Grocery prices have steadily increased for the past five years, alongside a recent spike in manufacturing and transportation costs. At the same time, both manufacturers and retailers feel pressure to drive sales at the lowest possible prices. These factors combined have created a "perfect storm" for manufacturers and retailers, forcing the two parties to work together to mitigate the negative impact of price increases.
“The Pricing Conundrum,” a new report from Acosta, Jacksonville, Fla., reveals best practices for effective collaboration between manufacturers and retailers.
"At times, manufacturers are able to absorb, delay or minimize cost increases, but eventually it becomes necessary to negotiate price increases with retailers," says John Clevenger, senior vice president/managing director, strategic advisors. "Seventy-six percent of retailers have pushed back on or have been hesitant to accept price increases. However, we have found that increases are not necessarily a negative, as long as they are executed fairly and equitably across all channels of retail with full transparency."
Highlights from the report entail:
Effects on grocery pricing by department
- No grocery department has been immune to rising prices, but the degree of the increase varies.
- The meat, seafood, pet care and departments, among others, are experiencing the highest degree of price increases.
- The dairy, grocery, bakery and produce departments, among others, are experiencing below average price increases.
Price increase vs. reduction in package size
- Many shoppers and retailers prefer a price increase vs. a reduction in package size.
- 50% of shoppers surveyed noticed size reductions.
- 80% of shoppers accept food prices may go up when external cost factors rise.
Price increase statistics result in new retailer practices
- Almost half of manufacturers surveyed processed a price increase in 2018, with an average increase of 7.8%.
- The trend is expected to continue for the next 1-2 years.
- Retailers are implementing new practices, including adding economists to staff, alignment with private brand costs and protection/compensation until largest competitors move retail price.
Best practices for manufacturers
- Know your facts. Understand price elasticity and be able to simulate the price increase. Identify the right level of price increase to avoid loss of market share or significant sales velocity.
- Be transparent. Include specifics on what is driving the increase, evidence that the increase is applied across the market/competitors and a plan to offset a price increase in the short term.
- Provide time. 90-100 days of lead time is ideal. Ensure timing does not conflict with marketing programs in place for key promotions or seasonal periods.
- Confirm commitment. Reaffirm with the retailer that you are investing in the right ways to drive traffic to your brand, and in turn, the retailer.