After two years of record-high inflation, supermarket food prices dropped for the first time and food inflation finally began to slow. But with the next shock potentially lurking around the corner, retailers need to avoid falling into the trap of making reactive price changes and keep ongoing margin optimisation front and centre, writes John Moss, CEO of Flintfox.
As businesses have navigated the many economic hurdles that have come their way over the last few years, from inflation to energy prices to supply chain disruptions, strategic price management has emerged as the key to safeguarding profitability. Retailers have explored a number of different pricing strategies and initiatives to protect margins without jeopardising volumes. Many grocers made the strategic decision to absorb inflationary pressures and shield many household items from big price increases while increasing prices for other items, and many also adopted new approaches to maintain margins, such as introducing new private-label products to shelves and launching discount clubs and loyalty schemes.
While these efforts may deliver high returns for some businesses, they are often incredibly expensive and time-consuming, and shouldn’t be implemented at the expense of comprehensive, data-driven pricing strategies to protect the bottom line.
As inflation begins to recede and wholesale prices stabilise, some consumer brands and major grocers are signalling their intent to halt price increases and even reduce prices in some cases. While this will be welcome news to consumers, it’s important that price changes are made based on solid data and form part of a longer-term strategy to maintain customer loyalty and avoid putting margins at risk.
Rethinking pricing strategies
The price rises implemented during the peak period of inflation were effective at offering much-needed margin protection, but came at a cost in terms of brand reputation and customer loyalty. The scale of the increases created much unwanted media and consumer attention with neither FMCG brands nor retailers avoiding public scrutiny for potential profiteering.
While it might seem that these broad-based, large-percentage price hikes were a calculated risk, they are often executed as a result of not having the capabilities to implement more fluid pricing practices.
To navigate the evolving economic landscape and avoid alienating customers, retailers will be better served by deploying more nuanced pricing strategies. This entails moving away from broad-based, large-percentage price hikes during times of high inflation, and similarly avoiding knee-jerk price cuts driven by reduced costs or a marketing strategy.
The limits of legacy pricing approaches
One of the biggest challenges for retailers reviewing their pricing strategies is not having the data to be able to make strategic and timely pricing decisions. Despite leaps in digital transformation in other areas of retail and the explosion of data, pricing is still extremely manual. Most ERPs don’t have the capabilities to deliver accurate margin insights, which means that pricing managers often have to resort to spreadsheets which require days to collate and analyse.
As the retail environment becomes more complex with multiple channels, legacy systems and processes are no longer fit for purpose. The average retail organisation spends 71 hours per day processing manual data. As well as being heavily time consuming it’s also highly error prone. Our in-depth research in partnership with Forrester, revealed that 60% of businesses felt that poor data quality was hampering their ability to keep on top of market fluctuations and remain competitive.
Preparing for future challenges
If the last three years of challenges have taught us anything it’s that we can’t let the latest slowdown in inflation lure us into complacency. The retail industry will always face volatility in some form. While spikes may be less dramatic than what we’ve seen over the last three years, there are always going to be peaks and troughs in spending and consumer confidence, and businesses need to be able to respond quickly and effectively. Not with best guess or large-scale price changes that are then difficult to draw back from, but with incremental and targeted price changes that are in tune with what’s happening in the market.
As the retail landscape continues to evolve, the imperative of data-driven pricing becomes increasingly clear. Retailers that invest in digital transformation and leverage data-driven insights will be better equipped to thrive in an uncertain future, where agility and adaptability are key to success. In the complex world of grocery retail, a proactive and data-driven approach to pricing is no longer a luxury but a necessity for sustainable growth and profitability.
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