Kroger Okay with Brand Price Increases
Food, drug and mass retailers have bristled at the idea
of consumer packaged goods manufacturers taking prices up in recent years.
Many in private will tell you brands raised prices several years back when
fuel spiked, but few reversed course when costs slid back down. Most have warned
brands that share losses were waiting if they took prices up. A number of larger
chains have gone so far as to threaten to cut shelf space or delist SKUs should
prices be increased.
Now, however, brands are seeing increases in a number
of commodities and few choices other than a hike are left to those looking
to maintain their profitability. For those that want to put increases through,
there is some good and bad news.
According to a Wall Street Journal article,
David Dillon, CEO of Kroger, recently said, "I don’t see [rising manufacturers’
prices] as a problem for us. It is a problem for them. Each national vendor
must make a choice."
The opportunity for Kroger is that national brand
price increases could lead more consumers to shift to the company’s private
label, even though suppliers there also face inflationary pressures.
Kroger
has been exploring buying more private label manufacturing, but has not yet
concluded a deal because asking prices have been too steep, according to a Reuters report.
Discussion Questions: Can national brands afford to take prices up in the
current environment? What would your reaction be, if you were a buyer, to price
hikes from vendors?
The next time someone brings up the improving partnership between retailers and manufacturers, we should trot out Dillon’s comment–reminds me of Marie Antoinette.
If all manufacturers in a category face commodity increases, then by all means increase prices–but study the impact first. Our experience is that categories are much more elastic than brands (there is more “give”) and that an across-the-board price increase may not matter very much (assuming it’s not a dramatic increase). We believe that when price comparisons are being made, it is usually within-store, not between-chains. If everyone raises prices 5% in a grocery category, the odds of a consumer noticing is pretty small.
If commodity prices are rising, the private label firms will have similar pressures as the national brands. Using commodities as a ‘whipping boy’ for all of the price changes, however, are not going to fly in the coming 90 to 180 days.
The consumer still sees themselves in position to seek an alternative. Granted, we don’t live in an agrarian society today. But that consumer understands the macro reasons for corn, wheat, beef, hog, coffee, etc, prices moving about–or they will quickly decide to do so, and make adjustments in their market basket.
Price increases are a fact of life when the cost of doing business increases for the manufacture and supplier. If retailers want to help to control price increases then they should also help manufacturers by getting the cost of doing business with them in line.
I agree with Steve–for center store items price comparisons take place within the store across items in the category. Based on that assumption, if I am the Kroger buyer and the prices of my private label and national brands are increasing at the same rate, I am far less concerned than if my PL items are rising faster. That being said, as the buyer I would want to make sure our prices remain competitive for the category.
Kroger may be OK with price increases, but I am not. Neither is the average consumer unless I am sadly mistaken.
That being said, I have no doubts that the retailers will use any means or excuse possible to increase prices. Someone wrote earlier the prices were increased because of the increase in fuel costs; but never went down when those costs were reduced. We are approaching the “here we go again” point. That does not sit well with me. At some point we have to go back and recall the character in the movie (neither of the names I remember) who said “I am mad as hell and am not going to take it anymore.”
Kroger and all of the retailers are simply acknowledging changes in prices that are occurring. However, I strongly disagree with David Dillon’s assessment that suppliers have a choice to make and should consider NOT increasing their prices. Manufacturers have shareholders to report to, just like Kroger, and the consumer will see price increases in other products, both in the same category and others, regardless of the retailer they are shopping at. As the CEO of Kroger, David Dillon should be supporting his supplier partners, not expecting them to carry the burden of rising prices.
Dillon is right. Why would it be a problem for the retailer? “The problem is for them (CPG). Each vendor must make a choice.”
Other than Private Label, there never should be a concern from the retailer about the manufacturer’s price. If CPG raises their prices and the consumer switches to less expensive products, they made a mistake. If the consumer does not switch, they made the right decision. It is their choice and their risk.
In terms of pricing, the retailer should be concerned with its pricing vis-a-vis their retail competition. Run a better operation (i.e. Wal-Mart) and they will be successful, no matter what CPG charges for products.
My concern is that with all the pressure for brands to bring down prices, there is a serious danger of the brand not accepting responsibility for persuading the customer that THEIR brand is worth a higher price. Instead, retailers treat all brands (except their own, maybe) as commodities and competitors chime in to endorse the anti-brand message: treat all products as commodities. All this anti-brand force tends to make brand managers lose confidence in the value of their own brands, and surrender to commoditization of their brands. The retailer doesn’t care, why would your competitors care (about your brand.)
I have pointed out again and again that people will pay more for the moderately higher priced item – IF you given them justification for it. But they don’t want to be chumps and just give you extra money. They do want to treat themselves better, with value and a more comforting purchase. If you don’t believe your brand offers a better value at a higher price, or don’t know how to convey that message to shoppers, get the hell out of brand management, NOW. And stop doing damage to the foundation of modern free enterprise, and the thriving prosperity of the free world.