Decreased Use Of Trade Promotions Hikes Grocery Costs, But Everyday Branded Prices Still Not Rising – IRI

A new study released by IRI shows that despite rising inflation and widespread predictions of soaring supermarket prices as Britain prepares to exit from the European Union, the price war with discounters continues to keep the everyday base prices of grocery products sold in the mainstream supermarkets lower than at the beginning of 2014.

The study, IRI Big Question: The grocery price war and outlook for 2017, is based on analysis of actual sales of food and drink products in the UK’s major supermarkets. It reveals that while average prices have risen – by 1% in the last year – the increase is almost entirely due to a decreased use of trade promotions. There were 12% fewer promotions in 2016 as multi-buys (such as 3 for the price of 2 deals) disappeared from many shelves and the level of discount offered by promotions reduced. Manufacturers and retailers have opted, where possible, to reduce the promotional savings that shoppers can benefit from, instead of increasing everyday base prices.

Although manufacturers and retailers have had to contend with increased costs, IRI found that the base prices of branded grocery items (that is the price excluding any promotional discounts) remain lower than they were three years ago. At the end of February 2017 they were down by -1% compared to the previous year. Base prices for alcohol brands were also down by -1% for that same period, the slowest rate of decline for more than two years.

Martin Wood, Head of Strategic Insight, Retail at IRI UK and co-author of the report, said: “With fewer deals on grocery items, the cost of the shopping basket is more expensive, but only by 1.2%. Importantly, the increase kicked off at the very end of last year and is not yet due to retailers increasing everyday prices. The grocery industry has not only reduced the number of deals that they run throughout the year but also cut back the deepest levels of discount that used to be given. There were over half a million fewer multi-buy opportunities for shoppers in 2016 compared with 2015, reducing particularly during the last six months of the year.

“Despite this small rise in the average price of food and drink, shoppers have continued to be the winners, saving £9.3bn over the last three years from price cuts, which is equivalent to £2.90 per household for every week over the last three years.”

Wood added: “Manufacturers are caught up in the retailer price war, but this hasn’t stopped retailers from increasing the price of their own label ranges.”

Own label pricing is rising faster than brands as retailers start to manage their own rising costs. This is the first time that own label prices have risen year on year for three years. Grocery own label base prices were the same in February 2017 as they were in February 2016 but started rising in November when branded base prices were still going down.

Meanwhile, with many financial forecasters warning of further commodity and duty increases this year, IRI said it also believes that the UK is set for a period of sustained food and drink price inflation.

It expects that the number of promotions to continue to reduce and to be more price off than multi-buy. Pressure on margins will also lead to more ‘shrinkflation’ on the size of products and other initiatives to reduce operational costs.

Wood advised manufacturers to keep on top of overall price changes by category, week by week and to monitor base pricing in addition to average pricing when negotiating with retailers. “Understanding the relative everyday and promoted pricing within each category is vital for optimal strategic planning and tactical decision making,” he said.

“If manufacturers know how their products respond to changes in pricing and promotions, they are better placed to optimise price in a rapidly changing environment.”

NAM Implications:
  • The consumer is being treated as sufficiently savvy to appreciate that multi-buys lead to increased wastage because of refrigerated sell-by breaches, yet too dumb to notice ‘shrinkflation’ in their favourite brands.
  • An open goal being created for the competition?