Street talk: Pressure to grow affects prices and promotions

Investors who have stayed in the stock market through the last decade are struggling to achieve sufficient returns. The decade has not been kind to most Western stock indices and, even with dividend income, investors have not secured the total gains that they expected. The result is that big corporate investors are putting pressure on the companies they invest in to find the growth that underpins returns.  

When the growth doesn't happen quickly enough, they become impatient with corporate management. We have already seen calls for management changes at UK retailer Tesco and just this month New York analyst Sanford Bernstein issued an advisory report on Procter and Gamble (P&G), where it stated that unless P&G shows improvement in the next year investors may lose patience with the CEO Robert McDonald. 

But is growth possible when consumers are changing the way they shop with vigour? Rising inflation and stagnant wages across Europe has sapped shopper confidence as well as buying power. Unlike in previous recessions, uncertainty impacts the majority. They see their buying power squeezed and feel uncertain about the economy. The recession seems to be never-ending. The outcome is consumers have made permanent changes to their shopping behaviour, expecting the austerity measures to continue for some time. Whilst under pressure from shareholders to grow and alleviate the pressure on margins, food manufacturers continue to push through price increases and try to use promotions to sustain volumes.

The combination is forcing consumers to look carefully at their grocery purchases. Swapping to cheaper products and cutting back on meals out have already been two tactics. SymphonyIRI's latest special report on price and promotion across Europe reveals another – looking at whether we really need the product in the first place. Sales volumes for grocery are up just 0.8% and most growth has come from price increases that drove value sales up 3.7%. 

Prices are rising faster in Germany and the UK, where the economic situation is less pressured than Greece and Spain. Yet in many ways the intensity of the price pressure felt by food manufacturers in most categories is masked by the increases in promotions over the past three years. Promotions now account for more than 56% of all products sold in the UK and an average of 25.6% across Europe. The level of promotion is lowest in Germany at 11.6%. This compares to 17.9% in France, 18.5% in Spain, 21.5% in The Netherlands and 29.7% in Italy. 

Beneath this overall frugality, consumers continue to become even more sophisticated in how they shop, responding subtly to the variances in price growth between categories and preferred products. This reflects the greater planning and attention being given to the shop, as they adapt their consumption, swapping familiar brands for retailers' own label or even buying different products in their effort to keep the total cost of their basket down. 

Implementing price increases is a challenge in this market. While essential for manufacturers who feel they need to pass some of the cost increases they face, retailers striving to drive their own competitive growth often resist. This is normally under the covers, but last year we saw a major dispute between UK food manufacturer Premier Foods plc and Tesco. The owner of brands such as Mr Kipling, Hovis and Oxo tried to push through a significant increase, which led Tesco to delist a large number of its lines. This led to a significant fall in sales for Premier and impacted earnings for the year. 

Price is still clearly high on the shoppers' agenda across Europe. It is the reason for the continued growth of the round euro or pound prices we see in many stores. I expect to see a dampening of headline price rises through next year as cost pressures ease and manufacturers recognise the need to retain shoppers. However, the re-engineering of pack sizes and promotional deals will continue to ensure acceptable margins and still enable shoppers to enjoy their favourite brands. 

The economic difficulties faced by consumers across Europe mean that FMCG retailers and manufacturers must master a tough balancing act well into the middle of the decade, trading off volumes and margins. 

I suspect our report is only an early chapter in this overall story.

Rod Street will address the role promotions have in frugal times in a just-food webinar on 3 July. Registration for this event is still open. Click here to sign up.