In the fourth quarter of 2022, the majority of consumers (77%) reported that their spending either decreased or stayed flat ahead. Unsurprisingly, retail holiday sales in 2022 fell well short of forecasts – with some of the biggest retailers in the world softening their predicted earnings for 2023.
Whether we’re in a recession or not is still up for dispute.
But one thing is clear.
Consumer demand is shifting in 2023, impacted by a myriad of forces (including trends, technology, the economy, and even politics).
Retailers that adapt to these shifts (and proactively optimize their operations) can protect themselves from these risks – and even stand to win market-share from less prepared competitors. Those that don’t adapt risk missing their targets and losing out on revenue.
But to adapt, retailers will first need to identify these shifts and create a strategy for addressing them.
Let’s uncover what some of these shifts look like.
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. Vacation
In 2022, retailers noticed a shift in post-pandemic consumer behavior. 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 demand
The causes of a notable shift in market demand could be the result of major changes in the following individual or combined factors.
- Economy
- Demographics
- Environment
- Culture
- Politics and laws
- Consumer Preferences
- Competition
At present, we can see a number of these shifting factors come into play because in the real world the cause and effect of separate factors are rarely isolated. More likely, more than one factor is linked together to create a shift in demand.
For example, because we’re in a recession-based economy, the average consumer braces for possible loss of employment, which would negatively affect their income levels, and so, they reduce spending.
As you can see, these factors influence demand, regardless of the price of a product.
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 coach
If you can prepare for shifts in demand you can strategically pivot in areas of:
- Inventory
- Pricing
- Marketing
- Understocks and over-stocks
By making strategic adjustments in these areas you can stay competitive, maximize profits, avoid lost sales, as well as overspending on costs–all of which affect your bottom-line profitability.
The key takeaway here is that you have to make sure your business is prepared to pivot as a result of a shift!
You have to ask yourself, how can you best set up your retail business to accommodate major shifts in demand?
Let’s take a look at what preparation looks like.
Four strategies to prepare for shifts in demand
Now, 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 thinking
Leaders 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 data
A 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:
- Reliable
- Accurate
- Clean
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
- Planning
- Inventory Management
- Pricing and Promotions
By analyzing large amounts of data, AI-powered analytics can identify patterns and trends held in your data that may not be apparent to human analysts.
It is a valuable tool to help guide you and navigate a rapidly changing retail landscape.
4. Be nimble
It 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
In season, on-the-ground sales of certain items may not sell as well as anticipated because of demand shifts factors that are out of your control.
What can you do at this point? React quickly.
You have to adjust accordingly to maximize sales opportunities and not get stuck with inventory that doesn’t sell.
If you’re an omnichannel retailer, you won’t know which way to pivot because there are too many moving targets to consider:
- Transportation costs
- Which SKUs to ship elsewhere
- Customer satisfaction
Among tens of thousands of products, you need to have all the necessary information at your fingertips to make efficient and effective decisions quickly.
Top retailers are doing this with the help of AI-driven analytics. It can give you a best-case estimate when things change on the ground because its demand forecast changes dynamically.
A good AI forecast will adjust to the reality on the ground, catching even minor fluctuations in demand, and tell you if you should move slow-selling products to other locations where they will perform better; and even the best markdown price point to sell the product to maximize profit.
Your retailing operations will be more flexible because AI-based analytics gives you the information you need quickly and you’ll make effective, efficient decisions with confidence.
Preparing for change develops resilience
History 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.
By being proactive in preparing for and responding to shifts in demand, you can avoid potential disruptions and strengthen your retailing business in challenging times.
