The Arsenal for Food and Gas Cost Increases

The Arsenal for Food and Gas Cost Increases
February 15, 2011 Dave Thompson - Chief Technology Officer

Retailers are still reeling from the commodity inflation experienced in 2007 and 2008.  Many attempted to hold prices to compete against the big box stores, as consumers became more value-conscious in the wake of the recession.  The result for many retailers using legacy pricing technology was margin erosion and damaged customer loyalty.

Retailers are facing a new wave of cost increases due to commodity and gas price increases.  Today’s challenge is compounded by a forever-changed, price sensitive consumer.  Harry Balzer, chief industry analyst at NPD and author of Eating Patterns in America, stated:

“It amounts to ‘relative food inflation’.  [Consumers] have so much to spend on food and they will carefully pick-and-choose how to spend it.  Looking for more coupons and discounts, buying more private label foods, eating more leftovers, and generally getting the most bang for the buck.”

When fuel and commodity prices are on the rise, retailers will generally see cost increases across the board.  Some categories, vendors, and products will be hit harder than others depending on exposure to increasing commodity costs.   Retailers with solutions such as Revionics Price Optimization can proactively plan for these increases and automate much of the execution effort, preventing negative impact to consumer loyalty.

How can price optimization help?

First – The solution is able to maintain margins by identifying less price-sensitive items and recovering margin on these items.  A retailer using our software will do much better than a less sophisticated retailer that simply spreads their price increases across the category or responds product-by-product by boosting prices to recover eroded margins.

Second – Similarly, Key Value Items (KVI) capabilities within our solution allow a retailer to maintain a sharp competitive focus on the items that dominate customer price perception while remaining non-KVI items can be given greater latitude to respond to margin pressure.

Third – Because costs change progressively over time (not necessarily all at once), it is important to maintain size/price relationships and brand-to-brand/PLG pricing relationships.  This is another area where Revionics finds ways to recover margin while maintaining overall pricing alignment and consistency.  In comparison, a less sophisticated approach would reactively apply cost increases without aligning pricing relationships over time.  Worse, such an approach may fail to consider the total effect of price movement across related items.

Finally – Price optimization dynamically reconciles margin goals with customer sensitivity.  As costs increase, price optimization will attempt to recover profit, but the solution may not recover penny-for-penny costs in recognition of the elastic effect of price on consumer demand.  The Revionics solution can also recognize increased customer price sensitivity over time in the face of rising prices and will respond by taking greater margin compression on items and categories where customers show increasing sensitivity – recovering more margin on less price-sensitive items and categories.

These are just a few examples of how retailers with the right arsenal of tools can proactively and effectively manage cost increases while protecting profits.  This blog has focused primarily on Everyday Pricing, but more solutions are available for TPR, Promotions, and Markdowns.  Please comment, or reach out to us at info@revionics.com for more information.