Convenience retailers need to gird themselves for battle to address the inflation, labor, supply chain and growth challenges confronting the U.S. That’s one of the takeaways from the NACS State of the Industry Summit’s “Convenience Industry Economic Outlook for 2022 and Beyond” session.
“Looking back on the first quarter of 2022, I have to say it was a tremendously tumultuous quarter,” said John Benson, a director at AlixPartners. “It was probably the most tumultuous quarter in decades. It’s been quite some time since we’ve had so many economic and political trends all converging at one time with interconnected outcomes that have uncertain economic impacts.”
On April 12 when Benson addressed the NACS SOI Summit audience, GDP growth was up 5.7% overall for 2021, the unemployment rate was at 3.6% for March, inflation was at 8.5% and the Conference Board Expectations Index was down 5.2%.
Companies need to ask themselves ‘How do we make ourselves the employer of choice in the industry?’
“The fundamentals of the economy are strong, but you could argue that it’s too strong; it’s overheating,” said Benson, who pointed to GDP growth that accelerated in the fourth quarter of 2021 to 6.9%. (At press time, GDP had plunged to 1.4% for the first quarter.)
The strong GDP momentum in 2021 was driven mainly by unprecedented fiscal stimulus over the past two years, as $5 trillion in federal fiscal stimulus poured into the economy. Historically low federal interest rates, as well as $120 billion monthly asset purchases injected into the economy, also have fanned the economic flames.
Inflation stands at a 40-year high of 8.5% and is the highest it has been since 1981—and Benson does not see an end in sight. “We do think that this is going to have a significant impact on consumers and is going to continue to impact [them],” he said. “For every 10% increase in the retail price of gasoline, there is a $23 billion hit to consumers. They now have to spend $23 billion more to maintain the same level of spending.”
Supply chain challenges also remain a major driver for cost inflation for retailers and consumers, and 69% of CEOs surveyed by Bloomberg are concerned about the impact of supply chain disruption.
Benson also noted that some investors are wanting to take advantage of the inflationary environment of raw materials, which could lead to a 40% surge in commodity costs over the next six months if investors start allocating more of their portfolios to raw materials, he said.
Overall, the outlook on the economy is a bit unclear, according to Benson, and there is good evidence that prices will continue to rise, and economists suggest that inflation could hit 10% over the course of 2022.
In response to the economic environment, 95% of companies are raising prices, but companies need to get more creative, as raising prices will only work to a degree, Benson said. “There’s a limit to how much consumers can absorb the increases,” he said.
Benson suggests that retailers establish a plan against inflation and commodity cost increases, including creating an “inflation war room,” which should consist of a cross-functional team that can tackle inflation head on.
“As suppliers are increasing their prices, understand what the impact has on your finances and then triage the impacts. Ask yourself, ‘What areas are we going to focus on?’ You can’t address everything, so ask yourself, ‘Where is this having the biggest impact?’” said Benson.
The labor market is “red hot,” said Benson, and 4 out of 5 CEOs surveyed fear that the current labor shortages may become permanent. At the time of his April SOI Summit presentation, the job openings rate was 7%— the highest level since at least 2000.
“It’s an incredibly tight labor market, but the problem for workers is that, yes, there is a 5.6% nominal wage growth, and they have a tremendous amount of power at the moment, but at the same time they see the 8.5% inflation rate, and when combined, they are seeing a negative 2.9% real wage growth,” said Benson. “Workers are feeling poor.”
Benson said that CEOs’ fear of a permanent labor shortage may be correct, as COVID-19 accelerated the baby boomer exit from the workforce, and the birth rate has decreased. “The economy has long benefited from steady population growth with relatively cheap labor,” said Benson. “It was changing before the pandemic, and then [the pandemic] super-charged it.”
Benson said that in order to maintain the current GDP rate, the U.S. will need to increase productivity by 80%, and although some recent forces for wage hikes may be temporary, the long-term effect of the shrinking workforce will entail higher wages.
“Companies need to ask themselves, ‘How do we make ourselves the employer of choice in the industry?’” he said. “We can expect major dislocations as traditional companies that do not reinvent fast enough get sidelined and squeezed.”
As suppliers are increasing their prices, understand what the impact has on your finances and then triage the impacts.
6 KEY STRATEGIES
Benson noted six key priorities for industry leaders to focus on in 2022:
1. Build flexibility and agility into business plans. Be prepared to adapt to an ever-changing business environment.
2. Establish an inflation war room that reinforces procurement’s role, secures supply and increases visibility of future costs.
3. Invest in employees by taking active steps to become the employer of choice (think: culture, flexible hours, wages, bonuses, benefits).
4. Get the most out of the people that you have by focusing on labor optimization, including organization and operating model design and investments in digital tools.
5. Re-evaluate your customers. Engage with consumers digitally (e.g., loyalty), through new channels (e.g., delivery), and look to create new occasions (non-fuel related).
6. Develop an electrification strategy and transformation plan. How will the energy transition impact your company, and how do you need to respond?
“In 2022 and beyond, there are going to be winners and losers,” said Benson. “Certainly, the winners are not going to be the ones who are slow, reactive and resistant to change— quite the opposite. Those that are front footed on these issues, proactive and willing to attack these challenges head-on are the ones who are going to get through 2022 and beyond successfully.”