Pushing Back on Prices
Retailers and wholesalers have been understanding over the past year as fuel and grain costs went up and suppliers sought price increases for their products. But, the combination of cash-strapped consumers, falling fuel prices and stellar financial results posted by manufacturers has many merchants vowing to “just say no” to any other hikes that brands might seek to push through.
“It’s going to be difficult for food companies to maintain price let alone take price,” Jim Hertel, managing partner at Willard Bishop, told The Wall Street Journal. “The prospect of a prolonged economic slowdown has made retailers’ price competitiveness top of mind.”
Executives at major consumer packaged goods manufacturers understand that they will need to follow other paths to build bottom line results.
Irene Rosenfeld, chief executive at Kraft Foods, said, “As we look ahead, we’re assuming our margin growth will come from volume growth and higher-margin products in the portfolio and not pricing.”
David Mackay, Kellogg’s CEO, said his company had not seen retailers getting tougher when it came to negotiating deals but “certainly there’s a heightened sensibility to the pressure that consumers are under. Naturally that’s going to lead to very full discussions on all these topics.”
Discussion Questions: Do you see retailers and wholesalers pushing back on manufacturer requests for price increases? Will they be looking for price decreases? How will this affect trade relations?
Commodity prices have declined. Wheat is less than 50% of its March peak price. Furthermore, supermarket profits rise when commodity prices rise, because most groceries are priced on percentage markups. If the supermarket’s margin is 20% on Cheerios, the higher the wholesale price, the higher the supermarket’s margin dollars per box. As long as all competitors’ costs rise at once, no single supermarket is disadvantaged by a price increase. They all make more on the same unit volume. Inflation helps retailers. Deflation kills retailers. Ask the folks in the shoe business. They suffered deflation for years.
Two comments: First, I don’t think manufacturers are showing record profits. Otherwise, companies like Pepsico wouldn’t be laying off thousands of employees.
Second, I believe that while it makes no sense from a customer relationship standpoint for retailers to allow more price increases than are necessary, selective re-pricing is probably a good idea for both parties. We, as an industry, don’t do nearly enough work with product pricing to achieve higher profits. Perhaps we’ve lost this aspect of category management to layouts and assortments and experiences, but it is potentially easy to fix pricing such that the consumer is not gouged but everyone makes more money.
Manufacturers can never hide their greed, regardless of how they may portray themselves. The fact is that they will continue to raise prices with whatever retailers that they can get away doing so.
While larger retailers may have the clout and buying power to call the shots, I worry that smaller retailers and mom and pop shops will face higher prices. I expect manufacturers to use volume discounts as the proverbial carrot, knowing full well that smaller stores will never be able to hit those numbers.
Increase in prices? Now? With consumer confidence at such a low point? This is not the best time to pass on price increases to customers. We need to get people shopping again and we need to get them to feel good about spending money. The only message that customers need to hear is a value message and retailers must get vendors on board. If I were a retailer, and a vendor demanded a price increase, I would seriously re-evaluate their current shelf space and positioning. High margin, high velocity and high value is what I want on the shelf.
I have been in numerous meetings conducting business with retailers and manufacturers and there is absolutely no question that retailers are showing a stronger resistance, and the “just say no” tendency to manufacturers announcing price increases. Unfortunately, this resistance is actually adding to the problems of the troubled economy because manufacturers in turn will be losing significant amounts of profits on their end which in turn will result in many brands going out of business and lost jobs which also mean fewer consumers that can spend at retail. Would it be acceptable to retailers if manufacturers took a similar approach and said they will need to stop paying increasing fees for slotting, promotions, and to curtail the overall rising cost to do business with retailers? The burden needs to be taken on both sides to get through this struggle, together.
As a small retailer in the pet category we are feeling the squeeze. I know that I cannot cut my margins if I am to survive–as all my costs are rising.
I have just posted a price increase on a popular dog food that has been out of stock for months, apparently in preparation for a reduction in bag size and a substantial price increase. How does it make sense that the price of the large bag goes up $10, the bag size goes *down* 5 pounds, and there’s a rumor of reformulation to boot?
I’m thinking about “just saying NO!” by discontinuing the food. Does the manufacturer think my customers are stupid?
You just can’t categorize “manufacturers” and “retailers” as if they’re all alike. Not all manufacturers took price increases that they should have. They tried to hold off either out of fear or out of a genuine loyalty to their customers. Not all retailers are going to beat up every manufacturer for every nickel. Unfortunately, the vendors who held back will now be beat up by those retailers who happen to be greedy and unreasonable. This works its way around in every possible combination, as it always has, and ultimately market forces prevail. As for the short term, of course, everyone is watching their pennies, and price will rule more than usual.
For many categories, it is hard to get a price increase from some major retailers. So many manufacturers took the easiest justification to explain and that was the price of oil. It was hard for retailers not to go along with price increases based primarily on oil as a justification. Now that oil has dropped so dramatically, it leaves these manufacturers very vulnerable to demands for a price cut.
Most manufacturers have had many other price increases other than oil and most likely needed an increase without considering oil, but they took the easy way out when they they explained their last increase. Now they will have some big selling and dancing to do to satisfy the Walmarts of the world and their ultimate consumers. Trust is not in high supply right now.
As the dollar weakened over the past several years, many retailers had to accept effective cost increases just on the currency conversion. In the current business environment, with the dollar strengthening, I can’t concieve of any retailers accepting any cost increases. Rather, I would anticipate a determined effort to gain fresh cost concessions across the board.
There is definitely an imbalance. In September, the Consumer Price Index was up 7.15%, year over year, for food at home, but the Producers Price Index rose 8.1% in the same timeframe. This also the fifth straight month that the PPI has been higher than the CPI, and it measures the extent to which retailers are eating a lot of the price hikes. That can’t go on forever, and consumer prices will have to rise. This is a difficult situation for retailers, but in actual fact, over the last year and a half or more, PPI increases have exceeded those for CPI in food at home for most of the time. The implication is that the gap between manufacturers’ prices and retailers’ ability to pass them on is an increasingly serious threat to retail profitability.
If retailers aren’t pushing back on manufacturers to reduce price increases, they should be. And this goes for private label suppliers as well.
This is the problem with pricing changes associated with economic events. When manufacturers go to retailers with a price increase and directly tie it to rising fuel costs then when the fuel costs drop, retailers naturally will come back for price concessions.
Pricing strategies from manufacturers need to start with retailers and thus ultimately are consumer-centric. Regardless of economic conditions, we work with manufacturers and retailers constantly on pricing strategies–it is as important as any other strategy such inventory management etc. A good pricing strategy needs to look at product segment individually and have a short term and long term pricing strategy that factors in economic changes.
We find many retailers and manufacturers have started to figure this out. However, many more still need to. This is critical to the long-term survival of both parties.
Similar to others, I fail to see evidence of manufacturers recording record profits. In the end, this matter will play out at the store level. Are consumers willing to pay more for goods with confidence at such a low and wallet tightening at such a high? Highly doubtful.
That said, it will ultimately come down to supply and demand–especially over the holiday season. Consumers will be the determining factor here. Will they demand products despite higher costs or stay true to their vow to curb spending?