Getting pricing and products right to win in the era of inflation

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Australian retail sales are on the rise, but new research suggests that this growth is driven by inflation, not by consumers buying more.

Other new research also links this growth to rising profits. So, with inflation at its highest in three decades and the Reserve Bank forecasting a 7.75 per cent peak later this year, how can you provide Australians impacted by the cost-of-living crisis with affordable products and convenient shopping in a retail environment facing squeezed margins, rising business costs, and a consumer shift toward value purchases? It’s all about perfecting the balance of pricing and products in the right platform.

The record-high cost of doing business in Australia is passing prices on to consumers 

In Australia, inflation is most commonly measured as the change in the Consumer Price Index (CPI) collected by the Australian Bureau of Statistics (ABS) whose June quarter data shows a CPI rise of 6.1 per cent annually. The price of goods (+2.6 per cent) is still accelerating more than services (+0.6 per cent) driven by food hikes (+2.0 per cent) in vegetables (+7.3 per cent), fruit (+3.7 per cent), and meals out and takeaway foods (+1.4 per cent). Food and grocery prices topped our cost-of-living concerns in April (30 per cent overall and rising to 38 per cent of those 35-55 and 40 per cent of Aussies 55+).​ 

Those price increases lead to decreased consumer sentiment and discretionary spending

Australia’s strong pandemic recovery and growth in domestic spending are now testing our economy’s ability to meet the demand for goods and services. With housing, petrol and groceries the biggest household expenses, analysts predict rising inflation to lower the relative demand for discretionary products over staples. Supply chain disruptions driven by flooding, labour shortages and rising freight costs are also increasing manufacturer costs, which contribute to higher prices. 

This adds pressure to suppliers trying to optimise prices for both retailers and shoppers

Suppliers are being squeezed by those soaring local and global soaring supply chain costs​. Retailers are focused on delivering a winning price perception​ to instil pricing trust. This means measuring and addressing inefficient operations and eating away at profits is critical. For example, regular online shoppers with smaller orders require more shipping, fulfilment, potential returns and customer service – are you accounting for these costs if you’re absorbing and not passing them onto the shopper? Cost-to-serve elements are essential to managing price and profit but can be overlooked in the race to stand out on value perceptions or promotions. 

Get to know customers to understand and influence their inflationary shopping behaviours 

Use your first-party data to anticipate inflationary-influenced behavioural changes in your different customer cohorts. These can include:

  1. Choosing low(er) priced options​: smaller packs with a lower PPU, larger packs with a lower PPV, private label alternatives, or searching and buying on promotion​.
  2. Changing where they shop and consume: shopping more at retailers famed for better value, cherry-picking deals across a repertoire of retailers, bringing out-of-home service experiences back in-home, and cutting back on convenience-led retailers.
  3. Change their frequency of purchase and use: planning list-based big shops and subscriptions; just buying what they need, when it is needed; cutting back on or stopping buying non-essentials​, and changing quantity of consumption​.
  4. Reducing their risk and taking control​: buying known and trusted brands​; limiting the trial of new products; building a digital basket to control spending​; and comparing and considering the total value proposition​.

But there are key actions you can adopt right now to support Aussie shoppers

You must plan for a fast response to rising CPG prices as they bring a return to elasticity – consumer sensitivity to prices. As such, we have five act-now strategies that can help you plan for any likely price sensitivity that could influence a drop-off in product volumes:

  1. Monitor volume and be ready to switch on promotions or a new pricing strategy when you see sales volumes start to dip.
  2. Invest in innovation now to justify and future-proof higher prices with a value proposition, such as a special benefit, package or ingredient.
  3. Focus on assortment, consider pack alterations and don’t forget to consider cash-strapped shoppers who are seeking to trade down to downsized options. 
  4. Be ready to promote products that you know you can supply to provide incentives when shoppers need them the most.
  5. Target audiences based on price sensitivity – by leveraging your shopper data, you can target audiences in different in-store and e-commerce environments with unique offers. 

Plan for and adapt to market shifts to emerge stronger from these challenging conditions

This inflationary environment can help you to capture market share. Remember, price transparency can appeal to customer loyalty – we’re all going through this together, and like other crises such as the pandemic, we will come through the other side.

Help your customers now by astutely applying well-established revenue management levers to drive net price realisation and be transparent with clear communication about price differentials and the reason behind them. Aussie shoppers appreciate both value and localism but will pay close attention to how your individual products are priced against category competitors. And consider your platform strategy – promotions, shipping and fulfilment can all influence price-sensitive shoppers.

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