4 factors online businesses should consider during times of global crisis
The coronavirus pandemic created huge disruptions to the way businesses of all kinds do business. Some of those most effected, for better or worse, were online businesses that became a vital lifeline for those in lockdown. However, when supply chains were so badly impacted, getting goods to customers was not always easy. But through every crisis comes opportunity and for many, it was a learning opportunity in how to make their businesses more resilient for the future. Indeed, when any major interruption in economic activity occurs, companies need to understand and navigate if, and how, their business will be affected.
From one global crisis to the next, the current wave of high inflation that is engulfing many parts of the world is shifting the way consumers make purchases. The Russia-Ukraine war is another major global event that has already had a huge impact on many global economies, consumer prices and cost of living in general.
In this article, we’ll discuss four major costs eCommerce stores need to account for during times of global uncertainty such as these.
Increased loan interest rates
Both Russian sanctions by the West as well as the Coronavirus have caused worldwide inflation. According to Euromonitor International, global price inflation is going to hit 7.5% in 2022, compared to the 2001-2019 average of 3.8%.
To combat this, the US Federal Reserve has increased interest rates by the most it ever has in 20 years. According to Fed chairman Jerome Powell, “Inflation is much too high, and we understand the hardship it is causing…and we’re moving expeditiously to bring it back down.”
However, the hike in interest rates makes business loans more expensive, causing a strain on eCommerce businesses that need to borrow money to keep their companies afloat.
Unfortunately, there is no way to know exactly how long the Federal Reserve’s strategy will take to bring down inflation. According to Steven Blitz, chief US economist at TS Lombard, this increase in interest rates can be an effective tactic. However, on how long it will take to see results, “It’s a question of time,” he says.
Supply chain disruptions
Both the pandemic and the war in Ukraine have caused supply chain disruptions, as Russia is a major exporter of paramount materials such as oil, wheat, iron, gold, and iron, to name a few.
US and European imposed sanctions are causing a decline in “industrial production, consumption, and investment.” According to Interos, a US-based supply management firm, approximately 300,000 American businesses depend on Russia for manufacturing supplies. As a result, these businesses are suffering due to extreme hikes in cost and unavailability of goods.
To counter this, eCommerce businesses should reevaluate their supply chains to reduce any possible negative effects.
Surge in shipping costs
Global crises, particularly but not limited to increases in oil prices, negatively affect the movement of goods that require transportation. Therefore, eCommerce businesses are hit particularly hard because they depend entirely on shipping to deliver their products to consumers.
Because Russia is the world’s third largest oil producer, the trade sanctions imposed by the West have been a catapult for the tremendous spike in gas prices, leading to more expensive shipping costs. The average cost of gas in the US was $4.28/gallon on May 2, 2022–but it’s not the first time Americans have seen such jumps. The US invasion of Iraq after 9/11 as well as with the Global Financial Crisis led to gas prices as high as $4.11/gallon in 2008 (adjusting for inflation, that would be over $5/gallon today).
But the rise in shipping costs isn’t just from the war in Ukraine. European eCommerce companies suffered severely when freight prices from Asia to Europe increased over 500% between 2020-2021 due to the Coronavirus. In addition, the costs for transportation from America to Asia intensified during this time.
Reduced consumer demand
Inflation and recession lead to reduced consumer demand of non-essential goods. Increased interest rates and price hikes for gas and food mean people have less money to spend on luxury items. As a result, many B2C eCommerce brands may lose profit. While eCommerce among Americans spiked during the Pandemic, reaching $1.7 trillion dollars (that’s $609 billion more than the two years prior), the current economic situation and supply chain disruptions due to the war in Ukraine are feared to reduce demand. According to Adobe, we will pay “as much as $27 billion more online for the same amount of goods” in the next 21 months.
eCommerce companies will need to be creative with their marketing and pricing strategies in the upcoming years. While consumers favor the speed and efficiency of online ordering over going to stores, it won’t be enough to counter reduced demand for non-essential items.
What can you do to respond to the global economic crisis?
Understanding the implications that inflation can have on your online business, and how this will also affect your customers, can prove vital to maintaining revenues and profits during turbulent financial periods such as these.
For some ways in how to fight off inflation and its effects on your business, check out this blog post.