Food retailing has entered a dynamic period of change where the practices used throughout a relative period of high growth over the last 20 years should be reconsidered.
As food inflation continues, manufacturers and retailers have reached their limit on how far and how long they can continue to offset the full impact of price rises and deliver the value that squeezed shoppers seek.
Prices will continue to rise. And as they do, volume sales will continue to be impacted. Already we have seen the first decline in volume sales across some food categories – and in household and health and beauty too. Although this is most prevalent in the UK, it is clear across Europe families are making hard choices about what they buy and how often. Nonetheless, with declining volumes, the old dynamics of pricing and promotion rests on a precipice. The only way to move forward and through this deadlock is for retailers and manufacturers to work together.
Creating joint business plans that acknowledge shared goals of improving margins is a great first step. In the UK, the new Grocery Adjudicator Bill seeks to ensure large retailers treat their suppliers fairly with a legally enforced code of practice. However with restrictions on the length of time that a manufacturer can maintain certain promotions, the positive uplift generated by long-term ‘3 for 2’ deals is likely to be severely affected.
Offsetting the decline in volumes that such legislation will bring for brands that regularly leverage longer-term promotional mechanics is going to be of key concern. This is particularly true for brands that operate in an expandable category such as yoghurt or treats where they use these ‘buy more’ deals to create additional reasons for consumers to purchase and eat their products.
New promotional strategies will need to be adopted and this will demand deeper analysis using advanced analytical models to determine how changes in pricing can impact the growth and profit of the entire category – not just for individual brands.
Such category level insight wins favours for brands with retailers too. No longer are they fighting for their own corner of the shelf, but they are working in partnership with the retailer to maximise sales for entire ranges and categories, recognising that both parties want to improve their return on investment and boost profit margins. Providing such vision to retailers also acknowledges volume sales increases are not the only route to profits – indeed they are sometimes a road with a dead end as profits may not always be improved by increases in volume sales.
Certainly our next report (available from 11 July) into pricing and promotion in Europe will highlight that promotions are no longer the critical booster of volume growth that they once were as consumers have become used to them.
For example, by showing retailers how specific factors of high-low promotional strategies generate real margin lifts instead of just looking at volumes, manufacturers can move closer on the road back to growth.
Insufficient analytics is no longer an option. There is urgent need to view not just the profitability of individual brands but of entire categories before pricing and promotional strategies can really be decided. Changes in products in the same and other categories are now extremely relevant in the dynamics of price modelling. Taking a more shopper and basket-centric view of pricing is key.
The mechanics of pricing and promotions has become more high risk with smaller margins for error and the all very real risk that manufacturers can erode brand loyalty if they drive too fast down the wrong path. Working alongside retailers to gain granular insight and plan future pricing and promotional strategies is the only way to find a clear path through the economic gloom.