As inflation surges, retailers & manufacturers need new strategies to earn consumer loyalty

By Elizabeth Crawford contact

- Last updated on GMT

Source: Getty/Tom Werner
Source: Getty/Tom Werner

Related tags: Inflation, Food price inflation, Consumer price index, labor shortage, Supply chain, Marketing

Consumers grappling with skyrocketing grocery prices due to fast-rising inflation may take cold comfort knowing that the increases are not as dramatic as other sectors or as high as in past economically difficult periods in part because of industry’s valiant cost-saving efforts in recent months.

Rather, their loyalty to brands and retailers may begin to erode as they look for ways to offset higher everyday prices and lower their overall spending – pushing players to rethink their marketing strategies, including how they communicate with consumers and how they approach promotions, according to industry stakeholders.

Manufacturers and retailers also will need to rethink their approach to offset or stem core contributing factors to inflation, including ongoing labor challenges, which unlike supply chain challenges are not responding as positively to current alleviation efforts, warns one industry veteran.

Does the surge in inflation feel worse than it is?

Last week’s upsetting revelation that the sharp rise in inflation that began with the pandemic and surged with each rise of a major coronavirus variant may not be slowing as previously anticipated, signals the need for grocers and manufacturers to rethink and redouble strategies for managing higher costs and consumer expectations.

In January, the price of food jumped 0.9% over the previous month – reversing a two month slow down that began in November when price increases slowed slightly to 0.8% from 0.9% in October. The January increase was particularly sharp off the back of the 0.5% increase in December, according to data released late last week by the Bureau of Labor Statistics.

This U-turn brought year-over-year price increases for food to a staggering 7%, with the price of food at home even higher at 7.4% compared to that of food away from home which grew 6.4%, according to the consumer price index.

The jump was led by increases in five of the six major grocery food group indexes, with that of cereal and baked products increasing the most at 1.8% over the month. This was followed by a 1.6% increase in the index for food at home in January, a 1.1% increase in that for dairy, a 0.9% increase in fruits and vegetables and a 0.3% increase for meat, poultry, fish and eggs, which was running hotter than the other indexes already with a 12.2% increase year-over-year. The only category left untouched in January was for nonalcoholic beverages, according to BLS.

Prices hikes are not as bad as they could be

While these increases are undeniable, Leslie Sarasin, the president and CEO of the Food Marketing Institute argued it was “important to note that the cost of most staples has fallen from their height in the earlier days of the pandemic,”​ and that “the price of groceries has not increased as much due to inflation relative to other commodities.”

During a webinar hosted by the trade group last week, she further made the case for groceries by noting that USDA’s Economic Research Service in 2022 predicted food at home prices would increase between 1.5% to 2.5%, while food away from home prices, such as those at restaurants are predicted to increase between 3.5% and 4.5%.

She also noted that average household weekly grocery spend is down to $144 on average from a high of $161 witnessed during the height of the pandemic. Still, this is notably higher than the average weekly grocery spend of $113.50 in 2019 before the pandemic and before inflation began to rise.

‘Foods are significantly cheaper today than they were’ ​20-50 years ago

Ricky Volpe, associate professor of agribusiness at California Polytechnic State University, further defended grocery prices during the webinar noting that if food prices are measured “in real terms” with the changing value of the US dollar controlled for, then “most food prices are down and down in a big way in the long term.”

He explained, “Things like milk, eggs, bread, bananas, chicken – all of those foods are significantly cheaper today than they were 20-30, 30-50 years ago. … And I personally, would like to see more messages coming from retailers and manufacturers to help educate consumers and to say, ‘Hey, your dollar is gong further to buy food to feed your family to meet dietary guidelines today than it did 20 years ago.”

He added that this is possible because of industry efforts to create more efficient supply chains and to lower the cost of acquiring, processing, adding value to and moving and storing food.

“All of these costs are down in the long term. So, sure, we’re going to have bumps in the road, we’re going to have inflation here and there, but the food is more affordable now than it was a generation ago. And that’s important that people know that because I think it’s going to help reduce concerns about availability and affordability,”​ he said.

Consumer education can build loyalty

However, this may not offer consumers the kind of comfort they want or need when faced with notably higher grocery bills and inflation that is growing faster than most working adults have experienced in their lifetimes.

To that end, Sarasin recommended that retailers help cushion the impact of year-over-year price increases by “offering suggestions on how shoppers can further stretch their grocery shopping budgets, better plan their meals and utilize ingredient and recipe substitutions in the event that a favorite or preferred product is temporarily unavailable in the store”​ or out of reach financially.

Manufacturers, which have been passing waves of pricing through to consumers to offset unexpected cost increases and inflation over the past year, also have tried to hold down price hikes by offsetting costs in other ways, such as focusing on the most cost-efficient SKUs or trimming the fat in other areas of their business. But this may not be enough long-term.

Personalized promotions can boost cost savings, freeing funds for other needs

As consumer willingness to pay higher prices begins to slow, manufacturers will need to consider how to rebuild loyalty through promotions, which for have been tabled for much of the pandemic, argues Spencer Baird, the executive vice president and president at Martech at Inmar Intelligence.

A recent consumer survey conducted by Martech at Inmar Intelligence found in December 66% of shoppers considered purchasing an alternative brand to offset higher prices, and nearly half of shoppers have begun shopping at a different store for groceries because of price increases at their regular store. In addition, 70% of shoppers purchased private label specifically to save money and over one-third expect their coupon usage to increase over the next six months.

Based on these shopping shifts, Baird said brands and retailers need to prioritize price incentives and promotions to maintain or regain shopper loyalty, and to do so effectively without further squeezing already tight margins he said these promotions must be personalized.

He explained that about a third of the advertising dollars most retailers and manufacturers currently spend is not incremental, but by creating more personalized promotions they can “chip away” at that loss – allowing consumers to save, but also helping them save.

Those savings, in turn, can be redirected to other expenses that are contributing to inflation, such as higher wages and benefits for employees to help stem labor challenges, which he says is one of the biggest hurdles to bringing costs back in line.

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