What is a shift in demand?A “shift in demand” describes a situation where people’s willingness to purchase a product changes (even if the price remains constant). Some demand shifts are seasonal. For example, fewer people will buy winter jackets during summer (unless the price decreases significantly to counteract this shift). Most retailers are aware of the seasonality of their products, and stock according to seasonality. However, some demand shifts are not seasonal and are influenced by other influencing factors like the economy, culture, laws, or competition.
Example: Staycation vs. VacationIn 2022, retailers noticed a shift in post-pandemic consumer behaviour. Rather than continuing to buy more products, many consumers opted to shift their spending to travel. During the pandemic, the demand for home improvement and in-house entertainment products significantly increased as a result of people having to live, work and have fun at home. After the lockdowns fizzled out, however, North American consumers just wanted to get away. American Airlines’ Q2 revenues soared 79.5% in Q2 to $13.42 billion; and expected its Q3 revenues to be 10% to 12% higher than Q3 2019, which would be a 46% to 49% increase YoY. United Airlines Q2 revenues jumped 121% to $2.45 billion; and projected an 11% increase compared to Q3 2019, which would be a 62.9% increase YoY. Simply put, consumers were influenced by factors (pandemic lockdowns) other than price. The domino effect? Retail became bearish and hospitality became bullish as consumer spending shifted away from consuming things to consuming experiences. After two years of being under a travel ban, and only being able to buy goods and services during the pandemic lockdowns, consumers were now choosing to buy new experiences, regardless of the price of goods and oftentimes, regardless of the price of plane fares. Shifts in demand can be represented by a curve. If the quantity demanded at each price level increases, the demand curve shifts rightward. If the quantity demanded at each price level decreases, the demand curve will shift leftward. In the example of travel, demand is represented by (D1). The curve will move to the right (D2) as travel demand increases and will move to the left (D3) if travel bans take effect again. It’s important to note that while changes in price cause movements along the demand curve, demand shift factors move the entire curve. In this case, the external factor causing a demand shift was consumer taste, but there are others. Do you know what they are?
Powerful factors influencing shifts in demandThe causes of a notable shift in market demand could be the result of major changes in the following individual or combined factors.
- Politics and laws
- Consumer Preferences
Why is preparing for a shift in demand important?It’s important for retailers to prepare for shifts in demand because they can have a significant impact on their retailing business; especially in a recession when spending is already conservative. If you can prepare by pivoting and adjusting operations, you’ll be in a better position to deal with the shifts and their trickle-down effects.
“A winning effort begins with preparation.” – Joe Gibbs, auto racing team owner, and former professional football coachIf you can prepare for shifts in demand you can strategically pivot in areas of:
- understocks and over-stocks
Four strategies to prepare for shifts in demandNow, even top retailers have little to no control over the factors responsible for moving shifts in demand as they are out of retailers’ hands, but there are aspects you can take control of to survive and even thrive when this happens. Here are some strategies you can implement:
1. Adopt big-picture thinkingLeaders are “captains of industry.” Top retail chains and omnichannel retailers, stay in tune with what is going on in their own business and with external happenings that influence demand shift factors. By monitoring economic indicators and market trends you’ll gain the perspective you need to see what factors affecting shifts in demand are on the horizon and how they may impact demand for your products.
2. Increase visibility with high-quality dataA big part of preparing for change is the ability to see it coming and managing your data well plays an important role in this. Your data contains information that indicates developments like macro trends that are impacting sales, or maybe your low-cost product lines that are outperforming higher-end products. Your data can be used to help you see the result of the factors that are driving change, so you can adjust accordingly. So, you have to make sure you invest in data management tools to ensure your data is:
3. Let a compass be your guide>As you know, a compass is a navigation tool that sets you in the right direction to get you to your desired destination. Well, leading retailers use AI-driven analytics and predictive solutions as their compass for their retailing decision-making. When combined with your accurate data, advanced analytics unlocks the information your data holds and makes sense of it by offering insights and predictions of future trends and solutions regarding
- Consumer behavior
- Market trends
- Inventory Management
- Pricing and Promotions
4. Be nimbleIt can be two different realities when forecasting demand for pre-season sales versus actual in-season sales. This is because, depending on the product, retailers must make inventory planning and buying decisions as early as one year in advance to account for manufacturer and distributor lead times and meet customer demand during peak sales periods. Common examples include seasonal demand forecasting for items such as
- Holiday gifts
- Summer/winter clothing
- Sporting goods
- Transportation costs
- Which SKUs to ship elsewhere
- Customer satisfaction
Preparing for change develops resilienceHistory tells us that the only constant in retail is change. So it’s no wonder that the factors that cause change are always looming, coming together in any combination to cause shifts in demand. So, in a recession-based economy when consumer spending is already more conservative, leading retailers who prepare for factors that influence shifts in demand will bolster their resilience. Strategies leading retailers use are:
- Monitoring major economic indicators and market trends
- Making sure their data is of the highest quality
- Leveraging AI-based analytics for accurate demand forecasting in planning and on the ground
- Building flexibility into retail operations.