With much of North America experiencing record-breaking heat and near-drought conditions, many are concerned with Mother Nature’s impact on the Consumer Packaged Goods (CPG) industry. Most agree on one very likely outcome: expect higher grain and food prices across the board.
Historically, CPG manufacturers have preferred to pass such increases along to the consumer. But in today’s challenging economic environment, such conversations have become extremely difficult with retailers. In fact, a May 2012 survey conducted by Consumer Goods Technology Magazine revealed that 61 percent of manufacturers felt they were shouldering the burden of increased costs. Twenty-eight percent of the manufacturers’ surveyed believed consumers were hit the hardest, while four percent thought retailers were affected the most.
The practice of passing along cost increases can be a real challenge for manufacturers. If not executed carefully, such conversations can erode collaboration and undermine your long-standing approach of looking for win-win solutions. Inevitably, initiating the conversation will require a great deal of thought, preparation and top-notch negotiation skills to ensure a successful outcome for both parties.
Here are some helpful tips manufacturers should consider before sitting down at the negotiating table with retailers:
- Be first to the party. Planting the seed about pricing strategies early is critical. Begin discussions with retailers by properly setting the stage and demonstrating you are a forward thinking player. There can be downsides to making the first move, but being seen as reactive and “me-too” in this particular situation can be very challenging.
- Be creative in proposing solutions to a customer. Take a hard look at the overall investment picture with each customer and their growth potential as identified through customer segmentation. Then consider creative strategies from a total customer investment perspective and/or take cost-management steps such as down-sizing packaging. As more consumers ponder overconsumption habits and deliberate adopting a ‘less glutinous’ lifestyle, paying the ‘same for less’ may be a winning strategy.
- Be transparent about how you arrived at price increases. Remember, commodity pricing is well known, so don’t be unrealistic regarding the cost of goods components. Be open with customers if you are also taking a margin increase. As the manufacturer, if you feel the category can bear the increase, discuss how the retailer can win with you.
- Discuss mitigation tactics. Show the retailer that you have taken action to lessen the impact on them and their customers. Taking a price increase is often seen as the “easy way” to manage changes in cost. Demonstrating that you’ve taken other steps to mitigate costs can help gain support for your proposed price increase.
- Seek volume opportunities to deliver profit to all players. Understand the elasticity of your product and what opportunities exist to deliver comparable penny profits across the supply chain despite a cost increase. In many cases, basic improvements in the quality of promotion execution can deliver enough volume to show growth despite higher prices.
To be truly successful when managing price increases, manufacturers need to be armed with factual information before developing an effective go-to-market plan. Utilize the history and data from your Trade Promotion Management system to justify suggested tactics and strategies. At times, it will be necessary to ‘stick to your guns.’ Oftentimes, flexibility and compromise will be in order.