The consumer packaged goods (CPG) industry is undergoing significant price inflation, driven by increased demand, out-of-stocks, a reduction in promotions, and premiumization.
This is according to a new study by IRI entitled – Revenue Growth in an Inflationary Environment – which aims to support CPG manufacturers and retailers as they navigate this evolving environment. The report is based around the US market but is also relevant for the industry in Europe given recent warnings by several leading manufacturers that the prices of some food and grocery goods will need to increase this year to offset rising costs in the supply chain.
“Following traditional pricing practices alone will not be sufficient to increase revenues, boost market share and compete effectively in today’s inflationary environment,” said Dr. Krishnakumar Davey, president of Strategic Analytics for IRI.
“Revenue growth leaders monitor their own as well as competitive price and promotion execution to identify and capture revenue growth opportunities, adapt their pricing to changes in shoppers’ price sensitivity, and leverage the full spectrum of revenue growth management levers.”
The report highlights that manufacturer and retailer decision-makers are facing a new series of pricing challenges as the US economy moves into a post-pandemic phase. In-home consumption in several categories is likely to decrease as more people are vaccinated and become increasingly mobile. The share of dollar spend for in-home compared to out-of-home consumption was approximately equal prior to the pandemic. In-home consumption share jumped to 66% in April 2020 and receded to 57% by December 2020.
Price sensitivity among US consumers is increasing as they begin to purchase goods and services that were not available to them during the pandemic. The IRI study shows that the reduction in demand if prices increase 10% has risen from 16.3% in the 26 weeks ending 26 October 2020, to 17.1% for the 39 weeks ended 28 February 2021, among edible goods. Among non-edibles, the increase is much more dramatic: demand reduction if prices increase 10% has grown from 8.5% to 12.9% over the period, a significant rise of 4.4 points.
This comes at a time when manufacturers and retailers are competing to retain the new shoppers they have acquired over the last year.
In this “evolving, uncertain and highly competitive market”, IRI states that manufacturer and retail leaders must quickly discover new pricing and promotional opportunities and enable granular execution in the form of prescriptive and market-intelligence infused recommendations to teams in the field and in the store.
IRI’s specific recommendations for manufacturers include:
- Frequently monitor price elasticity to capitalize on pricing opportunities in a supply-constrained environment.
- Track promotional effectiveness quantitatively and direct investments to the highest-return activities.
- Gain an understanding of price-pack opportunities across channels and consumers, and assess potential evolution, especially with e-commerce versus in-store.
- Create adequate opening price points and value products while driving sales of premium and super premium brands.
- Drive increased occasions and focus on innovation to realize value.
Recommendations for retailers include:
- Focus on attracting and retaining omnichannel shoppers who are less price sensitive and exhibit greater loyalty, using the right targeting, messaging and assortment.
- Build both value and premium offerings and manage the trade-in gap between value and maintain, and between mainstream and premium brands to fine-tune assortment.
- Understand the effect of pricing and promotion on specific shopper segments to drive penetration and incremental revenue.
- Strategically leverage promotions to drive growth where there is greater price reaction and return on investment.
- Monitor continuously price and promotional elasticity at granular levels and implement revenue growth management practices.
- Clearly articulate the banner’s total value to customers and reinforce opening price point products as inflation increases and a segment of shoppers trade down and look for value products and retailers that potentially offer more value.
Download the full report here
NAM Implications:
- What we have all suspected…
- i.e. significant price inflation, driven by:
- increased demand
- out-of-stocks
- a reduction in promotions
- and premiumization
- (Ultimately driven by a government need to dilute Lockdown debt)
- This 48-page IRI report is a must-read…
- …with insights worth the effort.
