Grocery Prices Plummeting…Your Next Move?

By Steve Kim and Ray Florio

What in the world is happening to grocery prices this year?  They have been falling in 2016, mostly in perimeter categories and among private label brands. There have even been reports of eggs as low as $0.99 per dozen, regular price, at some Aldi stores.  We are also seeing a significant uptick in commodity surplus in the marketplace. And several big retailers have been cutting prices in key categories to regain store traffic.  All of this deflation has put tremendous pressure on retailers, with many revising their full year earnings outlook.

If you are a CPG manufacturer, what’s your next move during this tumultuous time?  It starts with understanding your brand’s pricing power.  With that knowledge, you can leverage it to drive incremental growth.  So what is pricing power?  Power comes from your ability to predict consumer demand, and managing price and trade activities effectively. This applies not only to your products, but also to competitive and substitute products. 

For example, a shopper that sees a price decrease for a granola bar they’ve never tried before, may choose to buy it over their usual choice. Having the ability to comprehensively predict how price impacts consumer behavior is what your pricing power is all about.  So how do you get that insight?

You can enhance your brand’s pricing power by taking advantage of the three levers of price responsiveness.  IRI Strategic Analytics has modeled granular price elasticities for all scanned CPG products. Through this database, IRI has identified several major levers manufacturers can pull to influence price responsiveness across their product portfolio, and to fine-tune pricing to maximize impact.  And the biggest lever is promotion activity…

Promotion returns are declining across the majority of categories. Frequent, predictable promotions in grocery are driving fewer incremental sales and subsidizing more purchases that would have happened without the deal. In fact, brands with heavy promotional activity exhibit significantly higher promotion price sensitivity than those with lower levels of investment.

These same brands also exhibit similarly high everyday shelf price sensitivity. Frequent promotions are eroding the reference price that comparison shoppers use when finding the best deal. Categories with longer purchase cycles or that serve as attachments to main basket drivers, like cooking ingredients categories, see significantly lower response. This also plays out across the brand level, where more heavily promoted brands within the categories also display higher levels of sensitivity.

As grocery chains look to new means of regaining food and beverage sales share, some have opted to shift from hi-lo promotions to an everyday low pricing model. For brands that relied heavily on promotions, the high level of everyday sensitivity means that it is vital to establish proper shelf price versus the competition. 

IRI Strategic Analytics’ elasticity database provides the granular visibility into relative sensitivities across entire categories. This allows you to make the price adjustments that will encourage consumer purchasing, without giving up margin.  So call or email your IRI contact to find out more about this valuable database to see how your products stack up.

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