By Apratim Sarkar, Shantanu Verma and Peng Bi

Rising inflation is squeezing retailers as consumers spend less while costs and pressures from vendors persist, putting stress on profit margins.

In the United States, the Producer Price Index (PPI) shows that prices remain higher than ever. While 2021 and 2022 saw more drastic increases in PPI, 2023 and 2024 have provided persistent increases that continue to squeeze retailers.

This is far from just an American problem. Retailers in other large markets such as the UK and Japan face a similar issue. From January 2021 to October 2022, the UK saw its PPI increase dramatically, going from 109.5 to 137.5 in less than two years. Subsequently, retailers in the UK (and across the globe) are still recovering from this sharp inflationary pressure today.

Such persistent inflationary pressure is weighing on public confidence, with 60% of consumers worldwide stating rising prices as their biggest financial worry in 2023. As a result, retailers are faced with the challenge of balancing profitability and consumer concerns.

The importance of product assortment optimization

What can retailers do to alleviate this problem? In short, to maintain profitability and meet evolving consumer preferences, they must optimize the product assortment. This means adopting a comprehensive approach to evaluating business performance.

Examining the profit margin of a single product or category is not enough - retailers should analyze various metrics from multiple perspectives for a holistic view on category performance. They must expand their analysis to assess performance in conjunction with other products for a comprehensive overview.

Achieving this overview is not easy. Retailers need the right analytical tools that facilitate a visual analysis of sales, margin, inventory and profitability trends across product categories, sub-categories and SKUs. Only then can they gain clear insights into performance metrics.

Challenges to effective vendor negotiations

On the supply side, effectively negotiating with vendors is a key element in reducing costs and expanding profit margins. To do this successfully, however, retailers must overcome numerous data-heavy and time-consuming challenges, namely:

• Analyzing the performance of thousands of vendors on a regular basis and pinpointing potential opportunities for negotiations
• Gathering relevant insights to match the negotiation leverage of national brands
• Acquiring the right level of data granularity across vendors and SKUs to support negotiations
• Finding alternative suppliers to explore fresh avenues, benchmark performance and increase negotiation leverage

Data-driven insights for margin improvement

At Roland Berger we have an experienced team that helps retailers overcome the many challenges around assortment management and vendor assessment. To improve the level of analysis within these topics and provide an apples-to-apples comparison of profitability across vendors, products, categories and regions, we have developed the Retail Margin Compass digital tool.

Interested in learning more about the Retail Margin Compass and our approach to assortment management and vendor negotiations? Contact our team.

We would like to thank Aidan Johnson for his contribution to this article.