CPG Chatter

In last week’s blog post, I outlined Whole Foods good quarter and highlighted some items from the earnings call that I think are likely to impact its suppliers.  For one, the company expects that increases in cost of goods while inflation in the consumer market will lag behind.  This kind of dynamic can be very challenging as suppliers face rising costs, but consumers are unwilling to accept any price increases at the shelf.  Whole Foods hopes it can continue to offset price increases by improving operational efficiencies within the stores and distribution centers, but that approach can only pick up so much of the slack.  Eventually, rising commodity costs will have to be accounted for.

Last week, RetailWire wrote an interesting article addressing the unique situation we are facing right now.  Ordinarily, rising prices for commodities happens when there is an increase in demand – a basic economic principle.  However, in the current economy, rising costs are the result of U.S. federal policy intended to make it easier for businesses to borrow money.  The article covered many of the cost reduction strategies that Whole Foods outlined, but the associated survey shows that most feel retailers will ultimately have to pass along the price increases to the consumer.

What was not mentioned in either the Whole Foods call or the RetailWire article is the likelihood that the suppliers are most likely going to face increasing pressure to absorb much of the cost increases themselves.  While national prices may indeed increase, suppliers may find themselves more and more buying down prices to distributors and retailers to keep prices at the shelves steady.

This will have several likely consequences for suppliers to grocery:

• Suppliers need to keep close tabs on pricing, and plan for increased pressure from retailers and distributors for steady everyday low prices (EDLP).
• While many suppliers keep multiple price lists in addition to a national price list, they need to understand that any price discounts to retail are still considered trade spending.  Your trade rate may actually rising even higher than you realize.
• Trade budgets should take into account the fact that consumers may still balk at any price increases until we see real consumer confidence return.
• Be prepared for more forward buying as retailers and distributors look to lock in prices before commodity prices incrase further.

Operation efficiencies within retail will only go so far.  Eventually, suppliers will be asked more to help dilute price increases to the consumer.  Most consumers buying habits have changed for the long haul, and if they don’t see unemployment rates or real estate markets improve, they will simply have no appetite for any price increases.  This is a bit of an unprecedented time in the fast moving consumer goods market, so suppliers will need to remain agile and alert especially as commodity prices continue to rise.

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