A collision of factors
The causes of inflation are well documented—rising producer and fuel costs, supply chain and transportation challenges—combined with repeated waves of surge demand driven by the Covid pandemic. Consumer demand remains high. Unemployment is low. Out of stocks are visible on shelves across the country.
As outlined in the report, at the end of 2021, the core consumer price index (CPI) increased by 7%, year over year, with the CPI for food rising 6.5% in December.
Yet the U.S. grocery industry is flush with resources following a year of record sales and profits in 2020, according to FMI. Retailers have the capacity to absorb some producer price increases, and many have for short periods. When transportation costs and tight supply in key categories such as meat and seafood are added to the mix, the challenge becomes a bit knottier.
Industry experts believe that inflationary pressures will continue. Sarah Wyeth, S&P Global Ratings’ Sector Lead, Consumer & Retail, said, “We expect inflation to intensify as suppliers continue to pass on their own elevated costs. As consumers’ purchasing power declines, we expect it will be more difficult to pass on the costs. We expect this trend to emerge in the second half of 2022.”
Address inflation with insights
Addressing the inflation challenge demands an insights-driven approach. Retailers who leverage data strategically will better understand shopper response to price increases and gauge how to respond in each product category.
NielsenIQ Retail Measurement Services (RMS) has documented meaningful price increases across all 13 grocery super-categories, but the impact varies significantly. For the full year of 2021, the steepest inflation rates were in meat (14.2%), and seafood (12.4%). The same two departments continued to lead the charge in January 2022, with meat prices up 13.1% year over year and seafood prices up 11.8%.
Those January price hikes were associated with volume declines, however—off 5.2% for meat and 9.7% for seafood. By comparison, bakery prices were up just 3.5% in January, while volume increased 11.5%—the largest year-over-year category jump by far. Retailers will need a fine-tuned understanding of behavioral shifts like these to manage their impact upon loyalty and profits.
“The impacts of rising inflation and consumer buying behavior in response vary by category of consumer goods,” say the report authors. “Retailers need the data and insights to understand the categories and brands where customers may be more willing to tolerate price increases without negatively impacting sales.”
As prices rise, consumer buying behavior and sentiment is shifting:
- Shifts across categories. Consumers are making trade-off decisions between spending categories—meat and seafood volumes have declined year over year in recent months while the deli and bakery categories have trended upward.
- Shifts to value. Consumers are focused on value, so they are looking for less-expensive product alternatives. According to industry executives, price-sensitive shoppers are buying cheaper cuts of meat such as bone-in chicken and pork, as well as turning to store-brand meat products.
- Shifts to home cooking. Consumers are preparing more meals in their own kitchens and spending less at restaurants.
Retailers and brands should leverage best available technologies and data insights to confront these challenges and intelligently pass on costs to consumers where justified. More complete, granular, and timely data on the latest consumer buying trends can help retailers and brands understand how consumers respond to prices increases differently depending on the category. Long-held beliefs about price elasticities can be tested empirically to identify more effective strategic options.
“It is all about the data,” advises Phil Lempert, CEO and Founder of SupermarketGuru.com and Retail Dietitians Business Alliance. “Monitor consumer shopping behaviors and product availability in order to determine which foods are in demand and focus retail assortments on those. The days of 45,000 SKUs are in the past—focus, focus, focus, and satisfy shoppers’ needs and wants.”
Executing against those insights requires software tools designed to enable comprehensive price optimization and business planning across retail processes.
Four data-driven strategies
The report identifies four strategic areas where superior use of data and insights can lead to more informed decision making in the present inflationary period. All are familiar to retailers, but all can benefit from refined approaches:
Price optimization. Retailers can use more complete data and advanced pricing science to identify which products are most important to shoppers and analyze various pricing scenarios to find a balance between satisfying customers, driving increased sales, and optimizing profit margins.
Competitive pricing becomes elevated in importance when shoppers are feeling the strain of rising costs. Digital shopping tools let them rapidly compare prices across retailers and brands. For omnichannel retailers, competitive pricing intelligence is an essential capability, leading to decisions that may be refined further by geography, and linked with assortment, allocation, and promotion planning.
An understanding of brand-specific price sensitivity is critical to mitigating risk from price increases. A category’s overall elasticity can conceal significant variation across individual brands. Premium products from market leaders with strong customer loyalty may be more inelastic than mainstream products from follower brands.
Assortment and allocation planning. Shifts in demand during the pandemic and continued changes due to rising prices have exposed limitations in traditional methods for allocation, assortment, and promotion planning.
Retailers need data to understand how their customers’ buying behavior is changing. For example, according to industry reports, retailers are working with suppliers on stocking larger quantities of lower cost meat products in response to shifts in meat-buying preferences—and in anticipation that this behavior will endure.
With a better understanding of how product elasticities can vary by category, retailers can prioritize products in growing categories that may be less price sensitive, therefore more inelastic and less likely to decline when price increases are taken.
There is also significant opportunity in using shelf-edge analytics to rationalize assortments at the SKU level, both in stores and on the digital shelves.
Promotion management. Promotion strategies based on rules of thumb and how things have been done in the past are not sufficient in the current environment. They provide limited insight into the most impactful revenue generating opportunities and may focus too much on short term results.
Retailers are becoming more open to automation of promotion and markdown optimization, which can help unearth more impactful revenue-generating opportunities. Automation is also essential to implementing personalized promotions, which can go a long way toward persuading frequent shoppers that they are getting great value on items most important to them.
Retailer and brand loyalty cannot be taken for granted during inflationary times. These programs are key to maintaining shopper confidence.
Retailer-supplier collaboration. Retailers recognize the need to be competitive in the products that matter most to their customers. Many have pushed back (where they can) on price increases from brands and suppliers.
To balance these considerations with the reality of higher producer costs, tighter retailer-supplier collaboration is more important than ever to maintain sales volumes and keep the customer. This practice is rooted in shared insights, facilitated by a common data platform.
A look ahead
Retailers and suppliers need access to comprehensive data and analytics and new tools and technologies to maintain growth and profitability – not only during inflationary times.
With present market conditions changing rapidly due to inflation, timeliness and accuracy are at an even greater premium. Retailers can plug into multiple dataflows to gain a fuller picture of consumer and competitor trends.
Reliability and transparency enable more informed pricing and promotion decisions and support more productive, fact-based collaboration between trading partners. An intelligent approach benefits retailers, vendors and consumers alike. By acting with purpose, retailers can turn this situation into an opportunity to grow share, profits, and strengthen price perception.