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Has the inflation pricing playbook changed?
Through a special arrangement, presented here for discussion is a summary of a current article from the bi-monthly e-zine, CPGmatters.
Consumer packaged goods (CPG) companies aren’t just raising prices defensively to provide an offset against higher ingredient, labor and shipping costs. Their strategies for dealing with this historic new era of inflation includes working with retailers on more deliberate and symbiotic plans for pricing and promotional practices.
“Our advice to clients is that this is an opportunity for them to reflect the real costs of doing business,” Ken Harris, managing director of Cadent Consultants, told CPGmatters. “And retailers — while not excited about price increases — need to and will allow them.”
“It’s a matter of being collaborative,” Theresa Motter, CEO of Van’s Kitchen, a Dallas-based supplier of egg rolls to supermarkets and convenience stores, told CPGmatters. “You must have those conversations with suppliers and customers whether [prices] are going up or down.”
Beyond any adjustments to trade spending, being careful about pricing differentiation is another tactic. Mr. Harris said, “There are price cliff sensitivities to commodities that can put manufacturers at a disadvantage if they take, say, a 10 percent increase across the board versus a 20 percent increase on high-value items and commodities at 2 percent. It has to be thoughtfully considered.”
On a longer-term basis, new analysis is being explored on how to modify products, packaging, consumer testing and marketing to help navigate the new pricing minefield.
Changing prices more frequently is another option. CPG brands traditionally changed prices every six months or year and created promotional calendars and spot pricing events where any movements were almost languid, easily accommodated by little increase in the food CPI from year to year. Yet many major retailers change prices daily.
So far, few signs of significant pushback by American consumers to higher food prices have appeared, although the higher prices may push more consumers into store brands that typically are less expensive.
With record earnings being reported by several CPG vendors, some question whether prices are being raised too aggressively despite price elasticity sitting at historic lows. Joel Warady, CEO of Catalina Crunch, the keto cereal and snack brand, said, “We have a responsibility as food companies to feed people with nutritious products as efficiently and economically as possible and still make a profit.”
Discussion Questions
DISCUSSION QUESTIONS: What traditional and newer pricing approaches and mitigation tactics should CPG brands be exploring to counter inflationary pressures? What unique challenges does the current inflationary period create versus past ones?
Poll
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Paula Rosenblum
Co-founder, RSR Research
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
The thing that CPG manufacturers have to worry about the most is private label. It’s the easiest way for a food and drug retailer to combat inflation. Take the middleman out of the equation. Then, the price of PL may be the same as the old price for national brands and consumers will feel better.
Also, they just may have to bite the bullet and take a margin hit.
Finally, have the days of near-sourcing finally come? Shorter journeys = more flexibility and less cost. Of course, I’ve been recommending this for years to apparel retailers and still do. Yes, Chinese fabric is fabulous. They are very innovative. Well — that’s a challenge, isn’t it? Can we answer it?
Packaging is one of the largest ways to address this issue, particularly in my industry of home textiles, that needs to be looked at creatively. It is one of the big driving factors in freight, container fill, and cost. It either needs to be shifted to a value-add where customers can see value in the design to command a higher price, or it needs to be minimized — no in-between. Consumers will need to consider compressed packaging and more basics in order to offset some of the costs. Shipping large comforters that are full of air overseas is unproductive.
We are in a strange place right now. Prices are rising very rapidly but the consumer is, overall and relatively, unfazed by it. Higher savings, continued curtailment of travel, less commuting, and so forth are all feeding into this paradox. However as inflation continues to take hold all of this could change and we could see the coping strategies which are already present in lower-income households proliferate. Things like switching to private labels, moving into value channels, reducing volumes, promotion hunting and so forth will become more common. CPG brands needs to have answers to these things in order to defend their brand shares.
Headlines last month screamed, “January retail sales surge as consumers defy inflation.” A month later, some states are now seeing $7 per gallon gas, and Michigan consumer sentiment gauge dropped to 59.7, the lowest since 2011. I expect the seemingly unfazed consumers to significantly shift spending to value-based propositions, which will only accelerate through the spring.
Here is where a lot of CPG brands will discover what kind of brand loyalty they really enjoy. It will be very clear what happens to demand elasticity as prices rise. And when demand falls off, the brand might not know where the sale transferred to. But the retailer will know. They will be able to see overall demand in any given category and they will be able to see the individual pluses and minuses. Yes, this whole scenario absolutely gives the advantage to private label. And just like retailers in the boring middle are being crushed, CPG brands in the boring middle will be hurt the most.
Paula points out quite rightly that the real opportunity for the retailers and consumers is private label. The growth or lack of it will tell us if price inflation is a factor in buying decisions. From what I read, other than fuel, the consumer still continues to buy at the same rate as previously.
The strategy of the petroleum companies is clear. In 2021, they bought back shares at the rate of $38 billion. They certainly didn’t generate that cash by holding prices in anyway. If they can get away with it in 2022, they will do it again. The question is, should CPG companies also take this as an opportunity to increase the bottom line?
My position has always been that prices should be in line with costs. That philosophy leads to more innovation and innovative thinking to keep prices in line.
With many consumers never having experienced high inflation, brands and retailers are having to watch and learn very fast how those will react to regular price increases. Forty years ago, inflation was high and price rises were part of the normal everyday shopping experience, wage increases were also part of that package, so many consumers came out of it unscathed.
However we have now had long periods of wage and price stability, so we are all having to relearn how to cope and live with inflation. The fact that national government’s primary tactic for beating inflation is raising interest rates, which makes mortgages, house ownership or even renting more expensive, adds fuel to the difficulties consumers face.
Retailers that have value brands and own label products will see them increase in importance. Targeted promotional activity will increase. Everyone will be looking to see where they can make economies in their operation. The real concern this time is that this period of inflation, coupled with raw material, labor and resource shortages, could go on for a long time.
To counter inflation, CPG brands can e usprice increases (Hershey, P&G), shrinkflation (General Mills, Charmin) and AI-driven dynamic pricing.
Mitigation tactics include process re-engineering and digitization, and sourcing from more affordable raw materials suppliers.
To grow their top line, CPG brands need to focus on value-tier channels, including dollar stores and discounters. They can also offer excess manufacturing capacity to retailers for higher-margin private labels.
This inflationary period is unique, as the war in Ukraine sparked both cross-continental collaboration and dramatic division. We’re just getting started with inflation in groceries, gas and energy, as companies exit Russia and seek new partners, including more domestic suppliers.
Even the private-label strategy has its limits when key upstream commodities are constricted by a handful of multinational suppliers. Many have commented on Big Oil’s growing profits for instance, and we’ve all seen the inflationary effects of concentrated production of computer chips. Not nearly enough attention is being paid to the paper sector, where supply has been deliberately throttled even in the Before Times and mills are not being reactivated now despite huge demand. Everything needs packaging and a box to ship it in, and there are only a handful of producers.
The recent surge in private brand development, particularly in discretionary categories, is helping retailers make up for pandemic-era margin losses and driving differentiation as national brands become ubiquitous. Now, these programs are a powerful hedge against inflation. Private brands are the gift that keeps on giving.
We haven’t seen these levels of inflationary pressures in 40 years. That means most management teams have not experienced its magnitude or impact over the past year. So, we ought to expect surprises, false expectations, overreactions, and eventually angry consumers facing diminished purchasing power. Passing through price increases must be done delicately and deliberately, especially now that COVID-19-era government programs are ending and consumers shift to value through private label products.
There are probably very few managers still working in either CPG or retail that have direct experience charting their way through recessionary waters. Inflation, and record setting inflation at that, was inevitable once the ink was dry on the Trump tax cut package and it became clear the government would do whatever it could to “superheat” the stock market and the economy. Throw in a pandemic on top of that, a staggering national debt, and now an escalating war in Europe, not to mention all the ongoing economic uncertainty in Asia and other parts of the world and one could argue nobody has ever seen anything like this. One thought might be to cut margins and not “pass along” costs to the consumer. Scaled companies might want to take on debt now that it is to their advantage and apply some of that to pricing. The right answers depends on whether we are looking at an inflationary “tip” or a longer term, frighteningly large recessionary iceberg.
No. We have had periods of inflation during the early- and late-’70s (thank you OPEC), and 2008, that are similar to this. In each of these the Fed reacted to control the prime rate, in addition to managing the flow of money (speed) and growth of available money through its monetary policies (M1 and M2). We can expect the same actions to occur, while consumers react in the same manner; cutting back in spending, decreasing gas consumption and travel, shifting purchasing patterns, etc. Retailers in today’s environment have a stronger store brand presence that they can use to better manage their retail presence in an omnichannel retail world, as well as offering better promotional communications online to shift purchasing opportunities from one product to another.
I’ve been interested by the degree to which the issue of inflation is created artificially. Mass market press notices a higher price, makes a big deal about it, which makes consumers more sensitive yet also manufacturers more aware of price possibilities, and it spirals on. Nothing fundamental has changed, though.
We are already seeing the return of “shrinkage” and, not in the typical sense. CPG companies are resorting to reducing the size of their can/packages and contents to alleviate cost increases. Other techniques will be reduced promotions, higher margin goods marketing and offering bundled savings on quantity purchases.
Keeping in mind the record net profits reported by the supermarket industry in 2020, operators certainly had some resources available to absorb — or at least delay — taking price increases during 2021. There were good reasons to do this — maintaining shopper loyalty and community good will topped the list.
Alas the (pricier) chickens have come home to roost in 2022, and the industry has been compelled to pass along cost increases. Retailers and brands need to coordinate on these efforts, recognizing that the inflationary impact has affected major categories unevenly. NielsenIQ recently reported that meat, seafood, and health & beauty prices have led the pack, while consumers have shifted to better value items within all categories.
Retailers may consider taking full cost increases on some items, but absorbing most of the shock on pantry basics and store brands to send a message of solidarity to shoppers. Brands need to be active participants in these responses too, both by controlling their own costs and offering promotions that help shoppers balance their budgets.
At every step in the supply chain, the best businesses are using analytics to understand where and how to increase pricing while keeping in mind their customer and the end consumer. This is highly complex and the old playbook of raising prices by X% because costs increased by Y% will no longer cut it. Both retailers and CPGs need to be strategic, surgical and data-driven when making these decisions. They also need to use predictive analytics when engaging in cost negotiations to ensure optimal outcomes for all parties with share growth in mind. Private label remains an opportunity for retailers and a threat to CPGs, but the real threat for CPGs is just passing on costs as usual and not elevating their practices.