New inflation records
Inflation has been eating away at wage gains for many Americans during the last several months and the invasion of Ukraine combined with other factors are accelerating this challenge. The U.S. Federal Reserve’s favorite statistic on inflation—the core personal consumption expenditures price index—showed an increase of 6.6% at the end of March 2022 compared to one year ago, its highest level since 1981. The pricing of consumer goods products is naturally seeing a dramatic impact from this trend, but consumers aren’t yet balking at paying more across the board.
Many food and beverage companies have responded by raising prices, shrinking package sizes, cutting promotions, or increasing prices at the grocery store. NielsenIQ reports that all fast-moving consumer goods were up nearly 8% since last year, with meat and seafood up 14% and 12% respectively. Companies are well aware that they have to strike a delicate balance when it comes to raising prices enough to offset higher costs—all without making products too expensive for consumers, who could always trade down to cheaper alternatives like private-label brands.
In March 2022, the producer price index for final demand rose 1.4% over February and 11.2% versus a year ago, according to the U.S. Bureau of Labor Statistics. The metric tracks rising costs paid by domestic producers for commodities.
The New York Times reported that “companies are taking advantage of a moment of hot and seemingly unshakable demand … to cover rising costs and to expand their profit margins to pre-pandemic or even record levels.”
So, what does all of this mean for retailers and their CPG partners trying to determine how to price products in these volatile times?
NielsenIQ tracks consumer sentiment over time by segmenting consumer groups based on household financial capability, employment confidence, and spending patterns for years. This data show that consumers are split into two clear groups—those who are not faring well with the current economic situation and those who are maintaining their position or even doing a little better.
Past experience, including the financial downturn in 2007-08, shows that these groups need to be marketed to differently on select products and services, and jointly on most.
6 key approaches to retail pricing in inflationary times
Adjust to bigger baskets, fewer trips
Assess the competition
Address hypersensitivity to price head on
When even the slightest increase in price causes customers to switch to competitors, there is high price sensitivity in the market. Communicating with shoppers is critical in overcoming any price misperceptions. Retailers need to be frank and share the exact reasons for the increase.
Bolster marketing programs with coupons and loyalty rewards
Shoppers are still looking for overall value. Consider promotional tactics that soften the blow of price increases so your best customers always feel appreciated. One note—these programs should be digital-first, meaning they will engage the consumer via a mobile app or online to ensure quick measurement of a tactic’s effectiveness.
Focus on the trade up and trade down shopper
Store brands always grow during challenging economic times, but so do premier lines. Consumers will search for better prices from store brands in some categories, while spending a little extra on others. The key is to price each sector in a way that evinces value.
Adjust to the new normal of bigger baskets, fewer trips
Similar to what the industry experienced during the first wave of the pandemic, shoppers are limiting their trips to the store and ordering more online. This time, it’s not for fear of the virus but to limit their driving due to increased gas prices.
As a result, retailers need to conduct more analysis to determine the impact of price changes on the entire store to better understand what strategies will best retain profitable shoppers.
Assess competition beyond other retailers
The consumer’s value perception of a retailer goes beyond comparing the store to similar operators. After a period when they were one of the only games in town, supermarket retailers in particular need to incorporate restaurants into their competitive purview because the shopper certainly is.
It is critical that supermarkets provide prepared meal selections and kitchens to capitalize on this consumer demand. Pricing is key here because customers have access to a full range of information that enables them to make better value decisions across verticals.
Local, local, local and pricing
While there is the understanding local products may cost more to produce, there is also the expectation by shoppers that local products should now be closer in price to similar products made overseas because of increased shipping costs. Retailers need to be transparent with customers about the price differential or risk alienating them.
For pricing, think overall value
Because some products posting higher prices see a reduction in demand and others retain or grow their sales during inflationary periods, retailers need to pay close attention to individual items and how they are priced within their category.
The bottom line for retailers remains that they should focus on delivering value. The underlying contributors to the current inflationary climate, exacerbated by the war in Ukraine and related fluctuations in fuel prices, aren’t likely to go away next month or even next quarter. These pressures may even increase before the environment gets back to near normal.
Inflation and consumer sensitivity need to be at the center of all pricing strategies and marketing plans, or retailers risk alienating their best customers.