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Grocers fret over how to pass higher costs onto customers
Through a special arrangement, presented here for discussion is an excerpt of a current article from Frozen & Refrigerated Buyer magazine.
Thanks to record inflation, price sensitivity at the grocery channel is back. With a vengeance. And all indications suggest it’s only going to get worse.
Grocers, however, have been reluctant to pass on recent manufacturer price increases because they know from experience that when a product consumers want is unavailable — or in this case, too expensive — shoppers will happily switch brands or, worse yet, stores. But grocers can only hold off for so long. What can they do to prevent a devastating drop in volume when prices go up? Lance Goodridge of IRI’s Global Analytics & Insights Solutions practice has a few ideas, outlined in a recent report “Managing Price During Turbulent Times.”
- Monitor volume and be prepared to switch on promotions or a new pricing strategy the moment you see things start to go south.
- Whether new packaging or better quality ingredients, invest in product innovation now so that when you do raise prices, you can justify it to consumers.
- Develop new package sizes, both larger value packs and single portions, so consumers have more affordable alternatives. Package downsizing is also an option.
- Consider eliminating low-margin offerings, and be prepared to increase prices on select items while holding the line on the highest-value, most-price-sensitive products.
- Only promote products you know you can supply. Promotions will make a comeback because manufacturers know consumers would rather find a deal on a preferred brand than switch to a lower-priced one. But it’s a moot point if you can’t keep the product in stock.
- Leverage your consumer database to create different offers for the same product based on shoppers’ price sensitivity. That’s why you’re collecting that information. So use it!
Price increases are already happening in categories such as frozen dinners, beef, bacon and eggs. But that doesn’t mean steep volume losses are inevitable. “You have a great opportunity right now to capture market share from competitors who would prefer to keep their heads in the sand and hope for the best,” said Mr. Goodridge.
Discussion Questions
DISCUSSION QUESTIONS: What suggestions do you have for managing prices at the grocery level in inflationary times? How does grocery differ from other channels in handling inflationary pressures?
Poll
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Jenn McMillen
Chief Accelerant at Incendio & Forbes Contributing Writer
Joel Rubinson
President, Rubinson Partners, Inc.
What a great opportunity for grocers to plug their loyalty program — highlight the value proposition and decrease the likelihood that consumers need to go somewhere else.
Excellent idea Jenn! When prices are fluctuating at your stores as well as your competitors, now is the time to emphasize the value of your loyalty program. Reward customers for staying loyal. Grocers have no choice but to raise prices when their suppliers raise prices to protect their margins. Consumers on fixed budgets will prioritize their budgets on essentials and will pass on special treats, but their overall spending should be fairly constant.
Costs of goods are up. It’s a tough time for everyone – consumers, retailers and brands. Now is a good time to have a very good grasp on what your core consumer values the most. If there are value-add bundles that allow a grocer to mix and match profitable items with traffic drivers, now is a good time to find great value-add bundles.
Being transparent about value and passing on cost is important too. Consumers aren’t stupid, they can see costs rising – be transparent about it. Holding hands with your brands to find good solutions and good messages to transmit together to the consumer is also key.
The key to all of this is that cost of goods are going up for everyone. Now is not the time to throw suppliers under the bus – do it together!
Grocery is a tough category to manage price increases. Higher frequency of purchases compared to other channels mean price increases are more apparent for grocery. If you’re shopping for eggs or cereal each week, you’re sure to notice increases in price — and adjust your buying if you are on a budget.
Inflation is so pronounced and so persistent that increasing grocery prices is inevitable. This is especially so because grocery margins are already low and overall volumes are nowhere near as sensitive as some other categories because food is essential. That said, retailers can be creative about how prices are passed across and should look on an item by item basis to work out the best approach. Moreover, there is an opportunity to boost margins through premium lines. As we have seen in the past, some premium products see growth in harder economic times as people substitute having a nice meal at home for dining out.
The grocery center store has been evolving to a more value-driven model led by the increased private label assortments, a curated selection, and a good/better/best strategy. Grocery operating costs are on the rise as we are experiencing unprecedented supply chain disruptions and escalating inflation levels, which has led to stealth and pronounced price increases as customers go to check out.
The Target, Whole Foods and Kroger model of featuring their private label assortments has helped mitigate the impact of the costs and related price increases. However now is a prime opportunity for grocers to step up with a more substantial, value-driven, and engaging loyalty program. While customers are going to right-size their purchases based on the price increases, as a token of goodwill and in the hopes of building a long-term relationship, grocers should reevaluate the significance of their loyalty programs.
Retail margins are thin enough. If manufacturers meaningfully raise their prices, raise yours too – then apologize to your customers because higher prices are not your fault.
Mr. Grocer, Even if the inflation rate goes down, prices do not. You will not be able to take a short-term view with the idea that this is a short-term issue.
So, what to do? Plan to raise prices, with the caveat of keeping a close spread vis-a-vis competition. Know your SKUs and which are inelastic, and take advantage of that. Shift your mix away from the products that are elastic.
As with any pricing strategy change, you have to plan accordingly and look at the entire landscape before making a move. Look at SKU rationalization as well as an option.
There is no “magic pill” given the low retail margins, workforce shortages, and supply chain challenges. All of this coupled with record inflation has created a significant dilemma. Shoppers expect certain known-value commodities to remain reasonably priced or their loyalty will wane and substitutions will prevail.
Here are three ideas to consider to ease the pain:
Grocers are not the only retail format experiencing pressure, however, given the frequency of purchase in this channel it is most often associated with rising price.
Grocers should definitely consider all of IRI’s suggestions. On top of that, they should strongly consider how to leverage and grow their private label brands and further invest in the analytics to better understand their consumers and their competitors. The best retailers are turning a challenging inflationary environment into an opportunity to profitably grow share by using the best analytics and adopting an approach that focuses on providing their consumers with the best prices on the items they care about most. Consumers are watching, and keeping your head in the sand and hoping for the best is not going to cut it for retailers who don’t adopt best practices.
We know it’s never a blanket either/or option. An exception is Sprouts, which decided that it didn’t compete on price and passed through the inflationary costs to its customers and is experiencing smaller basket size and unhappy investors. Grocers can take a lesson from Albertsons’ surgical approach to passing through inflation costs. First, optimize the entire shopping basket for unit and dollar increases. Second, look at macro-categories like protein, and use your butcher to make different cuts and mixes of animal proteins that fit your customer’s budget. Third, don’t mess with benchmark items that consumers use to evaluate your pricing strategy automatically. These can vary by category and market, so act locally. Fourth, Use customer loyalty data and purchase histories to guide your pricing and promotion decisions. Finally, on promotions, be more selective and keep your shelves stocked.
I don’t think grocers can dodge price increases indefinitely, given the pressures on costs of goods and labor. Loyalty programs are surely one way to maintain a value positioning, and tactical price promotions are another.
Grocery is a high-frequency channel. Grocers need to delight customers to keep them coming back for big baskets at least weekly. Inflation gives grocers an opportunity to prioritize private labels that offer affordable quality and deepen loyalty with exclusivity.
First, our customers know inflation is high and expect (even if they’re not happy about it) to pay more. It’s nice to have some explanations, but if prices are in line with what consumers experience in other industries (gas, hospitality, etc.), they understand this is the way it is. Any communication that makes them feel better about paying more is a lofty goal, but also one that can be accomplished through communication transparency.
One suggestion to add to the list is for retailers, manufacturers, and others involved in the supply chain to collaborate on how to be successful in the wake of higher inflation. I remember when the head of purchasing for Ford met with suppliers and said they needed to lower prices, but didn’t expect these suppliers to just drop the price. They wanted to work together to find ways to do so that wouldn’t financially hurt either side.
A different way to go — strong private label, advertising to develop brand value perception and focus on keeping shelves stocked which is becoming a problem. With all of that, pass along the price increases and don’t agonize over being the lowest priced retailer on national brands.
Pricing tools can help simplify this but grocers will most likely have to push these inflationary costs back to their suppliers or on to their customers. One suggestion listed above is an interesting one – changing package sizes and quantities, better known as shrinkflation. This method can help maintain prices by offering lower quantity of goods. It has proven to work in less frequent and larger, usually bulk purchasing options, but not everything can fit into this boat. This is an opportunity to bundle products and move slower selling products with faster ones with slight discounts as well.
Grocery is unique in its high frequency of purchase, regularity of purchase, and necessity of purchase. This makes inflationary pressure hit much more close to home for consumers. The low price providers in this space will see some upticks in volume – but that can turn into a race to the bottom.
Invest in your staff now to recruit and retain the best employees. Don’t underestimate the value of a good customer experience. Friendly, knowledgeable and productive employees are the real loyalty driver.
Especially in grocery channel, employees are the key to engendering loyalty, not their boring, uncreative, “me too” type loyalty programs.
Customer loyalty in grocery is a total failure. Grocery operators have no clue how to engender loyalty. What they do know how to do is run an operation heavily dependent on supply chain, logistics and product planning/analysis. Two-tier pricing in return for sharing your phone number — it’s a game to match the buyer to the basket. Product giveaways based on points earned, totally random as the product may not be relevant nor timely in relation to need.
Insight based on data matching to inform price/promotion ok — dunnhumby, 84/51 and Nielsen do this all day long, use of coupons or online promotions/offers is standard practice — what is new, different, motivating, value-add, customer-centric that is happening today? Anyone? Nada.
This is not the first time inflation has hit our economy and it won’t be the last. But manufacturers, CPG companies down-sizing the goods while increasing the price so that the cost/ounce is higher, just not as high is a game that can indeed cause a shift to private label, alternate channels (big box) and more with market share of traditional grocery going down further and unable to recover to prior market share levels.
Grocery could always promote their private label lines, assuming they are first rate. This is an opportunity to lure and convince reluctant shoppers that store brands are of good quality and often at lower price.
Agreed, John. This needs to be led with empathy. Consumer’s shrinking dollars are real and grocery is essential. Those retailers that are honest, transparent, and truly concerned and committed to helping will rise to the top.
Excellent strategies and points made by others here.
I would add that communicating with customers in signage, marketing materials and loyalty programs about what you are doing to help them to make decisions, and find value or savings during this period. Showing them where they can save, how they can easily put together meals and how to still eat well will engender customer loyalty down the road.
When inflation rises, customers eventually decrease their discretionary spending rather than essentials such as groceries. As a result, the grocery industry is relatively less affected by such economic downturns. Customers definitely notice price increases, and it could be detrimental to the brand if customers believe these increases are unreasonable. Grocers must ensure that these pricing increases are adequately disclosed and justified to their customers.