In the context of a volatile, high-inflation environment, the consumer goods industry is continuing to feel the squeeze. Coupled with an increasingly centralised retail market, defensibility and discipline around pricing is proving to be critical. For most manufacturers, this context has created more pricing dispersion over the past year as the commonly used local market model has not proved to be successful in this new environment.
Typically, FMCG companies revert to these 3 techniques in response to this challenge:
- Firstly, coordinating the approach to cost price increases, as not doing so can cause dislocation when dealing with international retailers.
- Secondly, targeting specific brands or geographies to build a more consistent and defensible pricing architecture.
- And finally, repositioning certain brands or renovating portfolios in order to correct pricing outliers.
However, pricing dispersion has not gotten better, with only a small minority of manufacturers reporting improvements. As retailers and manufacturers feel the squeeze from inflation, the cost of goods continues to increase and, with it, the resistance to these increases. Whilst forecasts state that this pressure will decrease in the second half of this year, the landscape is unpredictable and expected to continue for the foreseeable future.
Looking at the current retail landscape, we can segment the European retail industry into 3 categories:
- Integrated buyers
- Buying alliances
- Strong local players
This shows a trend for more centralised models through which retailers can take advantage of efficiencies or amalgamations to increase their strength while negotiating with suppliers. This poses a problem for manufacturers if they have operated a local market model when creating their pricing and commercial policy. If they wish to participate in the new world, manufacturers need a new commercial framework to work with these operating models.
What can manufacturers do?
Historically, manufacturers have taken a more reactive, defensive stance to centralised negotiations, but over the last few years there has been a move towards proactive engagement.
In the reactive response, the customer will take the initiative, provoke you to analyse data and position, formulate a response and get back to them. A proactive stance involves monitoring day-to-day performance and having clear guardrails on how organisations are managing inflationary pressures and pricing. Additionally, proactive manufactures have an established pricing governance process, and the decision mandate is clear for making decisions around pricing direction, as well as engaging commercially at a regional level.
There are still massive differences across the European market for pricing, causing net pricing risk, and we are still a long way from equalisation of consumer pricing. There are a range of potential courses of action to reduce net pricing risk:
- Price up in low net priced markets
- Differentiated net price increases
- Proactive delisting of low volume SKUs
- Relaunch products at new price points (renovation)
- Pack size differentiation/ re-engineering
- Reallocate investment between SKUs
- Reduce weight/ depth of promotional investment
Having a trade terms framework that is consistent both locally and internationally is important as well – inconsistent trade terms will drive inconsistent pricing.
How can manufacturers move to a more consistent investment structure?
The start point is to be clear on the principles and framework that will work for both the centralised context and the local level:
What are the steps you can take?
- Establish visibility
- Build internal alignment
- Set pricing direction/ case for change
- Establish decision mandate – stick to it and evolve over time
Acumen are a revenue management consultancy and SaaS provider, helping consumer products companies make smarter, more profitable decisions through a combination of pricing, promotions, and mix management optimisation. Speak to one of our consultants here to find out how we can help your business make more profitable decisions.
