What is inflation?

In the case of inflation, the value of money decreases. The general price level rises and raw materials, goods or services cost significantly more. People spend correspondingly less money - including in the retail sector. There are many reasons for inflation. The current inflation, for example, is due to the war in Ukraine, scarce raw materials and high energy prices.

How is inflation developing?

In December 2022, inflation was 10.4 percent. This is a record value that was last reached after the Second World War. And: Inflation has been slowing down since then, but contrary to many forecasts, it remains high. Economists had expected a much faster recovery, but at the beginning of the year they had to report another month-on-month increase to 8.7 percent.

Inflation rate in Germany from January 2022 to January ²⁰²³¹

What impact does inflation have on the retail sector?

The year 2022 brought the economy not only record inflation, but also record sales. Sounds paradoxical, but it's easy to explain. After all, retail sales were 8.2 percent higher than in the previous year - but if the price increases implemented by retailers are factored out, this leaves a minus of 0.3 ^percent2.

"Rising inflation is massively reducing customers' purchasing power. At the same time, companies' profits are coming under pressure from sharply rising costs. "³
- HDE Chief Executive Stefan Genth

Since the causes of inflation, such as the war in Ukraine and scarce raw materials, have not changed, the German Retail Association (HDE) is correspondingly pessimistic about the future. But what are the specific effects of inflation on the retail sector?

Rising prices: With the high production costs, the purchase of goods is also becoming more expensive. This price increase cannot always be passed on to customers. Business owners therefore sometimes have to draw on reserves or scale back their profit expectations.

Sharp drop in sales: Some sectors are particularly struggling with inflation. Sales in bookstores, for example, fell by 21 percent compared with the previous year 2022. Toy stores recorded 17.5 less sales and shoe stores as much as 4.9 percent. Stores in the stationary retail sector, which have their store in the shopping streets of the city centers, are particularly affected.

More bankruptcies: When prices rise, many non-essential purchases are put on hold. This means that consumers mainly buy food and other essential products. On the other hand, less money is spent on goods such as decorative items or cosmetics. In 2022, therefore, it was precisely those stores that had not built up reserves that had to file for insolvency.

There is little retailers can do about inflation itself. However, you as a business owner or shopkeeper have some options to cushion the effects of inflation.

Inflation: How can the retail sector respond?

As a self-employed person, you are used to taking the success of your business into your own hands. Even during an inflation you should not crouch like the famous rabbit in front of the snake, but become active. With our tips and a little luck, you will come out of the crisis stronger and your business will be healthier and more profitable than ever before.

Inflation: tips for business owners and shopkeepers

• Passing on price increases: Admittedly, this method is simple and not very popular. Nevertheless, you should pass on rising purchase prices to your customers as far as possible. Because this is often the only option to keep the quality of your offer high and to survive economically. As an entrepreneur, you don't have to be a crisis profiteer, but you are also not a charitable foundation. In the end, your loyal customers have nothing to gain if you have to file for bankruptcy. Passing on higher prices to your customers in a moderate form therefore makes sense and is also morally perfectly okay.
• Keep an overview: As a business owner, you should always have an overview of your income and expenses. This is made possible by a modern POS system that clearly presents all data. Our recommendation: Choose a digital cash register system that is both legally compliant and convenient. The LocaFox POS system, for example, offers you extensive statistics, analyses and reports. A receipt journal is just as integrated as the cash book or a sales overview for several days at once. Statistics on inventory or sales volume can also be called up. This way, you know exactly what figures your company is posting. This overview is an invaluable advantage in times of crisis and during inflation and lets you sleep more soundly.
• Stay flexible: "Never put all your eggs in one basket" - this old wisdom also helps you during inflation. Because if you make yourself dependent on one supplier, you may have to accept price increases more or less grudgingly. It is better if you have several partners and compare the delivery conditions.
• Securing liquidity: When customers don't pay directly, it's usually just annoying in good economic times. In a crisis, however, a delay in payment can lead to insolvency. After all, your employees, suppliers and even the tax office want to see their money. Good receivables management and dunning are therefore extremely important, especially during an inflation.
• Review contracts: As a retail business owner, you have numerous contractual partners. Landlords or your electricity and telephone providers are just three examples. Regularly review these contracts and consider where renegotiations or more favorable conditions may be possible. This will save you a lot of money, even after inflation, which you can invest in your core business or put aside as a reserve.
• Build up reserves: After the crisis is before the crisis. This tip does not only apply during an inflation, but is valuable at any time of your entrepreneurial self-employment. By setting aside a portion of your profits, you build up a financial buffer for bad times and can remain calm even in the event of surprising setbacks or a drop in sales. Ideally, you should continuously save a certain percentage of your profits and thus gradually build up a solid reserve.

Inflation and retail: crises are not a permanent condition

In 1923 - i.e. shortly after the First World War - the economy was in the doldrums. The so-called hyperinflation developed. At that time, money lost so much value that people were pushing wheelbarrows of banknotes in front of them and one liter of milk cost 360 billion marks! But just a few years later, the "Golden 20s" brought an enormous economic upswing. History shows that even severe economic crises come to an end and things quickly pick up again afterwards. We are sure: You and your company will survive the current inflation - with us at your side!

1 https://de.statista.com/statistik/daten/studie/1045/umfrage/inflationsrate-in-deutschland-veraenderung-des-verbraucherpreisindexes-zum-vorjahresmonat/
2 https://www.lkz.de/lokales_artikel,-steigende-preise-bringen-einzelhandel-rekordumsatz-_arid,717328.html
3 https://einzelhandel.de/index.php?option=com_content&view=article&id=13845

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