Once thought to be a haven for discounts and cheap goods, the e-commerce industry has been hit hard by inflation. And you thought that inflation affected only the brick and mortar stores! The price of products available online has increased from 2019 with Covid-19 being the obvious culprit. The period from 2015 to 2019 was the golden period for online consumers. The prices of goods were declining at an average rate of 3.9% every year due to various factors like stiff competition and growth in the spending power of the people. But that came to an abrupt end in Dec 2019 when the pandemic hit us hard.
Covid-19 brought about the decline in buyers’ purchasing power. Even though e-commerce benefitted from lockdowns and social distancing, inflation came into play for online retail. Adobe Digital Economy Index has tracked the average prices of over 100 million stock-keeping units from 18 different categories. It has collected data from over one trillion online purchases in the US, UK, and Japan. In the report, the prices of online goods have increased by 3.1% year-over-year (YOY) as of July 2021 which is reverse of what it was in the time period 2015-19. It will be fair to say that the e-commerce inflation reflects the overall economic inflation rate that was at around 5.3% in August 2021. And the e-commerce inflation is expected to continue at around 4% for the next three years as per a report by Bloomberg.
How does the online price meter fare for products from the previous year?
Covid-19 brought some disruptions in the demand for online goods. Since people were confined to their homes, products such as books, apparel, and groceries were brought online. We can say that people shopped for everything from computers to medicines online. Normally, the holiday shopping season is the time when retailers start to push attractive deals to their customers. But this holiday season was different and it began with the rising prices of apparel.
Let us see how inflation affected the price rise in different segments online.
Without any doubt, the prices of the non-prescription drugs increased by 5.66% year-over-year in July when compared to the stable price pattern where a five-year average increase was only 0.01%. And no need to guess that Covid-19 was the main factor contributing to the price rise of online drugs and medical equipment.
And if you thought that offers on apparel meant you got a good deal, you are wrong here too. In fact, this segment saw the highest inflation rate with prices rising significantly even at the time of holidays. The apparel segment saw a year-over-year price hike of 15.5%.
The office supplies and computers saw a decline in a YOY price change. It was -6.97% for computers and -2.51% for office supplies. Again, as Covid-19 shut down physical offices, it is not a surprise to see the prices of office supplies fall.
People spent the lockdown time in their homes reading books and tending to plants. The YOY for books as of July 2021 was +2.26% and +1.56% for tools & home improvement.
So what are the reasons that pushed prices up in online retail?
Covid-19 saw a massive disruption in the supply chain. Even as of today, the supply of goods has not been normalized and there are bottlenecks that need to be addressed thanks to the new variant of Covid-19 and the subsequent lockdown in some countries. The furniture shipments have been delayed and there is a shortage in everything including computer chips.
Another factor contributing to the price rise is the strong demand. As the demand for some products continues to increase, their prices will also shoot up as we have seen in the case of apparel and non-prescription drugs. Online retailers are having a tough time catching up to the surging demand.
The rising sea freight costs have also caused an imbalance in the supply-demand chain. Moreover, a lot of containers are stuck in lanes and major ports because of the lockdown protocols.
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What can e-commerce retailers do about the rising inflation?
Maintaining health inventory is one of the best solutions for online retailers to counteract the rising prices, longer lead times, and unpredictability of the supply chain. Stocking at least 3-6 months of inventory will help retailers stay ahead in the competition.
Another way is to place bulk orders with the supplier instead of small orders throughout the year. This way you cut costs and maintain a good inventory.
Depending on your business, find a cheap local supplier instead of procuring goods from across the seven seas. The efficiency and cost of production are attractive in China, but at this stage, you better look for other alternatives than depending on them. By procuring your goods locally, you can save on sea freight costs and even add to your inventory.
Indeed, inflation has hit e-commerce and shows no signs of recovery. But, you have to brace yourself for the storm.