Yes, private label and less expensive lines can be expected to outperform their counterparts in inflationary times, but - all else being equal - this shouldn't lead you to significantly change your product mix or dive into deep promotions. There's a temptation at times like this to try to make up for slower sales by abandoning an everyday low price program in favor of a hi-low or hybrid program to bring more shoppers into the store. You may succeed in getting more transactions but eventually this strategy will lead to reduced profitability, said Hoss Tabrizi, SVP of advanced analytics at Information Resources, Inc., Chicago.
Promotion and schematics must be thought out carefully, with consideration also given to package downsizing that many vendors institute instead of price increases. Some vendors - afraid of the share impact of a price hike - put through aggressive deal discounts at the same time to ease the pain, he notes.
"They may be afraid of losing share right after a base price increase and therefore they try to do a BOGO immediately after a price increase to gain back some of the lost base volume," he explained. "It's a bad idea. On one hand, the consumer sees prices going up, and on the other hand there is a major incentive to purchase at a low price point. It's a destructive sequence because it conditions the consumer to buy primarily on deal in order to escape the inflation cycle."
Promotions such as this tend to attract cherry pickers who are not profitable customers, Mr. Tabrizi explained. Further, deep discounting in an inflationary environment confuses shoppers, cuts margins and only delays consumer reaction to new pricing realities, he added. Mr. Tabrizi said the temptation to act hastily with deep discounts is easy to understand, since shoppers - when first faced with substantial price hikes - tend to go into shock mode and dramatically reduce their purchases.
But this reaction tends to abate as consumers realize that an inflationary price increase is going to be around for a while and that they have to live with it, he noted. To speed up this process, some retailers are taking a price increase on an entire category as soon as the category leader does. This practice may prove highly effective as it eliminates the incentive for consumers to purchase low-margin deal items, Mr. Tabrizi said. "The retailer is telling shoppers, in essence, 'You have to get used to this. It's not a single brand, but across the board.' The only downside here would be if consumers feel you aren't being sensitive to their needs, forcing them to shop the lower-end channels. You have to be careful, because every category is different."
Discussion Questions: How should retailers using EDLP strategies adjust to the coming inflationary cycle, especially in categories that have seen long deflationary periods? Should they become noticeably more promotional? How do they transition to higher prices without rattling their consumers?