Inflation on a number of fronts is putting pressure on retailers and manufacturers, and changing consumer behavior. What does this mean for pricing and promotions?
The WHO may have recently declared an end to the COVID pandemic, but we’re still seeing some long-lasting negative effects on food retailing. It hasn’t been a hiccup and then back to ‘normal’, whatever that was in the first place. Although there are some slivers of light on the horizon, continually rising costs on a number of fronts raise the question of who pays for it in the end – the manufacturer, the retailer, or the consumer? How are manufacturers and retailers likely to cover costs, and is the consumer prepared to pony up the difference?
First, the bad news
We’re currently in a perfect storm of rising prices on a number of fronts. Broadly, inflation, rising consumer cost of living, high gasoline prices due to the war in Ukraine, interest rate rises, increased operational costs such as gas and electricity, continuing supply chain issues, and a tight labor market resulting in wage rises.
Specific to food retail, eCommerce has increased, and will continue to increase, the cost of doing business through both picking (wages) and shipping costs. Staffing costs are the largest operating cost for most retailers, and total wages for food retailers can typically be 11-13 percent of sales and in some categories such as fruit and veg, over 30 percent of sales. Wage inflation is set to increase by a couple of percentage points for retailers over the next two years, linked to broader wage-setting mechanisms. Companies with higher staffing levels relative to sales are likely to feel this most keenly, albeit that larger food retailers typically have some operating hours and shifts flexibility.
Consumers now look to save rather than treat
Compared with 2020 and 2021, where lockdowns in some states meant consumers were treating themselves to ‘little luxuries’ and trading up in many food categories in the absence of being able to spend on entertainment and travel, the reverse is now true.
Many consumers are now trading down. For instance, switching out of more expensive fruit and vegetable categories such as blueberries, raspberries, mushrooms and lettuce into less expensive ones such as carrots, potatoes, and bananas. Or postponing purchase of some non-staple categories. Or doing without; abandoning purchase of some categories altogether.
They are becoming more price and discount sensitive, albeit that in an environment of reduced basket spend this is not taking the form of the pandemic panic-based AWOP driven pantry stocking, but a reduction overall. Which means that heavily discounted products only serve to trade consumers down and reduce total basket spend. A review of promotional strategy is required, likely to shift to EDLP, or conversely more frequent, shallower promotions. For companies with a trade promotion optimization system, a look at baselines and promotional uplifts for 2018 and 2019 could provide some indicators for future planning purposes, albeit they will need to also take into account the current inflation driven behaviors.
Nervous consumers are choosing products based on brand trust and previous usage, and price or discount. Sticking to what they know rather than experimenting, unless it means they can save. Dependability and affordability are the current name of the game, so brands with new products or lesser known brands have to work harder to achieve penetration, familiarity and trust with presence across multiple touchpoints.
Now for the good news
A few bright spots include the fact that food retailing is less discretionary than non-food categories such as clothing, and therefore less likely to see high levels of volume slowdown despite slightly shrinking basket sizes and spend.
For food retailing, the inflation rate has an upside in that it acts to offset weaker volumes.
We’re not likely to be out of the inflationary woods for another 12 months or so, although some impacts are shorter term than others. Wage rate growth may continue to increase over the next 18 months years, given the continuing rate of inflation.
Supply chain driven product price rises may see another 6 to 12 months for prices to normalize. Until then, profit margin pressures on manufacturers due to raw ingredient costs will continue to see price rises passed on to retailers. The question is, if those are then passed to consumers, will consumers pay? Current indications are mixed at best. Software such as Decision Insight’s Price PredictorTM can help here. If retailers are unable to pass on costs to consumers, then they may seek cost recovery through higher trading terms with manufacturers.
The current environment means brands and retailers need to at least maintain consumer basket spend if it’s not possible to increase it other than through passing on price rises. Occasion based marketing, such as for socializing and entertaining occasions that are increasingly being pursued by consumers, or for a small treat, may assist in providing context for an AWOP or premiumization driven promotion rather than a price discount that trades consumers down and reduces overall spend.
In some ways the past couple of years has been a shakeup for the CPG industry that needs to be tracked and analyzed to provide a better guide path for pricing and promotional strategy for the next few years. Behaviors have inexorably changed, and continue to, and we need to build those changes into our future plans.
For more information on TELUS Consumer Goods’ Trade Promotion Management/Optimization (TPM/O) and pricing solutions, go to www.exceedra.com, https://blacksmithapplications.com/,
https://www.tabsanalytics.com/ and https://www.decisioninsight.com/