The pandemic has created a more volatile, uncertain, complex and ambiguous (VUCA) trading climate, prone to many and various bouts of instability. Both retailers and brands are seeing their base costs rise, causing supply chains to be disrupted.
There are four key factors that are impacting baseline costs:
- Rises in commodity prices (e.g. precious metals, natural gas, wheat, soybeans, plastics, coal, oil, oats, coffee, corn, sugar, wheat, palm oil, lumber).
- Soaring energy prices: UK gas prices are at record highs, as are French and German electricity prices, and inventories of physical goods are declining (from cars to copper) as consumer spending increases.
- Record high shipping costs: transporting a 40ft container from Shanghai to Rotterdam costs over 500% more than in the past five years.
- Huge shortages: there is a shortage of physical containers, ports are overcrowded, and ships and dock workers are in short supply. Furthermore, HGV driver shortages are causing UK-wide fuel shortages, putting Christmas trading plans and availability in jeopardy.
However, the margin pressure for the retailers is not just down to input costs. Because of the pandemic, retailers’ operating models have had to change, with a fast shift to digital and COVID-19 safety requirements in stores. This has driven a seismic shift in the cost to serve, placing significant strain on the profit and loss statement (P&L) for many retailers as they have invested heavily to open up capacity in online capabilities like click and collect and home delivery. As a result, they will be pushing teams hard to find new revenue streams, such as subscriptions and memberships, financial and healthcare services, monetising consumer and shopper data, and selling technology and logistics capabilities.
Therefore, while the predicted price increases are rooted in cost base realities, landing them with retailers will require some thoughtful planning. How brands manage their discussions with retailers will be pivotal, not just for implementing pack and price changes profitably, but also for their long-term relationship.
By being well prepared in every aspect of the pricing strategy and execution, you will be able to differentiate between strategic, credible, authentic, and empathetic discussions, versus poorly judged tactics that will remain in the minds of your customers for a long time.
So, how should sales teams navigate the minefield of price rise with retailers at this pivotal point in time, with so much pressure on their gross margins already, and when they’re actively looking to recoup these costs, not add to them?
Price Increase Implications
Understanding the immediate implications of your price increase is critical for anticipating and dealing with objections.
Cost price increases have an impact on the value of retailer stock holdings and therefore their Open to Buy quantities – if price increases lead to revenue slowdown, the impact is multiplied. Given the context of the price rise, imagine how many brands and suppliers are walking through the door with the same level of increase and how that ladders up at a total business level for the retailer.
It is important to look at the Pack & Price Architecture in the context of the retailer and not just the brand. For retailers, range and price architecture is a very involved process that draws on many different types of data and insights. Every product and brand, including private label, has a role to play; changing the tiering of a brand can unbalance the whole range.
The implementation process should also be considered. There will be a significant amount of time spent at head office in terms of the buyer negotiating with at least 20 suppliers, re-planning, re-forecasting, and the administration of keying price changes etc through to the shop floor – having to update and reprint shelf edge labels, and re-lay fixtures if increases lead to rationalisation and de-listings.
How do you mitigate your own cost pressures by ensuring you realise the net benefit and protect the bottom line? All too often, we see sales teams steel themselves for price rise notifications, don the metaphorical “tin hats,” and battle their way through a headline price hike, with the inevitable resulting halt in trading momentum, which immediately creates further pressure on numbers. Teams finally breathe a sigh of relief having passed the Gross Price Rise on after a month or two (often longer!), only to spend the next six months trading it all back again to make up for the loss of momentum.
The ‘Gross to Net’ price realisation is where successful price rise management lives or dies.
So, how ready are your sales teams for these defining upcoming discussions in the midst of annual planning, and the joint business planning season, while also trying to lock down a volatile Christmas trading strategy?
Will your sales team be well prepared and on the front foot to create an opportunity to drive competitive advantage?
Our five guiding principles for implementing a successful price increase are available for download below. This short guide provides you with tips to optimise your strategy to succeed with retailers.
Get in touch if you would like to understand how Kantar can support you and your teams in optimising your plan and in navigating this uniquely challenging period.