Cost recovery in today’s inflationary grocery market is a potential minefield. It’s a constantly moving target, made more complex by uncertainty about how all the moving parts (competitors, retailers, shoppers and consumers) will react.
- Costs continue to rise on many fronts across the FMCG sector internationally, not least due to supply disruptions, raw materials shortages and wage/salary escalation. There are variations from market to market, but many issues are common.
- The cost recovery challenge is very much driven by individual category considerations. Companies say price increases may not have a direct relationship to COGS increases for each product. More likely is a portfolio approach, influenced by competition and price elasticity assessments.
- Some say elasticity models aren’t working, however, because consumer patterns have been disrupted. So, if you are anxious about the degree of guesswork needed, you are not alone.
- Companies are adopting several strategies to mitigate increases, including SKU rationalisation, internal cost cutting and price increases, including raising average selling prices by adjusting their promo mix.
- Institute members tell us that retailers are generally realistic, even receptive, about price increases, while demanding more data to justify claims. No doubt they need branded product prices to increase as cover for their own private label increases, since they face the same cost escalation as manufacturers.
- Range rationalisation is not always welcomed by retailers, since manufacturers tend to cut low volume lines and many of these items offer higher margins for retailers. So, expect this to come back and bite you as retailers refocus on category average margins.
- Some say managing pricing right now is a tightrope walk between cost recovery and potential lost revenues. Getting the timing and scale right in the year ahead will be a major challenge.
- Retailers are themselves faced with can’t-win options as they stare down competitors, waiting to see who moves first. In the meantime, we can expect profit warnings from many retailers as they prioritise market share over short-term profit.
- The FMCG Institute?is a?global community for senior executives from FMCG manufacturing companies. It's a place for open discussion between peers, sharing best practices from around the world, and challenging entrenched ways of thinking.?Our mission is to assist FMCG manufacturers to anticipate and adapt in a fast-changing world. For more information visit: www.fmcginstitute.com
