Shops have to 'rethink their strategies' to cope with inflation

Retailers are facing a huge dilemma over whether to pass rising prices on to customers, says a new report.

The KPMG/Synovate Retail Think Tank white paper, to be unveiled this week, discusses the issues facing retailers on rising inflation.

Think tank member Tim Denison of market research firm Synovate said: "Inflation is one of the most significant influences of retail strategy as we turn into quarter two of 2011. On the back of snow-damaged Christmas campaigns and an unhealthily quiet start to the year, retailers are battling against rising costs and diminishing spending levels.

"As a consequence of deciding not to pass on higher costs to customers, H&M has seen its profits plummet by 30 per cent in quarter one of this year. In contrast, Next elected to pass its 8 per cent increase in stock prices on to customers, protecting margin, but at the expense of 1.5 per cent of sales. Two respected retailers with two different strategies to manage inflation."

Helen Dickinson, KPMG's head of retail, said: "A market driven by deflation, increasing volumes and space expansion will become a thing of the past. There will have to be a fundamental shift in the operating models of retailers to counter increasing costs."