Q&A: The impact of price increases on retailers and manufacturers
March 12, 2019
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This post is sponsored by Acosta.

Manufacturers and retailers are grappling with rising prices in the grocery and consumer packaged goods sectors. In this interview, Acosta’s Kim Adoerre and Colin Stewart discuss what is driving price increases, the impact on retailers and brands, and strategies for getting pricing right.

What’s driving price increases overall in the grocery segment, and what impact is this having on retailers and manufacturers?

Colin Stewart
Stewart

Kim Adoerre
Adoerre

Adoerre: Increases in price have mainly been driven by a rise in raw good costs such as aluminum and paper pulp for products like paper towels, but also packaging and transportation costs. The rising costs are having an impact on both retailers and manufacturers since they need to be absorbed somewhere, whether that means a higher price at the shelf or cost-cutting practices within production, logistics or human resources.

Why are some segments seeing extremely high increases?

Adoerre: Categories that are experiencing higher than average increases are being subjected to the rising costs at a higher degree, such as soda and beer manufacturers that use a high volume of aluminum. Another factor is product assortment, where certain categories now contain pricier selections that raise the overall category price. As an example, the fresh meat category has experienced some of the highest increases in overall price, with one reason being that shoppers are purchasing more expensive items like grass-fed and all-natural varieties. Similar trends are evident with pet food and baby/household care.

How should manufacturers balance the need for higher prices against consumers’ product size preferences?

Adoerre: According to our research, most shoppers view an increase in price as a more honest approach versus a product size reduction with no adjustment to price. When asked how size reductions made them feel, almost all expressed a negative response ranging from angry to cheated to disappointed. No one wants to pay higher prices for anything even beyond groceries, per our research, 80% of shoppers accept that food prices may go up when external cost factors rise. It’s important for manufacturers to really consider potential adjustments in package sizes since a negative response from shoppers can result in brand erosion and alienation. 

Why is it important to align with private brand costs and what’s the first step to doing that?

Stewart: The balance of price gap with private brands is important to sales and profitability. Too high a gap above private brand pricing will push more consumers to trade down to a lower price product. Too small a price gap will reduce private brand sales and reduce profitable brand sales. A key first step is identifying the optimum price gap between leading brands and private brands, which can vary across categories and is most important in commodity categories with higher private brand share.

Adoerre: In addition to the price gap between private brands and national brands, when it comes to rising costs some retailers compare manufacturer proposed price increases to their own brands and believe they should be comparable. An issue that can arise is for smaller manufacturers that may not have the sheer scale of some private brands and have a more difficult time either absorbing costs or getting the best rates for raw goods and transportation costs.  

What’s the most important thing to know about price elasticity?

Stewart: Price elasticity is not linear, meaning there are key price points and price cliffs where sales will decline or increase at an accelerated rate. It is also important to understand price elasticity in the context of sales and profitability in cases where an item changes price and whether other items in the category follow or not. It is important to not only understand price elasticity for a product, but also to understand the cross elasticity with other competing products.

For more insights, download Acosta's report, The Pricing Conundrum.

Kim Adoerre is a research manager on Acosta’s Strategic Advisors Team. With over a decade of category management experience for a wide-range of manufacturers, she now leads Acosta’s Hot Topic publications. She is focused on developing research to pinpoint new compelling insights in the consumer packaged goods industry.

Colin Stewart is senior vice president of Acosta Insights, Center for Shared Business Intelligence. He was instrumental in the development of Acosta’s Insights Team, known today as Acosta Strategic Advisors, which provides growth strategy, custom shopper insights and advanced analytics services to CPG manufacturers and retailers.

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