How growing consumer businesses can combat inflation crunch
There is little sign of relief on the horizon for the hard-hit UK consumer, with UK inflation coming in hotter than expected at 8.7% in May.
As wage increases fail to keep up with inflation, which is higher in the UK than in most developed market economies, household budgets continue to be squeezed. As belts become tighter, consumer-focused businesses are increasingly looking to adapt to evolving customer behaviours.
Consumer businesses of all shapes and sizes have seen margins contract over recent months, with costs increasing throughout the supply chain. In adapting to this new reality, management teams need to be managing their cash carefully and look to grow in a capital-efficient manner.
A spotlight on resilient qualities
In the face of ongoing economic challenges, we continue to encourage businesses to engage in scenario planning to prepare for all eventualities. In our experience, planning for contingencies ahead of time leads to considerably improved decision-making should any particular situation materialise. Management teams should always be looking to avoid making decisions under acute business duress and time pressures.
To successfully navigate through the continuing complexities, consumer-facing companies need to possess a range of resilient qualities.
Firstly, demonstrating a distinctive well-articulated proposition - which is backed by proven expertise and deep knowledge - is crucial.
Additionally, while establishing a loyal customer base is always invaluable, it is particularly important during periods of uncertainty. Here, clear and consistent communication cannot be overlooked. Innovation in product development must also be at the heart of the corporate management team thinking, while decision-making backed by customer metrics and data remains a sound strategy.
Sustainability to stand the test of time
The rise of the conscious consumer has also been a noticeable trend in recent years. Demand for sustainable goods continues to accelerate, with consumers often willing to pay more for products from brands adhering to responsible environmental and societal practices.
While most businesses are seeking to be on the right side of change in terms of sustainability, the current cost-of-living crisis called into question whether such strong commitments should be maintained or watered down to cut costs.
However, we believe standing by sustainability is the only strategy for successful corporate longevity.
The shift towards sustainable products will long outlive the current economic cycle, and abandoning values during tough times can permanently damage consumer perceptions. In fact, many consumers are finding creative ways to spend less by further embracing sustainability. This includes avoiding single-use plastics, reducing food waste, or opting for more durable products that can be recycled, reused or repaired. In our view, the ongoing trend of the circular economy will continue to create opportunities for consumer businesses - even during this uncertain period.
Collaboration can overcome challenges
For businesses backed by venture capital or private equity, constructive and transparent engagement with investors will play an important part in navigating the current choppy waters, with management teams able to access invaluable insights from investor experiences of previous economic downturns. This expertise is particularly informative for early-stage businesses. Investors are also well placed to utilise knowledge from across their portfolios to share best practices.
With the consumer sector often experiencing rapid change - both from shifting consumer habits and the emergence of innovative technologies like AI - being proactive in communicating with investors is particularly beneficial for businesses in adapting to future trends. It also provokes a need to question your business model, be on the front foot and consider whether you need to adapt to survive.
While the current economic backdrop is not conducive to buoyant consumer activity, proactive businesses able to lay solid foundations today will be best placed for future success when the environment eventually turns.