Curing the Inflation Hangover: How CPGs Move Beyond Price
On the heels of the most promising Consumer Price Index (CPI) report in quite some time, CPGs looking to raise prices are on notice.
The latest CPI revealed a 4% uptick in the overall index, the lowest increase in over two years and the 11th straight month showing an inflation slowdown. Of course, this doesn’t mean inflation is gone and the retail industry is free of all its macroeconomic challenges. It does mean brands can ease up on implementing broad brush price increases and instead treat their inflation hangovers with a more strategic approach to move units. Retailers are making it known: It’s time to move past price and focus on true organic volume growth.
Facing the Impact of Inflation
Having been on the retailer side less than three months ago (serving as the SVP of merchandising at 7-Eleven), the conversations between brands and retailers over the last few years have been difficult.
A 4% increase in the CPI is not ideal, but compared to the more than 9% increase a year ago, it’s a huge swing in the right direction. Retailers were struggling alongside brands to fight record-high inflation. CPGs had no choice but to keep taking price increases and feed them through the retailer, who ultimately passed those price increases on to the shopper.
Retailers repeatedly had to ask a CPG partner bringing a new price hike whether a consumer could bear that increase or not. Then they had to weigh how it could impact volume and sales,while considering the impact on store traffic and basket size. Higher prices were often passed onto the customer, resulting in softer unit volume.
This pattern occurred across retail channels and hit even the biggest retailers. Walmart is particularly concerned with persistent inflation in dry grocery and consumables, according to a report from CFRA (Center for Financial Research and Analysis). Walmart is delivering “a warning shot” for CPGs looking to raise prices, according to the report.
The hangover is real, and it’s clear that CPGs can’t keep increasing prices and expect retailers and consumers to take the hit.
Increasing Volume Growth
Looking at the back half of 2023 and into 2024, food manufacturers are posting strong earnings and citing softer volumes compared to their original projections. CPGs today have an opportunity to bring retailers intelligence and insights to attain true organic volume growth. With predictive analytics and machine learning (ML), there are three key strategies to help grow volume:
Identify the most resilient products. Some categories seemingly go unaffected by price. Confection and snacks, for example, can see prices increase but volume remains strong. Brands can leverage artificial intelligence (AI) to see near real-time results of which products in their portfolio are the most and least resilient against price hikes. The latter will require additional investment to drive volume.
Optimize promotions. Developing a promotional strategy that focuses on driving an increase in volume with the best return on investment is key, and this can be a lot of work. Through AI and ML, brands can run endless scenarios for their products testing an array of promotions and patterns to see which plan optimizes volume at the lowest trade investment.
Choose key partners. AI can also assist brands by identifying the retail partners with the greatest chance to deliver high incremental gains. AI and predictive analytics can help brands prioritize and more strategically deploy trade across retailers and across channels.
Losing the Inflation Hangover
Amid the current inflation cooldown, retailers and consumers are over price hikes. It’s now on brands to implement strategies that drive organic volume growth. Retailers are seeking brand partners with knowledge and data that lifts a total category and moves products. Consumers want prices back to normal.
Traditional methods of analyzing historical purchase data to provide recommendations on how retailers can improve shelf assortments, optimize pricing and evaluate promotions are not reliable in the face of inflation over the last two years. During times of increased volatility, past performance (unaided by AI/ML) is certainly no guarantee of future performance.
Leveraging technology such as AI and predictive analytics can support brands with clear and accurate recommendations on promotional strategies, highlight the retailers that expect to deliver the most incremental sales and zero in on the products in a CPG’s portfolio that will be the most resilient against fluctuating prices.
Like a hangover, the pain doesn’t go away immediately.But the best medicine speeds up the recovery process.
About the Author: Brooke Hodierne currently serves as an EVP – strategy consulting at Insite AI, an AI and strategy partner for larger consumer brands. She joined the company following her time as SVP of merchandising for 7-Eleven. In the role, she drove category management teams that developed, implemented and communicated merchandising strategies for vault, packaged goods, tobacco and services. Before joining 7-Eleven, Brooke held multiple positions at Giant Eagle, serving as VP of own brands, senior director of strategic sourcing and own brands, and director of prepared foods merchandising. She supported brand marketing at Del Monte Foods and held analytical roles with financial investment firms Wilshire Associates, Federated Investors and the Vanguard Group.