Ongoing pricing tension between retailers, manufacturers threatens margins, IRI research reveals

By Elizabeth Crawford

- Last updated on GMT

Ongoing price tension between retailers manufacturers threatens margin

Related tags Price Iri

Many consumers are cautiously optimistic that their financial situation is improving, but they continue to buy groceries based primarily on price and value – creating friction between manufacturers and retailers, IRI research reveals. 

Almost a quarter of consumers told IRI that their financial situation was better in the second quarter of 2015 than the same time last year, and an additional 23% expect it to improve even more in the next six months, according to IRI’s MarketPulse survey released in late July.

This confidence translates to a 5.12% increase in IRI’s shopper sentiment index to reach a score of 123 in the second quarter of 2015, which suggests consumers are less price driven, more loyal to favorite brands and better equipped to maintain their lifestyles than the same time last year when the index reached only 117, according to IRI.

This increase was tempered though by a 10.8% drop in the index score between the first and second quarter of this year – hinting that consumers are not as blasé about price as earlier in the year.

Price sensitivity influences shopping

Shoppers’ increased price sensitivity is reflected in how they are buying groceries.

Specifically, IRI found 52% of shoppers chose their retailer because it offers the lowest prices, 45% stock up on items on sale and 83% said they will choose brands based on price in the coming year.

At the same time, 80% said they will choose brands based on previous use or trust and 58% said they will make selections based on household requests, IRI reports.

The last two indications often are influenced partly by manufacturers setting a price that reinforces their values, while the previous factors are influenced more heavily by retailer pricing.

Historically, manufacturers have worked together to set prices that best drive volume and retain margins, but this is shifting more towards retailers as smaller manufacturers enter the market and consumers remain skittish about  high prices following the great recession, according to IRI analysis.

The market research firm explains that the influx of smaller manufacturers vying for shelf space has given retailers more leverage to price products outside of manufacturers’ suggestions and to resist price increases, many of which are overdue from the great recession.

Retailers also are eschewing suggested retail price because they have become more sophisticated in their tracking and analysis of consumer needs and shopping patterns – information for which they used to rely on manufacturers.

The increase in noncompliance with suggested retailer price is “driving incidents of overpricing, lost volume, eroded market share, disadvantaged future price negotiations and even a loss of brand equity in extreme circumstances,”​ IRI reports.

A potential solution

To repair the relationship between manufacturers and retailers caused by this noncompliance and undo the damage the friction is causing, IRI recommends manufacturers “actively work to regain their footing with their retailers”​ by “reestablishing and rebuilding their credibility as a pricing advisor to their retail partners.”

This means discovering individual retailers’ needs and goals and making tradeoffs for the long term success of brands and margins, IRI said.

An example of this would be agreeing to a mix of subtle price raises with fewer more visible price cuts that will allow margins to improve while maintaining retailers’ price image to consumers, IRI says.

By working together like this to improve realization even just 1%, retailers and manufacturers could increase profits to the tune of $10 million for every $1 billion in annual sales, IRI said. 

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