Consumer sentiment jumped upward by 13% in the first month of 2024 to its highest level since July 2021, according to the University of Michigan, as Americans say they have a somewhat brighter outlook on the economy. They are aware of reports that inflation is slowing. Most of the time they feel pretty good about that – until they are reminded when they visit the grocery store.
A recent article by economist Paul Donovan, chief economist of UBS Global Wealth Management, shed light on this phenomenon. It comes down to the price of a Snickers bar, he says. While he never uses the retail industry term, “known-value item” (KVI), he describes clearly why the present prices of frequently-purchased products remain painful reminders for shoppers.
While prices on some products like fuel, furniture and consumer electronics have actually fallen in recent months in response to market forces, higher prices on many consumer-packaged goods remain baked in. To add further frustration, the smaller pack sizes many brands introduced in an effort to keep price points stable (known as “shrinkflation”) are still on store shelves, and shoppers know it.
“The different inflation rates for infrequent and frequent purchases is a big part of why consumers mistakenly believe inflation is higher than it actually is,” wrote Donovan.
Food shoppers have long memories
Pricing professionals in the food, drug and mass trade well understand the importance of maintaining a positive price image that builds trust in the minds of their shoppers. Key principles include less frequent, less drastic price changes, maintaining consistency over time, and managing the relative value of items within each category. Also of primary importance: Maintain these disciplines especially vigorously on KVIs. Shoppers have long memories, especially about prices of items they buy often.
When France’s second-largest grocer Carrefour announced in early January that it would discontinue sales of a key vendors product in its stores due to “unacceptable” price increases, it sparked a dialog about the role retailers can and should play as advocates for shopper value.
“Carrefour’s move is significant, signaling a refusal to pass on undue cost burdens to customers,” wrote Forbes contributor Dan Pontefract.
Wrote Pontefract, “Carrefour continues to build its reputation as a brand that consumers can trust to act in their best interest.” Is this model behavior for other food retailers?
Bring data to the price fight
Certainly, when a retailer determines that its own price image is being harmed by manufacturer price increases, some tough conversations may be in order. It behooves retailers to bring evidence to the discussion. Possible signs that stress may be affecting price sensitivity lurk in the demand signal, while steep prices themselves directly alter shopper behavior. Some coping responses may include:
Trading down within the category to smaller pack sizes, less expensive brands or private labels
No longer purchasing items in a once-favorite category
Fewer average number of items per basket
Shifting trips to alternative retailers like hard discounters
Decline in overall shopping trip frequency
If retailer analyses of POS and loyalty card data signal these behavioral tendencies, brand manufacturers may well be persuaded to listen. They might recognize an adverse impact on their unit volume and consumer perception and collaborate to mitigate that.
Pricing as “love language”
It’s understood that many consumer product price increases since the start of the COVID-19 era were the results of shortages and rising ingredient and transportation costs. Where supplier price hikes cannot be avoided or reversed and shoppers are anxious about their budgets, grocers have an even greater impetus to keep faith with their valued shoppers.
Retailers cannot be expected to simply absorb supplier price increases to protect their shoppers. They can certainly negotiate vigorously for the best possible cost of goods and promotional support. Prices and promotions are the “love language” retailers use to remind shoppers that they are valued.
When every avenue on the cost side of the equation has been addressed, grocers must focus attention on a systematic and intelligent pricing process that serves their entire strategy. Here’s where the discipline we call Total Lifecycle Pricing has been even further elevated in importance in the current era.
A balance must be maintained between the intensely competitive pricing on KVIs and smart pricing on those items that can contribute a little bit more to profitability. A full complement of pricing tools will address four key disciplines that support faster and more accurate decisions while hitting profitability targets:
Price management and optimization
Promotion planning, forecasting, and execution
Collaborative Deal management for retailers and suppliers
Markdown management and optimization
With your shoppers continuing to confront visible and sustained evidence of grocery price inflation, a strong, comprehensive pricing toolbox is essential. Total Lifecycle Pricing is about more than maintaining volume and finding margin opportunities. It’s also about investing in a positive price image and shopper loyalty.
