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What’s really happening behind the inflation headlines?

Inflation increases are well documented and much commented upon but, as retailers face tougher challenges ahead, topline figures are hiding what’s actually playing out in store.

The Consumer Prices Index, is currently tracking at 4.2%, however the headline number  masks the underlying realities and nuances seen within the FMCG sector.

Although the average Price Per Unit (PPU) has increased by 2% over the last year, until now this has not been a result of direct price increases.  On the contrary, during that time, everyday prices were in fact reducing. The increased spend was driven by range changes and shoppers buying larger packs and more expensive brands.

Our most recent data shows that’s no longer the case. We are now at a tipping point where, for the first time this year, the change in average price for FMCG goods is being driven by direct price increases.

PPU
piː-piː-juː

The average price paid per item across the market.

Managing Inflationary Pressure

The analysis of PPU uncovers how the industry is managing inflationary pressure by breaking out the three main factors of range, mix and price using cross-market, item level data.

In the latest 52 weeks the intensity and expansion of retailer EDLP and price matching strategies delivered actual price deflation of –0.5% and it was shopper choice to buy higher priced items.

However, this trend is now starting to reverse. In the latest 4 weeks, the analysis shows a clear inflationary trend of +1.3%, driven through both increased everyday price and promoted price and we’re now starting to see the signs of shoppers moving to cheaper packs.

PPU Decomposition.
To understand how everyday price, promotions, ranging and ultimately shopper choice affect average price, IRI has created the Price per Unit Decomposition tool. PPU Decomposition allows us to understand what’s behind the average price paid by the UK shopper across Major Multiple retailers. By analysing over 430k products across the market, the tool distinguishes between change caused by alterations in the available range, mix changes created by shopper choice and direct price moves.

Trended Drivers of average PPU change

This, of course differs by category but changes in shopper demand have driven some consistency at the sector level. (See chart below)

  • The impulse foods category has had the most consistent level of direct price inflation, possibly due to the low price point of these products and prominent brand awareness.
  • Non-perishable products in personal care, pet food, household and even frozen food have seen range change as the main driver through bigger pack sizes or more premium products being introduced.
  • Healthcare is where mix has had the biggest offset and the only sector showing reduced PPU. This is driven by a shift to own label (OL), with new users entering the market through OL due to the large pricing differential to brands in this area. 

Drivers of Avarage PPU Change by Product Sector, 12 w/e 9th Oct 2021

Significant input cost increases and worsening supply side disruptions have forced manufacturers and retailers to review various revenue management levers to mitigate the impact of inflation.

There are essentially four options available in revenue management that can alleviate the inflationary pressure felt by manufacturers and retailers: increase price, reduce promotional investment, engineer pack size or reduce ingredient cost.

Understanding elasticity is essential for brand owners as they consider their options.

Both brand and own label ranges have experienced downward pressure on non-promoted price as expected from the major retailer pricing strategies.

Currently we see brands driving up price per unit, not as a result of everyday price increases but through a reduction in promotions. Moving forward, as we are seeing in the latest data, we anticipate mix offsetting some of the direct inflation as shoppers respond by trading down to own label.

Branded PPU Change
Private Label PPU Change

Looking ahead to next steps

Higher than expected earnings have enabled retailers to swallow lower margins on their balance sheets in 2021, but they will be under pressure to maintain strong profit performance in the 2022 financial year.

Whilst many consumers are currently carrying on as before, recent announcements of National Insurance hikes, Tax Credit changes will dent consumer confidence. Higher fuel bills, more expensive borrowing and mortgage costs will impact people’s spending in 2022 and budgetary constraints will mean tough choices for many UK households.

As the industry looks for ways to ease the pressure without losing shoppers, we’ll be keeping a close eye on what the future holds.   By using the PPU decomposition analysis, IRI forecasts predict that average unit price change could jump by between 5-8% by the end of the first half of 2022, driven by direct price inflation and range changes.

In market, we’re likely to see changes to deal mechanics and prices crossing psychological thresholds such as round £s. As pricing corridors between brands change, spend will move between brands, own label and even categories.

Agile manufacturers and retailers will now be anticipating shifts in shopper behaviour and market dynamics to maintain the delicate balance of shopper retention and shareholder profits as we work through what is likely to be a challenging few months.

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