by: KK Davey Today’s CPG retailers and manufacturers have several variables to contend with in order to drive sales and meet company goals. As retailers, manufacturers and consumers do not exist in a vacuum, maintaining and gaining market share relies on implementing mechanisms to account for circumstances beyond the control of the various parties involved.
Recent research showed that in 2014, the food consumer price index is likely to rise to 2.5-3.5 percent due to the drought in states like California and countries like Brazil. The ongoing drought in California is likely to impact the prices of fruit, vegetables, dairy and eggs, and the drought in Brazil will affect the prices of commodities like coffee and sugar.
Although overall food inflation this year is relatively moderate, some categories are experiencing accelerated price increases. Trend spotting capabilities established that frozen seafood, refrigerated seafood, processed poultry, refrigerated meat, cottage cheese, milk, mustard, ketchup, toaster pastries/tarts, refrigerated dips and luncheon meats are all experiencing the highest price per volume increases.
These price increases lead CPG retailers and manufacturers to a fork in the road: either absorb the price increase, which could bolster customer retention but result in smaller profit margins, or encumber the consumer and potentially lose customer base. To determine the best course of action, CPG retailers and manufacturers must find the intercept between maximizing profits and retaining customers. Unfortunately, there is no panacea when it comes to pricing.
One factor to consider is purchase frequency. If a product is purchased at a high frequency, a consumer is more likely to take notice of a price increase, and therefore seek out substitutes, and vice versa. Another factor to consider simultaneously is the price elasticity of demand for a given product. Typically, products that are deemed necessary and have few substitutes are relatively inelastic. For some products, such as milk, these two rules can be somewhat contradictory. The categories most significantly affected by the various droughts are seafood, dairy and meat. However, volume sales of staple commodities, such as milk, have proven to be more resilient to price increases. Milk is purchased at a high frequency, but is also generally considered inelastic. CPG retailers and manufacturers must consider all aspects of the product, consumer purchasing habits and economic factors in order to optimize the balance between profit margins and customer retention.
By leveraging trend spotting capabilities, CPG retailers and manufacturers can refine and monitor consumer reactions to pricing in other related categories prior to adjusting their own. These models serve to arm retailers and manufacturers with an understanding of emerging price trends, and to proactively evaluate and manage revenue growth despite challenging economic conditions.