By Krishnakumar Davey and Ray Florio

Over the past year, CPG manufacturers saw sales gains both from more in-home consumption and from premiumization. Now, consumers are returning to dining out more, and the U.S. is also experiencing high and broad levels of cost inflation. Inflation levels have significantly raised costs, pressuring margins for manufacturers.

For the 12 months ending May 2021, U.S. inflation jumped significantly to just less than 5%, the highest rate in 12 years. And while price/mix growth typically drives overall CPG growth, it has only done so at an average rate of 2.5% per year over the last 10 years, far below the current CPG price/mix inflation of about 4%.

How can manufacturers drive a successful price premium in this new, difficult environment? As we discuss in the IRI study "Achieving Profitable Growth in an Inflationary Environment," manufacturers can successfully drive higher price realization using four main levers:

1. Shift price to better align to value.
   
   If price elasticity allows it, take the opportunity to raise list and shelf price if it won’t disrupt desired channel pricing dynamics or misalign the price-volume curve. This is the quickest and easiest approach — assuming it’s a win-win for the manufacturer and the retailer.
2. Shift pack size to reduce costs.
   
   For some products, a price hike may not be possible. In these cases, the next alternative to consider is a shift in pack size to achieve a higher price per ounce, gallon or pound. History shows that shoppers react less negatively to a downsize than to a price increase. But this tactic does come with a risk of reduced overall consumption.
3. Refine your messaging and positioning.
   
   Your third option is to reframe the value position of your existing products. Better articulating what your products and brands deliver can pay significant dividends. One client of ours saw volume grow by 20% from refined messaging, even with a price increase. This can be a quick fix requiring no additional investment — but it must be done carefully to avoid alienating current consumers.
4. Innovate to grow willingness to buy.
   
   If the other options can't work, investigate altering your portfolio to capitalize on a positive cost-benefit relationship. You can do this by adding high-value, low-cost product benefits or by eliminating attributes that cost you more than they're worth to shoppers. These approaches can drive significant, sustainable benefits for you as a manufacturer, but also take the longest to realize.

The first two levers are fairly straightforward, but you may have many options to choose from when it comes to new positioning and innovation. At IRI, we recommend a three-phased approach to filter your choices down:

• Phase 1: Understand the market dynamics that drive shopper decisions and use that knowledge to identify potential growth opportunities for each brand and the category.
• Phase 2: Design products that capitalize on these promising market opportunities with the features and benefits that drive a higher willingness to pay.
• Phase 3: Develop an execution plan to launch your new channel-specific shelf set at the selected price points. Prepare contingency plans based on potential competitor reactions to maintain a strong business case both for your company and for retailers.

IRI offers several solutions that can help you:

• Harness advanced store-level price and promo modeling to determine granular, retailer-specific pricing opportunities.
• Game out multiple scenarios and compare outcomes for different pricing and promo actions.
• Manage risk by identifying changes in sales velocity related to specific price points and price gaps.
• Simulate full-category results from various assortment and space decisions for more strategic assortment planning.
• Determine the most profitable opportunities for your brands among pricing, pack size, messaging and innovation to drive market share and top- and bottom-line results.
• Continuously track promotional effectiveness and direct investments to efforts that deliver the highest returns.
• Understand price-pack opportunities across channels and consumers and assess potential evolution, especially with e-commerce vs. in-store.
• Determine segment-specific pricing optimization focused on securing longer-term shopper loyalty.
• Monitor price elasticity at a granular level with high frequency to capitalize on pricing opportunities in the supply-constrained environment.
• Ensure adequate opening price points and value products, while driving sales of premium and super-premium products.

With the right data and insights, you can determine the right levers to pull — and be able to sustain profitable growth for both your products and portfolio in this inflationary environment.

Want to know how your brand can sustain growth in this environment? Reach out to your IRI representative or IRI.StrategicAnalytics@IRIworldwide.com.