Photo: @rebekah via Twenty20
Will retailers find it harder to pass along price increases in the months ahead?
The Labor Department last week said U.S. inflation reached another four-decade high in January, accelerating to a 7.5 percent annual rate. Consumers haven’t fully felt the sticker shock so far, but they may very soon.
A healthy economy supported by stimulus spending has helped consumers ease the pain of steady hikes in prices across categories, but government subsidies connected to the stimulus have mostly ended.
Consumers, having indulged less on travel, restaurants, entertainment and sporting events, also had more money available to spend on consumer goods, but such discretionary spending has rebounded as the economy has opened up.
On Coca Cola’s fourth-quarter call last week, James Quincey, chairman and CEO, said crisis environments that involve “a lot injection of money into the economy” similar to the pandemic’s stimulus checks are often followed by continued inflationary pressures amid compressed incomes. In those environments, pricing power — whether through product innovation, marketing and execution — becomes more critical in pushing through price increases.
“It’s easier to do pricing in a stimulus environment where everyone else is going up,” said Mr. Quincey. “It’s much harder when there’s a real squeeze on incomes.”
Consumers may also become more price conscious as inflation pressures earn more headlines. A new study from Yelp’s Economic Average shows consumers’ concern with inflation is the highest on record.
Inflation is further expected to be a major theme around mid-term elections with accusations being made of corporate profiteering amid record profits across corporate America.
Many economists predict price growth will peak in the next few months before inflation slowly moderates, assuming no new COVID-19 variants arrive to sidetrack the economy’s recovery.
Speaking to Advertising Age, Gary Stibel, founder of New England Consulting Group and former P&G brand manager, believes marketers will have to work harder to hide price increases — shrinking packaging, launching loyalty programs or offering larger-sized value packs — or make noticeable product improvements to justify a higher price.
He further says marketers shouldn’t be afraid to talk about inflation and offer money-saving solutions.
“Too many brands are like deer in the headlights,” said Mr. Stibel. “They take naked pricing. They render themselves vulnerable.”
- Coca-Cola (KO) Q4 2021 Earnings Call Transcript – The Motley Fool
- Inflation Related Reviews Reach Record High in Q4, According to the Yelp Economic Average – Yelp/Business Wire
- What Does Inflation Mean for American Businesses? For Some, Bigger Profits – The Wall Street Journal
- Democrats Blast Corporate Profits as Inflation Surges – The New York Times
- Companies See Fattest Profits in 70 Years, Complain of Inflation – Business Insider
- How Marketers Should Adapt To Rising Inflation – Advertising Age
Discussion Questions
DISCUSSION QUESTIONS: Will it become more difficult for brands and retailers to pass through price increases to offset inflationary pressures in the months ahead? What advice would you have for brands and retailers struggling to make pricing changes and adjusting their messaging?
Poll
Loading …BrainTrust
Dave Bruno
Director, Retail Market Insights, Aptos
Ken Lonyai
Consultant, Strategist, Tech Innovator, UX Evangelist
As the heat comes out of the consumer economy it will become more and more challenging for many retailers to pass across price increases without consequence. The problem is that when faced with a squeeze on their finances households will cut back on volumes and that means some retailers and brands will miss out on their share of spending. The best way to hedge against this is to have a very compelling product or proposition that people want to buy. Other tactics include having clear tiers from value to premium so consumers can trade up and down as needed. Another, slightly more underhanded way is to disguise price increases with different formulations, pack sizes or added-value elements. An apparel retailer once told me that rather than simply bumping up prices to cover inflation, they embellished products with little features and designs that cost an extra, say $1.50 and then raised the price of the garment by $5.
Price increases will become unavoidable as product costs increase. For product categories that are seeing the highest cost increases, all manufacturers and retailers will be in the same position. To maintain profitability, it will be imperative for companies to pass the increased cost on to consumers with increased prices. In the end, consumers will be hit the hardest.
For households with a good cashflow, value packing will work for both sellers and buyers. For households that count on the next paycheck, discretionary items and large packaging will diminish. Apparel will be made to last longer and high ticket items such as C-E and automobiles will wait until inflation eases. The luxury market may not even notice the difference. There is no single answer that covers all segments. The question is “what will the overall economy do?”
We are seeing grocery prices go up by at least 15 percent in several products, and as much as 40 percent in a few categories. Something that was 99 cents is now 1.39 or 1.49. I think retailers would have priced this to absorb some level of inflationary pressure for a few months to a year. If it does not get better, retailers have no an option but to pass that on.
The other option is to implement more sophisticated pricing strategies that present consumers with a more balanced cart. Certainly, prices will have to go up on some key items where cost increases require, but there will be room for prices to go down on other items, and savvy retailers that leverage smart pricing science can find competitive advantage by improving their price perception during inflation. I suspect my friend and fellow BrainTrust panelist Matthew Pavich may have more eloquent things to say on the matter, so I will simply close by saying do not underestimate the opportunity to find advantage with more balanced prices during times of inflation.
Pricing is a minefield for brands and retailers – too high and customers either reduce spend or seek cheaper alternatives, too low and a retailer risks bankruptcy. It’s especially difficult today because of the power of scale wielded by Amazon and Walmart that gives them a clear cost advantage, and the strategic shift of Dollar General and Five Below to offer a wider range of products at discounted prices. Forming partnerships with other companies is one of the best ways to create a broader ecosystem of products and services to offset price increases by adding convenience and value for shoppers. Partnerships also help spread the cost burden and potentially share some operational infrastructure. Many hands make light work – and more customer traffic.
Much of the current inflationary pressure is coming from energy prices and fuel, which are pretty inelastic items so more pressure will land on retailers and brands to hold back price increases or become much more creative in how they package their product. All products will be affected by raw material price increases plus the increase in operating costs from transport and wages. Companies cannot just absorb those additional costs so they will have to find ways of passing them on to the consumer, but the clever ones will do it in a way that is much less obvious. One major difference this time around is the presence of discount retailers, particularly in the food market where Aldi and Lidl offer a very real alternative at a lower cost for the consumer. They could accelerate their growth in the market taking more market share from the major players.
Paper and packaging (corrugate) is another giant pressure point — the consolidation of paper manufacturers over the past two decades into just a handful of global suppliers, and their loosely coordinated efforts in the Before Times to close mills and restrict supply, has paid off for them in this crisis handsomely. My company prints games, flash cards, posters — I’ve seen more price increases from the paper suppliers during the pandemic than I experienced in the last ten years combined. Demand is booming, but the supply is restricted, and I have to pay what they demand — I’ve laid off all the staff I can bear, outsourced what we can (while still keeping everything in the USA) — but I have no choice but to increase prices.
Of course it will be difficult to pass price increases on. Nobody wants to pay more. The public knows about the high inflation, so it will not come as a surprise to them. It’s time for retailers to take a look at opportunities to save a few dollars, which could be passed on to the customer.
Retailers should look to partner with vendors on ways to decrease costs. I’m not suggesting they “squeeze” the vendor, but instead find ways that won’t impact either side’s bottom line. For example, we had a client that worked with their overnight shipping company to save money on shipping. That savings – at least part of it – was used to offset price increases.
I find it ironic that Mr. Quincey, CEO of Coca-Cola, quips about the ease of passing along price increases when consumers are the ones who take it in the wallets. Moreover, Coke passed along one of its highest price increases in its history, 10 percent, but was there anything better, special and different about that can of Coke Classic? No. Unfortunately, for the next several months, pricing will increase on nearly everything and consumers won’t see relief until the end of the year. I hate to say this, but 2022 is going to be a very tough year for consumers and retailers will need to get creative in their attempts to balance the tricky relationship of increasing prices while maintaining consumer loyalty.
The single biggest hurdle for retailers to pass through additional costs is what other retailers do. Much of the current inflation is demand inflation, driven by robust consumer spending. If shoppers want something, they will buy it, but they won’t buy it here if the guy across the street is selling it for less.
The comment in the discussion carries a lot of value, “Consumers may also become more price conscious as inflation pressures earn more headlines.” The current inflation rate follows a year of 1.5 percent. The current inflation rate follows 10 years of the lowest inflation rate of any decade.
Where are we feeling it? Gasoline up 49.6 percent. That is a big deal but the price of gas is still lower than it was twice in the last decade. Eggs up 12 percent, not so much.
This is likely to be an ongoing issue moving forward. It could be that in the short-term prices increase but in the medium term it becomes a combination of this and pack-size reduction as we have seen in some categories over the past years.
Consumers are certainly likely to become value focused over the coming months particularly when pressures on their finances that they have very little control over – like heating, fuel and taxation – rise.
We are experiencing the highest inflationary rates in decades, and it’s having a meaningful impact on where and how we spend our money. It absolutely will be more difficult for brands and retailers to pass through price increases in the midst of inflation. Typically retailers and brands pass along stealth price increases due to rising costs to serve, supply chain costs, operational costs, and the pressures to drive profitability and revenue increases.
Unfortunately, the optics aren’t good for retailers and brands who extend significant price increases during such a challenging time in today’s environment. Customers feel the pressures of inflation and price increases at the pump, grocery store, and other day-to-day expenses. There is the element of retailers and brands covering inflation with price increases, and others where it’s a pure profitability play.
No. Price increases can still be shielded through product price points and added fees for shipping. The inflation impact is still far less than 10 percent, so only bargain hunters will notice. Brands and retailers struggling to shift price points can do so with small increments over time as traditionally has been done. Inflation is affecting all competitors as well, but the consumer will take notice of commodity items that are purchased more frequently – e.g., gas, paper goods, and groceries. The messaging to date has been targeting the supply chain maelstrom, not inflationary pressure. Messaging will be confusing if there’s an immediate shift in pricing due to inflation – and consumers won’t believe corporate profit taking will be justified. Inflation is still a threat, not yet a reality in most peoples minds. When (and if) there’s a shift in this mindset, the retail market will quickly see a downshift – but the last few months’ retail numbers suggest we’re not there yet.
I like the idea of inflation forcing retailers to be better for consumers – designing more appealing loyalty programs, improving products to justify the cost, those are positive twists on a difficult situation.
Passing on price increases will be challenging particularly in food, drug and mass and among those outlets that position themselves as a value option. For other channels, whose offerings are less of a necessity and more discretionary, I believe they will be able to find ways to create value while maintaining margins. Across all retail channels, most would love to invest some of their profits by hiring much needed staff up and down the supply chain. If production and availability of product and services increase as we emerge from Omicron, perhaps the need for price increases will diminish by the third quarter.
Everyone is talking shortages and prices. We can’t hide that. I think a lot of merchants will offer programs with reward coupons with purchase levels on a monthly basis. to generate constant foot steps. Promotions will be the key for everyone as they try to create loyalty.
While no one roots for higher prices, to date consumer push back has been minimal. Chipotle just announced no change in demand after increasing prices. Consumers are flush with cash and also looking to retail therapy to cope with the collective mental depression of a pandemic. For now, it seems that price increases will be accepted. Long-term as rates rise, the stock market may dip and further challenge consumer confidence, reducing price elasticity and making the tradeoff harder.
As DeAnn has pointed out, pricing is a minefield. Who would enter a minefield without the most sophisticated mine detector knowing that one misstep could be disastrous? Dave is absolutely correct to advocate for a sophisticated approach to a very complex challenge. Inflation is just one disruptive factor that retailers need to consider when making pricing decisions. On top of cost increases, they need to consider the competition, supply chain challenges, labor shortages, financial objectives and — most importantly — their customer and what they are willing to spend on any given item, in any given market across any and all channels. And they need to get the timing right. Merchants simply aren’t able to solve this challenge alone and the old “maintain margin” or “keep the same penny profit” approach is a recipe for share loss. The best retailers are using a balanced approach which offers better prices on the items their customers care about the most while surgically finding margin elsewhere – a win-win for consumers and retailers alike.
Context matters. Some industries and categories will have an easier time of pushing reasonable price increases and some won’t.
Although it’s such a behemoth that no significant impact will register, Amazon’s Prime subscription increase is going to cause many to drop their accounts. The company can claim that the rising costs of fuel, packaging materials, etc. justify the increase, but not when company profits continue to grow and the founder’s net wealth grows another $20 billion. Members in the know aren’t going to want to fund another space joy ride or even bolster shareholder’s interests from their receding purchasing power. They will be more sympathetic to local businesses trying to stay afloat than irreverent corporations and choose the recipients of their crunched budgets more carefully.
It depends, of course, on the retailer, since substitution (of lower priced items) or just doing without are the alternatives; so Nordstrom should be wary, but if you’re a dollar store, what alternatives does your customer really have?
Outside of food retailers who have already factored in cost changes, other retailers will indeed be passing cost increases along to shoppers in the form of new retail pricing. Chances are we will see some traditional “sale” price points like 9.99, 19.99 also vanish, being replaced by newer, higher clearance price points.
In the consumable business, they already are passing on increases. There are constant increases. Big CPGs from Coke to Kraft to P&G have announced price increases and those are not yet reflected at retail level.
And just wait for next month, major mass retail chain that many on this thread praise has thousands of price changes planned and has warned stores to get prepared to have the labor to do it. Same for a major drugstore chain warning stores that hundreds or thousands of price changes are coming down in the coming weeks, so be ready.
Many chains do not price increase on a regular basis and wait for resets to take price increases. But in the current environment, those who used that strategy have decided to do increases NOW.
So yes, prices are going up. Some will pay, some will trade down. I think it’ll be another win for private label with lower cost structures to begin with.
I don’t think retailers will have any issues as long as they are transparent in their communications about price increases and other initiatives to mitigate the impact of inflation. In fact, customers half-expect retailers to boost their pricing whenever there is inflationary pressure. So there’s no harm in selling items at higher prices provided that they are not deceiving consumers by treacherous practices. They should keep customers informed about changes in their policies and pricing and give reasons for their actions.