-system needs to be able to collect, aggregate, streamline, analyze and orchestrate data to enable real-time business decisions. New tools such as ChatGPT signal disruptive times that are around the corner in customer relations and engagement.

When it comes to last-mile delivery, we analyze in real time more than 100 criteria related to the product that is ordered, the customer preference and promised journey, fulfillment variables, added value services, past performance, cost and more, and advanced AI algorithms selects the best delivery option, every time.

9. Act tactically, think strategically

All the above are important for you to cope with the conditions in 2023. But do not compromise quality for cost, neither focus on survival instead of growth. The changes you will make this year should make you stronger, more agile and digital driven and put you in a better position when we will enter the next growth cycle.

2023 is the year when the markets will settle and the opportunistic growth facilitated by the pandemic context is no longer possible. The business models are revised with the help of digital systems, open platforms and data enabled tools, which become pre-requisites in the new retail environment. Integrated, cross-channel, cross-border, customer driven, data enabled and AI assisted is the retail model of tomorrow. Conflicts will eventually end and new markets will be rebuilt and become available to you. Those who take now the opportunity to invest their time and revisit systems, processes and customer experiences, will be those successful in the long run.

If you need help, let us know.

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